Russian service sector contracts at fastest pace since 2022, PMI shows

Russia's service sector contracted sharply in September, with the S&P Global PMI falling to 47.0 from 50.0, marking its steepest decline since December 2022. This downturn was driven by the sharpest fall in new orders since late 2022 and accelerating input costs, despite businesses moderating output price increases to remain competitive. The broader composite PMI also registered its sharpest private sector output fall since October 2022, underscoring persistent economic headwinds from declining demand and inflationary pressures.

Analysis

Russia's service sector experienced a significant contraction in September, with the S&P Global PMI dropping to 47.0 from 50.0, marking the steepest decline in business activity since December 2022. This downturn was primarily driven by the sharpest fall in new orders since late 2022, a direct result of reduced customer numbers and diminished purchasing power. The weakness is broad-based, as the composite PMI, which includes manufacturing, fell to 46.6, signaling the most pronounced drop in private sector output since October 2022. Concurrently, firms faced accelerating input costs—the quickest rise in five months—due to higher supplier, wage, and utility expenses. This created a margin squeeze, as businesses moderated their output price increases to maintain competitiveness. A notable divergence exists between current activity and future planning; despite the sharp decline in orders, employment rose at its fastest pace since January 2024 and business confidence strengthened slightly, indicating firms may be preparing for a future rebound that is not yet supported by current demand data.

Key Decisions for Investors

• Investors should exercise caution on exposure to the Russian domestic economy, as the sharp contraction in both services and the broader private sector highlights significant headwinds from declining demand.
• The divergence between falling new orders and rising employment is a key risk to monitor; if demand does not recover, this trend could signal unsustainable labor costs and further pressure on corporate profitability.
• The combination of accelerating input costs and moderated output prices points to severe margin compression, warranting a bearish view on Russian consumer-facing sectors until there are clear signs of demand stabilization and easing cost pressures.