Russia’s services sector is maintaining a modest expansion, with the S&P Global Russia Services PMI holding at 51.3 in September, matching its six-month high and marking a second consecutive month above the 50.0 growth threshold. The broader private sector is also showing signs of stabilisation, with the Composite PMI rising to 50.8, its strongest reading since February.

The data point to a Russian economy that is stabilising rather than accelerating. New business is improving, private-sector orders are beginning to stabilise, and inflationary pressures are moderating. However, persistent employment declines, weak backlogs and subdued capacity pressures suggest that businesses remain cautious about the strength and durability of the recovery.

Market Snapshot

Services Sector Maintains Moderate Growth

The services PMI remains at 51.3, keeping activity in expansion territory for a second consecutive month. Growth is being supported by an increase in new orders and successful marketing activity, although the pace remains below the long-term series average.

This suggests that domestic demand is providing some support to service providers, but companies are not yet seeing the type of broad-based acceleration that would signal a stronger economic upswing.

For the coming months, the key issue will be whether new business continues to improve enough to generate stronger output growth and eventually translate into renewed hiring.

Private-Sector Activity Begins to Stabilise

The Composite PMI has strengthened to 50.8 from 50.6, marking its highest level since February and a second consecutive month of expansion.

Manufacturing remains weaker than services, although the rate of factory output contraction is easing. At the same time, service-sector growth is holding steady.

One of the more significant developments is the stabilisation of new orders after six consecutive months of contraction. This could provide an important foundation for future activity if businesses continue to see improvements in incoming demand.

However, the recovery remains fragile. Backlogs are continuing to decline, indicating that companies still have spare capacity and are not facing significant pressure from outstanding workloads.

Employment Remains a Weak Point

Employment continues to provide a negative signal.

Russian private-sector employment has declined for an extended period, with September marking the eighth consecutive month of job losses. Companies are largely reducing headcount by not replacing employees who leave voluntarily rather than through aggressive direct layoffs.

The pace of job shedding has nevertheless eased to its weakest level in several months.

This could eventually become a more constructive signal if stabilising demand encourages companies to stop reducing their workforce. However, without a sustained improvement in orders and output, businesses are likely to remain cautious about increasing payrolls.

Inflationary Pressures Are Moderating

Another important development is the moderation in cost pressures.

Input costs and output charges are increasing at slower rates, with both measures recording their weakest increases in three months.

For the Russian economy, easing cost pressures could provide businesses with greater flexibility on margins and pricing. It could also reduce some of the pressure on consumers and companies created by persistent inflation.

The direction of inflation will remain important for monetary policy expectations and, consequently, for the Russian rouble.

Bullish Scenario

The outlook would become more constructive if new orders continue to strengthen and the recent stabilisation in private-sector activity develops into a broader recovery.

A sustained improvement in services demand, combined with a further easing in manufacturing contraction, could lift the Composite PMI further above 50.

Lower input-cost growth would also support margins and potentially allow businesses to increase output without facing the same degree of pricing pressure.

A stronger domestic economy could provide some fundamental support for the rouble, particularly if improving activity is accompanied by stable monetary and external conditions.

Bearish Scenario

The main downside risk is that the current expansion fails to develop into a sustained recovery.

Services activity remains only modestly above the 50 threshold, while employment continues to decline and backlogs remain under pressure.

If new orders fail to build momentum, companies could continue reducing staff and limiting investment. A renewed contraction in manufacturing would also weaken the Composite PMI and reinforce concerns about the underlying strength of economic activity.

For the rouble, weaker domestic growth could become an additional negative factor if it coincides with softer commodity revenues, weaker external demand or renewed inflation and monetary-policy uncertainty.

Economic Outlook

Russia’s latest PMI data suggest that the economy is moving into a period of modest stabilisation rather than strong expansion.

The services sector is providing the main source of growth, while manufacturing is contracting at a slower pace. Stabilising new orders and moderating inflationary pressures are constructive developments, but the continued decline in employment and workloads indicates that businesses remain cautious.

The next several PMI releases will therefore be important in determining whether September represents the beginning of a broader recovery or simply a temporary period of stabilisation.

Louis Roche Analysis

The Russian private sector is showing early signs of finding a floor, but the current data do not yet justify calling this a strong recovery.

The most encouraging development is the stabilisation of new orders after a prolonged period of contraction. When combined with two consecutive months of services-sector expansion and a Composite PMI above 50, this suggests that domestic economic activity is becoming more resilient.

However, employment remains weak and businesses still have spare capacity. That tells us that companies are not yet sufficiently confident in the durability of demand to expand aggressively.

From a market perspective, I would therefore focus on the direction of new orders, employment and the Composite PMI rather than the headline services PMI alone.

If these indicators continue improving, the market could increasingly price a more stable Russian growth environment. If they reverse lower, the recent improvement could quickly be viewed as temporary.

For the rouble, the economic data are supportive at the margin, but currency direction will continue to depend on the wider combination of monetary policy, commodity revenues, external trade conditions and the strength of the US dollar.

Coming Sessions

Markets will focus on whether Russia’s private-sector stabilisation continues into the next reporting periods.

Key indicators to monitor include:

• Services and Composite PMI readings
• New orders and business activity
• Employment trends
• Manufacturing output
• Input-cost inflation
• Output-price inflation
• Consumer and domestic demand indicators
• Central-bank policy expectations
• Commodity and energy revenues
• Broader US dollar direction

A continued move above the 50 PMI threshold would strengthen the case for a gradual recovery, while a renewed deterioration in new orders or employment would challenge the recent improvement.

Currency Hedger View

Currency Hedger sees the latest Russian PMI data as moderately constructive but not yet strong enough to signal a decisive economic recovery.

The stabilisation in new orders and continued services-sector expansion provide a more supportive backdrop for the Russian economy, while easing cost pressures reduce some of the inflationary strain on businesses.

For companies with Russian-linked revenues, costs or cross-border currency exposure, the key consideration remains the interaction between domestic economic activity, monetary policy, commodity markets and broader USD direction.

Currency Hedger monitors these developments alongside global FX and macroeconomic conditions to help businesses assess and manage their international currency exposure.

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Contributor: Louis Roche – Currency Hedger

Market analysis prepared for Today Markets. For informational purposes only and not intended as investment, trading, financial or commodity advice.