(Bloomberg) -- Russia’s economy ended four quarters of contraction with a bigger growth spurt than forecast, putting it on track to return to its pre-war level as soon as next year as it adapts to the impact of international sanctions.

The stretch of annual declines since the invasion of Ukraine was the longest in more than half a decade. But with fiscal policy turning increasingly loose in support of the war effort, gross domestic product expanded 4.9% in the second quarter.

The preliminary assessment by the Federal Statistics Service on Friday was higher than all but two predictions in a Bloomberg survey of analysts, whose median forecast was for a gain of 3.9%. In quarterly terms, the economy has already been notching growth, and the surge became even more pronounced between April and June.

“If we are talking about the full year’s number, in 2024 Russia will already go beyond the level of 2021,” said Rosbank economist Evgeny Koshelev in Moscow.

The turnaround is defying predictions of a prolonged slump in response to the sanctions imposed over the February 2022 invasion of Ukraine. Increased defense spending has boosted industrial production while consumer demand is gaining momentum amid greater outlays on social support and higher wages. 

GDP may reach its pre-war size by the middle of next year, said Natalia Lavrova, chief economist at BCS Financial Group, who forecasts 2% growth in 2023. 

Labor Squeeze

But the Kremlin’s drive to expand military recruitment may yet get in the way as labor shortages grow worse.

As Russia tries to draw more volunteers into joining President Vladimir Putin’s faltering invasion of Ukraine, it risks creating a drain on the workforce that may prompt a shift toward more selective measures for drafting people whose absence won’t be felt as strongly in the labor market.

Putin last week signed legislation that raises the draft age to 30 from 27 in January and bans men from leaving the country once they have received a digital conscription notice. 

The measures may permit “targeted mobilization” that would boost short-term growth by reducing the impact of labor shortages and allow the economy to reach its pre-war size by mid-to-late 2024, soon after scheduled presidential elections, according to Bloomberg Economics. 

What Bloomberg Economics Says...

“Opting for conscript mobilization is unlikely to reverse the decline in long-term growth.”

—Alexander Isakov, Russia economist. 

Challenges are building for Russia beyond the labor market.

The ruble is approaching 100 per dollar after weakening about 25% since the start of the year, a slump central bank Governor Elvira Nabiullina has blamed largely on the deterioration in foreign trade conditions. 

While flows of imports remain stable, restrictions on Russia’s energy sales, including an oil price ceiling imposed by Group of Seven nations, have led to a steady decline in export revenue that has brought the current-account surplus to its lowest in two years.

Bank of Russia Halts FX Buys as Ruble Slumps Near 100 to Dollar

The Bank of Russia recently upgraded its full-year growth forecast to 1.5-2.5% for 2023, noting that output in most sectors focused on domestic demand had reached or even exceeded pre-war levels. It sees growth next year at 0.5%-2.5% and 1%-2% in 2025.

SURVEY: Russia Economy to Expand 0.6% in 2023; Prior +0.4%

Policymakers have warned that the “capacity to expand production in the Russian economy is increasingly limited by labor market conditions,” which are helping to stoke inflation risks alongside sanctions and surging government spending linked to the war.

--With assistance from Harumi Ichikura.

©2023 Bloomberg L.P.