The seasonally adjusted S&P Global Russia Manufacturing Purchasing Managers’ Index (PMI) posted 54.3 in April, down from 55.7 in March, as Russia’s manufacturing sector continues to enjoy solid support from spending on the war in Ukraine. (chart)

The latest expansion was stronger than the series average despite softening to the slowest in three months, S&P Global said in a press release on May 2.

“Russian manufacturers signalled a further solid improvement in operating conditions during April. Although expansions in output and new orders softened slightly from March, they remained robust,” S&P Global said.

Total new sales growth was led by domestic demand, while new export orders fell for the fifth time in six months.

Overall, industrial production remains strong. Year-on-year growth in industrial output in February was 8.5% and GDP growth hit 7.7%, according to the State Statistics Service, but output slowed to 4% in March as high interest rates, high inflation and shortage of labour are cooling the economy somewhat. (chart)

Increased new orders spurred hiring and greater input buying, as firms recorded the fastest rise in backlogs since July 2017. Input stock levels were depleted as efforts to replenish inventories were hampered by further supply chain delays.

Inflation in the price of inputs also remains a problem. Higher raw material and transportation costs led to a faster rise in input prices, costs that firms were passing on to their customers.

Russian inflation remains stubbornly high with consumer price inflation (CPI) at 7.6% in March and producer price inflation (PPI) even higher at 19.1% the same month. (chart)

However, the high interest rates appear to be having some effect as PPI eased a little in March from February’s 19.5% and is down from just under 22% at the end of last year. Although faster than in March, the pace of charge inflation was nonetheless the second-slowest since last June, S&P Global reports.

The Central Bank of Russia (CBR) kept the prime rate on hold in April at 16%, but is struggling to contain inflation, especially PPI as the economy runs hot due to the demand created by military production.

Inflation remains at especially high levels for miners (45.8% vs 46.4% in February), as the energy-intensive nature of production made the sector especially sensitive to higher fuel prices amid the country’s refining capacity crisis thanks to Ukraine’s drone attacks.

Lifting costs for oil and natural gas producers are also soaring (62.1% vs 61.9%) and metal ore miners (33.3% vs 37.5%), Rosstat reports.

Prices also rose for manufacturers, but those increases have been a lot more modest (14.6% vs 15.1%). On the other hand, prices were largely unchanged for utility providers (0.8% vs 1.2%).

Output growth remained sharp in April, S&P Global reports, as manufacturers noted that greater new order inflows supported the upturn.

Russia is currently spending 5% of GDP on defence, or around $100bn a year. It is now massively outproducing Ukraine, and Defence Minister Sergei Shoigu said last week that the Kremlin intends to continue to accelerate production output this year.

The rate of increase in general production was the second fastest since January 2017, albeit slowing from March’s recent high, S&P Global reports.

But Russia’s economy is not entirely dependent on military spending as Russian President Vladimir Putin is being careful to try and keep life at home as normal as possible. While the labour market remains drum-tight – unemployment in March was at an all-time low of 2.8% - the shortage of manpower has driven up nominal wages faster than inflation leading to rising real incomes that is fuelling a consumption boom according to the CBR’s latest macroeconomic survey.

The workforce also expanded for the third successive month in April. The rate of job creation meanwhile slowed from March but was nonetheless among the strongest in over 23 years. (chart)

“Contributing to the rise in output was another steep expansion in new sales by Russian goods producers in April. Although the slowest for three months, the rate of growth was historically robust as firms highlighted new client wins and successful marketing campaigns,” S&P Global said.

Despite a sharp rise in employment, firms saw a faster accumulation of work backlogs at the start of the second quarter. The rate of increase in work-in-hand was the quickest since July 2017 as capacity was placed under strain.

“Meanwhile, Russian manufacturers stepped up their input buying again in April, in a bid to replenish stocks and accommodate a sustained rise in new orders. That said, input delivery delays and the use of stocks to fulfil production requirements led to a quicker fall in pre-production inventories. Stocks of finished goods were unchanged on the month,” said S&P Global.

Output expectations at Russian goods producers remained upbeat at the start of the second quarter, albeit at the weakest level in three months.

“Hopes for greater production in the coming 12 months were reportedly underpinned by the development of new product ranges and hopes of stronger customer demand,” S&P Global reports.

The CBR’s business climate indicator also reached its highest level in more than ten years in March and remained near its maximum level in April. Respondents to the CBR survey note strong demand for their goods and services, as well as high investment activity in 1Q24.