Business activity across the Russian service sector expanded at its fastest pace in over two years in March, according to the latest PMI data.

Output growth quickened at its sharpest since August 2020, as stronger demand conditions supported the upturn. The seasonally adjusted S&P Global Russia Services PMI Business Activity Index posted 58.1 in March, up strongly from the 53.1 posted in February. (chart) Any result above the no-change 50 mark is an expansion.

“The latest data signalled a marked rise in output across the Russian services sector, with the rate of growth the fastest in just over two and a half years. Where an expansion in business activity was recorded, firms linked this to stronger demand conditions and a further upturn in new orders,” S&P reported on April 5.

Contributing to the expansion in capacity at Russian service providers was a renewed accumulation in backlogs of work. The level of outstanding business rose only marginally but for the first time in eight months.

“Service providers reported a renewed expansion in new export orders, as foreign client demand contributed to the rise in total sales. Greater new orders sparked a faster rate of employment growth, as firms expanded their workforce numbers in an effort to relieve pressure on capacity amid a renewed rise in backlogs of work,” S&P said.

The exceptionally strong services PMI result comes on top of another solid month for the manufacturing PMI. The seasonally adjusted S&P Global Russia Manufacturing Purchasing Managers’ Index posted 53.2 in March, down slightly from 53.6 in February, to signal a solid improvement in operating conditions across the Russian manufacturing sector.

The two strong results also pushed up the S&P Global Russia Composite PMI Output Index to an exceptionally strong 56.8 in March, up from 53.1 in February, to signal a steep upturn in private sector business activity.

“The rise in output was the fastest since August 2020 and historically elevated,” S&P said. “Supporting the increase in output was a quicker rate of new business growth in March. The upturn was broad-based, with service providers registering the sharper rise in client demand. A renewed increase in service sector new exports was offset by weaker foreign demand for manufactured goods, however.”

Nevertheless, firms are still battling inflation which remains in double digits, but that pressure is starting to ease thanks to the aggressive tightening policy of the CBR. (chart) The rates of input cost and output charge inflation eased to their slowest since January 2021. The CBR said this week that it expects inflation to fall from its current 11% to the target rate of 4% in the coming months, but then to rise again in the autumn. The rate of increase in operating expenses eased to its slowest since January 2021, however, amid some reports of a moderation in price hikes at suppliers.

The PMIs are being lifted by a revival in the Russian economy as it bounces back from the shock of sanctions imposed last year, plus a fillip from the heavy state military spending. While Russia’s economy contracted by 2.1% in 2022, economists are predicting growth, albeit mild, for this year of between 0.3% and 1%.

Driving the rise in output was a second successive monthly expansion in new business at Russian service providers at the end of the first quarter. Higher new business reportedly stemmed from increased customer referrals, greater client activity and successful advertising campaigns. The rate of growth accelerated to a steep pace that was the sharpest since August 2020, S&P reports.

However, sanctions have killed off most of the orders from outside Russia, although that trend seems to now be coming to an end. New export orders grew during March, ending a 12-month sequence of contraction. The rise in foreign client demand was attributed to increased customer interest from a broader range of export markets. Although only marginal, the pace of expansion was the quickest since October 2021.

In line with a stronger upturn in new business, Russian services firms stepped up their recruitment efforts in March. Unemployment in Russia is currently at a post-Soviet low of 3.5% (chart), partly induced by the partial mobilisation that started on September 21 last year that sucked 300,000 men out of the workforce. Indeed, Russia is currently suffering from a labour shortage, as the war has also hit immigration from the Caucasus and Central Asia that provides much of Russia’s low-cost labour force.

Rising demand in the service sector led to rising workforce numbers for the second month in a row and at a modest pace that was the quickest since June 2021.

From the Russian perspective, recent polls show that the people think the war is going well, and it has made a noticeable difference to daily life on the streets of Moscow.

It’s business as usual for most Russians, and services firms maintained a positive outlook for output for the year ahead in March.

“Plans for expansion of current facilities and new product lines, alongside hopes of greater client demand, reportedly buoyed sentiment. The degree of confidence slipped from February's recent high, however, and was slightly weaker than the long-run series average,” S&P reports its panellists as saying.