Russian Manufacturing Sector Experiences Deepest Contraction Since Early Ukraine Conflict

Business activity in Russia’s manufacturing sector experienced its most substantial decline since the early days of the full-scale invasion of Ukraine, as highlighted by recent data from S&P Global.

The Purchasing Managers’ Index (PMI) for Russian manufacturing plummeted to 47.5, a decrease from 50.2 recorded in May. A PMI reading below 50 signals a contraction in the sector.

This drop not only shifted the index into negative territory but also represented the most significant monthly decrease since March 2022, when Russia was initiating its extensive military operations, coinciding with extensive sanctions imposed by the West.

Out of the last four months, three have shown a slowdown in business activities. Although the PMI momentarily returned to growth in May, it fell again in June as new orders continued to dwindle.

S&P Global characterized the decline in orders as «sustained,» noting that export demand experienced its most considerable fall since March 2022, partly attributed to the strong value of the ruble.

Production has now contracted for four consecutive months, with June recording the fastest pace of decline in over two years. Companies surveyed attributed weak demand and reduced purchasing power among consumers as the main factors affecting their performance. On a positive note, the reduction in production and order volumes has allowed firms to clear existing backlogs more efficiently.

In this challenging climate, manufacturers have maintained minimal price increases, with June witnessing the slowest rate of factory price growth since November 2022. According to the Central Bank’s business monitoring reports, firms planned to implement price hikes of merely 4.4-4.5% annually over the next three months, with expectations for price escalation in the manufacturing industry continuing to regress.

This situation has alleviated some pressure on companies. S&P Global identified that inflation of input costs in June was the lowest recorded since February 2020, just prior to the onset of the Covid-19 pandemic.

While manufacturers remain optimistic about a potential recovery in demand and expect a modest rise in production over the next year, overall sentiment has decreased to its lowest point since October 2022. The Central Bank’s Business Climate Indicator (BCI) also fell in June, reaching its lowest level since December 2022.

«From the perspective of the business community, we are on the brink of a recession,» Economic Development Minister Maxim Reshetnikov cautioned at the St. Petersburg International Economic Forum earlier this month.

Nevertheless, Central Bank Governor Elvira Nabiullina and Finance Minister Anton Siluanov dismissed these worries. Nabiullina asserts that the economy is not in a recession but rather emerging from an overheated phase, with controlling inflation as the main focus.

Assessing the current condition of Russia’s economy has increasingly become a complex task, as pointed out by Natalia Orlova, Chief Economist at Alfa-Bank, in a recent op-ed for Forbes. She described a «two-tiered structure of economic activity» characterized by significant disparities across different sectors.

«The growing imbalance in the structure of growth makes it challenging to interpret the overall economic landscape,» Orlova explained. «While some companies understandably report declining market conditions, others… are rapidly increasing production and wages.»

Given the uneven expansion across various sectors, Orlova suggested that labor market statistics would serve as a more reliable indicator of any economic downturn. Labor shortages emerged as the second most frequently mentioned issue in the Central Bank’s June surveys, cited by 22% of respondents.

Despite the deteriorating economic indicators, official unemployment remains close to all-time lows, with the jobless rate recorded at just 2.3% in April, based on the latest government data.

However, June marked the steepest decline in factory employment since April 2022, as companies adjusted their workforce in response to falling orders, according to S&P Global. With layoffs increasing and forward-looking indicators softening, the Russian industrial sector seems to be under mounting pressure from both internal and external factors.