Russia’s headline seasonally adjusted IHS Markit Russia Manufacturing PMI improved to 49.8 in September, up from 46.5 in August, signalling only a fractional deterioration in the health of the Russian manufacturing sector.  

The downturn was the slowest in the current four-month sequence of decline. Any result below the no-change mark of 50 is a contraction.  

Russia’s economy has been growing since March but as the low base effects of last year’s summer lockdown fade the economy has started to cool. Going into the autumn the macro number and other indices will start to return to more “normal” levels as the coronacrisis distortions pass.  

“September PMI data signalled a fourth successive monthly deterioration in operating conditions across the Russian manufacturing sector. That said, the rate of decline was only fractional overall, as the health of the sector neared stabilisation amid a renewed rise in output and client demand. Meanwhile, firms noted a reduction in the severity of supply chain disruption, which was reflected in softer hikes in input prices. Although still marked, rates of input cost and output charge inflation eased,” Markit said in a release. “Hesitancy regarding future demand conditions and signs of excess capacity persisted, however, as output expectations dipped to an 11-month low and employment continued to fall.”

Contributing to the slower overall deterioration was the first expansion in output since June, Markit reports. September data signalled a fractional rise in production across the Russian manufacturing sector as firms noted stronger client demand at new and existing customers.

Although client demand remained historically weak, the latest data signalled an end to a four-month sequence of contraction in new sales. Where an increase in orders was reported, companies partly attributed this to the acquisition of new clients.

Russia’s recovery has been weighed down by a decline in new export orders in September, which outpaced the series average, despite easing to a three-month low, Markit said.  

Inflation remains the main bugbear, although the rate of cost increases has slowed somewhat at the end of the third quarter. Inflation took off in February last year from 2.3% and rose to the current peak of 6.7%. CBR governor Elvira Nabiullina said in a recent interview that she believes inflation will not increases further after the CBR has put through a string of rate hikes this year: March (25bp), April (50bp), June (50bp), July (100bp), September (25bp). The most recent in September surprised the market, which had expected a 50bp rate hike. Nabiullina says she expects inflation to returned to the CBR’s target rate of 4% next year.  

Markit’s panellists support Nabiullina’s optimism and reported that the rate of input cost inflation slowed at the end of the third quarter.  

“The pace of increase was the softest for a year and only slightly faster than the series average. Firms linked higher costs to greater supplier prices and unfavourable exchange rate movements,” Markit said.  

Manufacturers continued to note the partial pass-through of greater costs to clients where possible. That said, the rate of charge inflation also eased, with selling prices rising at the slowest pace since October 2020.

Pressure on capacity remained muted overall as backlogs of work decreased at a solid rate. Although the rate of decline eased to the slowest for six months, many firms did not require additional staff. This was highlighted by a modest decrease in manufacturing employment in September.

Finally, expectations regarding the outlook for output over the coming year slipped to the weakest since October 2020. Sentiment was upbeat overall, however, as firms hoped for further upticks in client demand, reports Markit.  

That tallies with the latest Rosstat business confidence survey. After soaring to go back into positive territory in June for the first time in over a decade, sentiment has cooled in the last two months and the index posted -1 in August.  

However, as the chart shows business confidence in Russia is very seasonal and always falls as the autumn starts only to pick up again in the spring. By comparison to previous years sentiment remains very buoyant.   

Bolstering sentiment is the boom in Russian corporate profits in July, which were the highest of any month in the last five years.  

The profits of Russian corporate profits soared in July, the last month of available data, rising to RUB2,767bn ($38.6bn), more than twice as much as the RUB1,061bn that companies earned in the same month a year earlier, but also more than twice as much as the RUB1,070bn they earned in July 2019, the last year of strong growth. This July’s result was by far the best result of any month this year as well as the best monthly result in the last five years, putting Russian companies on course for a banner year and by far their best year since sanctions were imposed in 2014 following the annexation of the Crimea.