The Russian economy put in a robust performance in 2023 despite facing formidable challenges, according to recent data published by Rosstat.

The activity data today suggest that, after a very strong the third quarter in which GDP rose by a larger-than-expected 5.5% y/y, growth in Russia’s economy remained solid at the start of the fourth quarter.

Aggressive interest rate hikes from the central bank (to 15%) should take some heat out of demand in the coming quarters, but this is likely to come alongside an additional fiscal stimulus next year due to higher military spending. We think this will keep GDP growth fairly strong and add further to inflation pressures next year.

Here are the key findings:

GDP Growth: Minister of Economic Development Maxim Reshetnikov's announcement of 3% GDP growth in 2023 is remarkable given the prevailing conditions of war and sanctions.

Economic Recovery: The economy in 2023 surpassed its 2021 levels, with GDP registering notable increases. In October alone, GDP exhibited a y/y growth of 5%, following a 5.6% growth in September. In comparison to the figures from two years ago, the increase amounted to 1.8% in October, up from 1.5% in September. The Ministry of Economic Development highlights, "Overall, in the first ten months of 2023, GDP grew by 3.2% y/y and by 1.1% compared to the level two years ago."

Independent assessments from Bloomberg Economics echo these figures. Their analysis suggests that an annual growth rate of 5-5.5% in the total output of non-financial sectors during the fourth quarter is indicative of an overall economic growth rate of 3-3.5% for the entire year.

Industrial Growth: The manufacturing sector, marked by a robust 9.5% growth in October, continues to be driven by the "special military operations," which has contributed to the expansion of industries such as engineering, chemistry, and metallurgy. Additionally, a surge in consumer and investment demand has been instrumental in boosting wholesale trade. In October, the total consumer spending of citizens exhibited a remarkable y/y increase of 10.7% (and a 3.3% rise compared to October 2021).

Investment Surge: Investment activity during the third quarter exceeded expectations, also driven by the war, recording an impressive 13.3% growth rate (compared to 10% from January to October). Russian military spending in 2024 will rise to 10% of GDP further driving investment and should bolster economic growth to the point where the economy was overheating in 2023.

However, while the current economic landscape reflects a surge due to a military Keynesianism effect, experts anticipate a slowdown starting in early 2024.

The "Cold Calculation" Telegram channel predicts that GDP growth will decelerate to 0.7% in 2024, as the structural problems like rising inflaton and a very tight labour market, start to make themselves felt.

The zenith of growth is expected to occur in the fourth quarter of 2024, with the subsequent increase in the Central Bank's key rate serving to temper price escalation but that will also take the edge of growth. Rate hikes could elevate the risk of recession to exceed 70% chance in the first half of 2024, say experts.

Russia’s economy is overheating and the central bank has more work to do, The rise in Russian GDP growth to 5.5% y/y in the third quarter was larger than expected and adds to evidence that the economy continued to overheat in 2Q23.

With fiscal policy set to loosen further and inflation pressures to continue building in the coming months, analysts think the central bank will raise interest rates further in 2024.

The strength of activity in 2023 year has been supported by loose fiscal policy and very strong real household income growth, but this has pushed the economy up against supply constraints and caused inflationary pressures to build.