Russia’s manufacturing PMI climbed to its highest level since January 2017 registering 52.8 in March, up from almost no change of 50.1 in February, said IHS Markit, which compiles the Russia Manufacturing PMI survey, in a press release.

“March data signalled a further improvement in the health of the Russian manufacturing sector. The solid overall expansion was supported by significant accelerations in rates of output and new business growth. Although foreign client demand fell for the third month running, new orders rose at the fastest pace since January 2017 amid stronger domestic demand. Subsequently, business confidence improved in March and the degree of optimism reached a fresh series high,” Markit said.

The acceleration in manufacturing comes on the back of improving business confidence as bne IntelliNews recently reported, even if consumer confidence remains weak. Business confidence is now at its highest level since the middle of 2017 after taking a hit in 2018.

The strong manufacturing PMI also comes on the back of better than expected industrial production numbers in February. Russia's industrial output growth surged to 4.1% year-on-year in February, after 1.1% posted in January, which surprised analysts, who say it was probably a one off caused by railway investment.

The caveat to the good news is inflation is still running higher than last year, partly driven up the increase in VAT rates imposed at the start of this year. Cost burdens increased at a faster pace in March, according to Markit’s panellists.  

“Manufacturers stated that greater cost burdens stemmed from the recent hike in VAT and higher supplier prices. The rate of inflation picked up from February and was faster than the series trend. Meanwhile, output charges rose sharply as higher input costs were partly passed on to clients,” Markit said.

Panellists suggested that the upturn was linked to greater new order book volumes, and the rise in new business quickened following new client acquisitions and stronger domestic client demand, according to Markit. The increase in new orders was the most marked since January 2017. Foreign client demand, however, contracted for the third month running. Still, the degree of optimism amongst businesses reached the highest level since data collection began in April 2012.

Siân Jones, economist at IHS Markit, commented: "Russian manufacturers signalled a significant uptick in domestic demand and production in March, indicating a solid end to the first quarter of 2019 following relatively lacklustre growth in February. Rates of new order and output growth accelerated, supporting an improvement in business confidence, which reached a series high.

"Despite a strong rise in new business, efficiency gains in production allowed firms to clear backlogs at the fastest rate since January 2015. Consequently, employment rose at only a fractional pace as strain on capacity was reduced.

"The ongoing impact of the recent hike in VAT and higher supplier costs continued to push input prices up. In response, firms raised factory gate charges sharply."