Russian manufacturing sector returns to growth in May, PMI shows

Russia's manufacturing PMI edged into expansion territory in May, rising to 50.2 from 49.3, driven by a marginal increase in new orders, the fastest since the start of the year, despite a third consecutive month of decline in output due to supply shortages. While domestic demand is strengthening, new export orders continue to decline, and manufacturers are slightly expanding their workforce to broaden capacity, expressing optimism for future output based on investment and hopes for strengthened demand.

Analysis

Russia's manufacturing sector registered a marginal return to growth in May, with the S&P Global Purchasing Managers' Index (PMI) rising to 50.2 from 49.3 in April. This shift above the 50-mark threshold, indicating expansion, was primarily supported by a modest upturn in new orders, which achieved their fastest growth rate since the start of the year, driven by strengthening domestic client demand and new customer acquisitions. However, this improvement is set against a backdrop of persistent challenges: manufacturing output contracted for the third consecutive month, a situation attributed to ongoing supply shortages. Furthermore, foreign client demand remained notably weak, with new export orders declining for the third month running, reflecting the impact of Russia's geopolitical situation. While significant state expenditure on military equipment has buoyed the manufacturing sector, broader federal data indicates a deceleration in industrial output growth over the past year. Despite manufacturers slightly expanding their workforce to broaden capacity and expressing optimism for future output—citing investments in production and hopes of stronger demand—the underlying economic picture is mixed, with reliance on domestic drivers and persistent external and supply-side headwinds.

Key Decisions for Investors

• Investors should interpret the improvement in Russia's May manufacturing PMI with caution, recognizing that the headline growth is driven by domestic orders, potentially linked to military spending, while core weaknesses such as contracting output and declining exports persist.
• Monitor the sustainability of domestic demand drivers within Russia and the ongoing impact of supply chain disruptions and weak external demand, as these factors represent significant risks to the manufacturing sector's outlook.
• Consider that while manufacturers express optimism, the tangible data on output and exports suggests that any investment exposure related to the Russian manufacturing sector carries elevated risks due to geopolitical factors and structural economic challenges.