Russia’s economy has been boosted by a tripling of defence production in the last year, Russian President Vladimir Putin said at St Petersburg International Economic Forum (SPIEF) on June 14.

Russia was quick to put its economy on a war footing after the invasion of Ukraine last February and arms factories in the hinterland have been working 24/7 with triple shifts to produce enough materiel to keep Putin’s war machine running, according to local reports. Much of Ukraine’s manufacturing base has been destroyed making Kyiv dependent on supplies from its Western allies.

Russia’s defence production increased 2.7-fold over the year, and by more than 10-fold for the weapons in most demand, Putin told a meeting of military bloggers on June 13.

Putin added that dozens and hundreds of private Russian companies that previously had nothing to do with the military-industrial complex have also been pressed into service.

"We have dozens, hundreds of private enterprises that have never had anything to do with the military-industrial complex and have joined this work," he said.

In a previous interview Putin said that Russia was also producing hundreds of new tanks and the production capacity for the crucial 155mm shells, the workhorse of the Russian army, would reach 2mn rounds a year this year.

Ukraine was given 1mn 155mm shells by the US at the start of the war, but since the end of Cold War US shell production was downsized and can only produce around 100,000 rounds a year, although that has recently been boosted to 150,000 according to US reports.

The frenetic military activity has begun to show up in Russia’s economic statistics. Industrial production has been contracting since April last year thanks to the shock of the sanctions and wide spread shortages of essential inputs that had previously been imported.

However, industrial production turned positive again in May and grew strongly in April thanks to a low base effect and as factories continue to ramp up production. Industrial output grew by 5.2% y/y in April, up from 1.2% y/y in March. RosStat’s own seasonal adjustment showed growth of 1.7% m/m in April, the fastest pace since late-2021.

“The defence sector is now one of the main drivers of the Russian economy,” the Bank of Finland institute for Emerging Economies (BOFIT) said in its weekly update. “Defence and security is the single largest area of spending in 2023 and, by June 1, almost 60% of those funds had already been allocated.” Production and supply of weapons has increased seven-fold, Deputy Prime Minister Denis Manturov said last month.

There is also a drive to repair and supply tanks and armoured vehicles. According to Manturov, deliveries of repaired vehicles in the first quarter of this year were equivalent to the total deliveries throughout 2022.

The war-bump to the economy has also lifted the manufacturing PMI, which has been positive for the last four months54.4 in May. Unemployment has also fallen to 3.3%, a post-Soviet low, as the labour market tightens thanks to the emigration of well over a million young men fleeing Russia and another 300,000 that were conscripted.

The shrinking labour pool is worrying the Central Bank of Russia (CBR) which warned in its last economic update there was a danger of the economy overheating as the war shocks wear off.

“One of the surprises of this war has been how stable the Russian economy has been,” Elina Ribakova, non-resident senior fellow at the Peterson Institute for International Economics, told bne IntelliNews.

While the rest of Europe slides into recession as a result of the polycrisis – and Germany and the UK are already in technical recession – the International Financial Institutions (IFIs) have upgraded Russia’s economic outlook several times this year and are expecting mild growth in 2023. The Russian Economics Ministry is forecasting growth of 1.2% this year, the CBR are predicting growth in the range of 1%-2% and Putin is the most optimistic of all, predicting growth of 1.5%-2% this year.

Money is being poured into the defence sector that is having a trickle-down effect and boosting real incomes and consumption. In parallel with the growing investment, inflation has fall to a mere 2.5% in May, lifting real incomes further and fuelling consumption.

However, the economy may cool somewhat in the rest of the year as Russian Finance Minister Anton Siluanov tries to keep spending under control. The budget deficit hit is full year target after the first ten days of March and is currently 17% over plan at RUB3.4 trillion ($48bn) as of the end of May.

The rate of state spending has already started to gradually slow, but remains high. The Finance Ministry has said that, from January through May 2023, spending was up 27% on the equivalent period last year (reaching RUB13.2 trillion).

“While monthly spending dynamics are approaching normal levels, they are still a long way from seasonal norms,” BOFIT said.