Russia’s manufacturing and service sectors reported modest growth at the close of 2024 but also indicate a clear slowdown in economic activity as the stress caused by the war in Ukraine begins to take its toll. (chart)

According to the latest Purchasing Managers’ Index (PMI) data from S&P Global both services and manufacturing sectors expanded, but the pace of growth decelerated, reflecting subdued client demand, material shortages, and rising costs that continue to weigh on business activity.

The S&P Global Russia Composite PMI Output Index dropped to 51.1 in December from 52.6 in November, indicating a slower and marginal expansion.

“Supply chain challenges and the prospect of higher input costs prompted firms to increase purchases, but workforce reductions and dented business confidence remain concerns,” S&P Global noted in its report.

Manufacturing faces headwinds

The Russia Manufacturing PMI slipped to 50.8 in December, down from 51.3 in November, marking only a marginal improvement in operating conditions. While new orders continued to grow, the pace was modest and below the long-term trend. Export orders, buoyed by trade with neighbouring countries, outpaced domestic sales but still reflected slowing momentum.

Manufacturers faced persistent inflationary pressures, with input costs rising at the second-highest rate since October 2023. Currency fluctuations and material price hikes were significant contributors. Despite easing cost pressures, companies increased selling prices to offset input cost surges.

Labour market trends also pointed to strain. “Production efficiencies and subdued order growth allowed firms to manage backlogs, reducing the need for additional staff,” the report highlighted. Employment levels fell slightly for a second consecutive month, reflecting dampened confidence in future output.

Services maintain resilience despite slower growth

In contrast, the Russia Services PMI posted at 51.2 in December, a decline from 53.2 in November, though it marked the sixth consecutive month of expansion. Firms cited sustained demand and new client wins as key drivers. However, the pace of new order growth softened compared to November, while backlogs of work accumulated at the steepest rate since August 2023.

Employment in the service sector continued to rise, growing at the fastest rate in four months, as firms grappled with capacity constraints. However, cost burdens soared due to exchange rate volatility and supplier price increases, leading to the sharpest input inflation since January 2024.

“Although firms sought to pass on costs to customers, the pace of output price increases moderated to a four-month low,” S&P Global noted.

Russian economy slowing

While both sectors showed resilience, the outlook for 2025 remains clouded by inflationary pressures and supply chain uncertainties. Businesses have expressed concerns over rising material costs and transportation delays, which could further strain margins.

“Concerns around higher prices and material shortages dampened hopes of strengthening client demand,” manufacturers reported, reflecting tempered optimism for the year ahead.

The Russian economy faces a precarious balancing act as it navigates these challenges. Robust demand and improved efficiency will be critical to sustaining growth, while policymakers may need to address structural supply chain issues to support long-term recovery.