Russian services sector contracts at fastest rate since June 2024, PMI shows

Russia's services sector contracted at its fastest pace since June 2024 in July, with the S&P Global PMI falling to 48.6 from 49.2, primarily due to declining new orders and weak client demand. This downturn follows a significant contraction in the manufacturing sector, contributing to a near three-year low in overall business confidence. Despite the domestic weakness, new export business expanded for a ninth consecutive month, and services firms increased staffing levels, reflecting underlying optimism for future demand and financial conditions.

Analysis

Russia's services sector contracted at its fastest pace since June 2024, with the S&P Global PMI falling to 48.6 in July from 49.2 in June, indicating a deepening economic slowdown. The contraction was primarily driven by a reduction in new order intakes and weak domestic client demand. This trend mirrors weakness in the manufacturing sector, which also recently declined at its fastest rate since March 2022, contributing to business confidence falling to a near three-year low. Despite these significant domestic headwinds, the data presents a mixed picture. New export business expanded for the ninth consecutive month, albeit at a slower rate. Furthermore, services firms increased staffing levels, citing optimism based on expectations of future improvements in demand and financial conditions, suggesting a corporate belief that the current downturn is manageable or that strategic shifts will prove effective.

Key Decisions for Investors

• Investors should view the contracting PMI figures in both services and manufacturing as a clear signal of deteriorating domestic economic conditions in Russia, warranting caution on any direct exposure.
• Monitor the divergence between weak domestic orders and resilient export growth, as a continued reliance on exports amid a faltering internal market could heighten geopolitical and trade-related risks.
• The increase in hiring despite the downturn is a key forward-looking indicator; if the anticipated demand recovery fails to materialize in subsequent reports, a sharp reversal in employment and a deeper recession could follow.