The seasonally adjusted S&P Global Russia Services PMI Business Activity Index plummeted to 38.1 in March, down from 52.1 in February – the biggest fall since the PMI index crashed at the start of the coronavirus (COVID-19) pandemic, S&P said in a press release on April 5.

“The latest data signalled a marked decrease in business activity across the Russian service sector, which contrasted with the modest expansion seen in the previous survey period,” said S&P on the results. “The fall in output was the sharpest since the early stages of the pandemic almost two years ago. Where a decrease in activity was reported, firms linked this to the impact of higher selling prices on demand, and geopolitical uncertainty.”

The collapse in the service sector also dragged down the S&P Global Russia Composite PMI Output Index to 37.7 in March from a breakeven 50.8 in February. Any result below the no-change level of 50 is a contraction.

Russia’s economy is experiencing one of its most severe economic shocks since the fall of the Soviet Union after the West imposed extreme sanctions after Russia’s attack on Ukraine on February 24. The full impact of the sanctions is still unclear, but the early results make it clear that all the main indicators are collapsing.

“The decline in output was the fastest since May 2020, following a substantial drop in client demand and new orders. Weaker domestic and foreign customer demand was recorded. Subsequently, firms cut back on workforces, with employment declining at the sharpest pace since June 2020,” S&P said.

During the 2020 crash unemployment soared to reach a peak of 6.3% in August of that year. However, the combination of state social support and the appearance of the vaccines in the autumn saw employment rapidly recover to the post-Soviet low of 4.3% in the spring of the next year. This time round economists are forecasting that unemployment may rise to 7.1%-7.8% (still less than the circa 8.5% seen in the bowl of the 2008 crisis) and expect the high levels of unemployment to persist for longer.

“Reduced staffing numbers also reflected subdued business confidence, as expectations regarding the year-ahead outlook slumped to their lowest in two years,” S&P said.

Weak client demand led firms to reduce their workforce numbers during March. The fall was the fourth in as many months, with the pace of job shedding quickening to its strongest since June 2020.

“The decrease in staffing numbers reflected waning pressure on capacity at the end of the first quarter. Backlogs of work fell further at Russian service sector firms, and at a marked rate that was the quickest in almost two years,” S&P added.

S&P’s panellists also highlighted costs are rising rapidly on the back of severe disruptions to both supply chains and the financial system, after the Central Bank of Russia (CBR) slapped numerous capital controls on payments to contain the fallout from the SWIFT sanctions.

High inflation was a problem before the invasion, but economists are predicting that inflation could rise as high as 20% in this year, although early results released by RosStat suggest the current rate of inflation at the end of March was a more modest 15%.

“Inflationary pressures intensified notably compared to February. Rates of input price and output charge inflation accelerated to series-record highs amid hikes in supplier charges and input costs,” S&P said.

“On the price front, cost burdens surged again in March. The rate of input price inflation quickened notably from that seen in February and was the sharpest on record. Higher costs were commonly attributed to soaring supplier prices and unfavourable exchange rate movements,” S&P added.

In line with a record rate of cost inflation, Russian service providers raised their selling prices at the fastest pace since the series began in October 2001. The hike in output charges was overwhelmingly linked to the pass-through of higher costs to clients.

The main impact of the current shock has been to undermine confidence and freeze business as companies stand on the sidelines and husband resources.

Business confidence regarding the outlook for output over the coming 12 months turned negative in March. Russian services firms signalled a marked turnaround in sentiment from the strong degree of optimism seen in February, as the level of confidence dropped to its lowest since March 2020. Where firms were pessimistic, this was often linked to greater economic and geopolitical uncertainty, says S&P. 

The March data indicated a substantial drop in new orders at Russian service sector firms, reports S&P. “Panellists noted that lower order volumes were due to greater economic uncertainty, which weighed heavily on customer demand,” S&P reports.

To add to the pain, the rest of Europe has largely severed business ties with Russia and the panellists report a renewed contraction in new export orders. “Foreign client demand fell substantially and at the steepest rate since April 2020's series record low,” S&P reports.