Russia’s economy remains in recession and will likely contract by between (official estimate) 0.6% and (bne consensus) 0.8% in 2016 before returning to mild growth in 2017. While there is still no consensus on just how much growth there will be in 2017 no one is talking about anything more than about 1.5% with the bne consensus at 1%. The long-term growth potential -- assuming no drastic structural reforms which are unlikely until after the 2018 presidential election -- is capped at 2.4%. Having said that the economy is clearly starting to recover . Inflation fell below 6% for the first time ever in modern history in recent months. Unemployment is also at record lows under 6%. Industrial production remains underwater, but only just, while some sectors -- notably manufacturing and agriculture -- are now growing. Even more encouraging was a strong improvement in the PMI manufacturing index. Russia became a world leader in grain exports this year on the back of a bumper harvest and grain has overtaken arms in exports in dollar terms. And with labour cost now lower than China’s the talk of non-oil exports with products like Russian-made cars may appear in 2017. On the flip side there is still little progress with significant import substitution in any sector other than food processing, but this takes time to build up. Presidential economics advisor Alexi Kudrin suggested that Russia could return to 4% GDP growth if non-oil export volumes doubled every year - which remains an extremely ambitious target and has not been formally adopted as a governmental goal. Politically Russia remains tense. Rosneft CEO Igor Sechin is now operating with little restriction in his sector . He has successfully captured Bashneft and is poised for his company to buy a 19.5% stake in itself using money lent by Rosneft’s parent company Rosneftegaz in a totally pointless deal that brings no fresh money to the budget. Minister of Economics Alexei Ulyukayev publically opposed the deal and was subsequently arrested for receiving a bag of $2mn cash in it -- a bag given to him by Sechin personally, according to bne sources. However, socially things are calmer. Putin’s popularity is currently at an all time high of 84%. The polls also show the population think the worst is passed. While retail borrowing has only made a modest return to growth and no one is planning big ticket purchases, the bne Watcom index shows retail traffic has recovered to 2014 levels and mild consumption will support growth next year. The bank sector is now back in profit, but state owned Sberbank still makes up some 70% of the sector’s profits, although its share is starting to fall again. Mortgage lending is booming with volumes expanding by a third y/y in the third quarter, but corporate lending remains very depressed so the sector cannot be called “healthy.” The securities markets are also doing well. The bond market continues to see growing number of issues with spreads down by about 100bp since the start of the year. The equity market has also come back to life with the RTS up about a quarter YTD and the MICEX index up about 13%. At a microlevel the big companies are back in profit and taking advantage of the recession to consolidate their market share through acquisition and organ expansion with many of the leading chains foreign and domestic rolling out ambitious new store plans that double their network in some cases. Retail sales remain negative overall, with a 4.4% contraction in October, and real disposable incomes also contracting, even if real and nominal incomes are growing. Russia continues to run a double trade and current account surplus, but these are down by about a third on 2015 thanks to the low prices of oil. At the end of December OPEC announced a production cut that will support prices, but as Russia’s budget breaks even at $70 oil and prices are unlikely to rise much above $50 there is still a hole to fill. At the macroeconomic level containing the budget deficit at around 3% this year is main challenge the government is facing -- and failing to solve. The deficit is likely to end this year at about 3.7%, barring a last minute privatisation. The official plan is to reduce the deficit by 1% each year thereafter to 2019, but this goal is entirely dependent on the government sticking to its large scale privatisation plans. Currently between Sechin’s shenanigans at Rosneft and the political problems Russia faces with the west finding investors to unload many billions of dollars worth of shares in huge companies looks like a pipedream.