Rapid Decline in Russian Business Activity Reaches Near Three-Year Low
The Russian economy is experiencing tough times, as indicated by German Gref, head of Russia's Sberbank. This sentiment is reflected in the latest data, with the Russia Manufacturing PMI dropping to 47 points in July, signalling contraction in factory activity and the fastest decline since the early months of the 2022 war in Ukraine.
This downturn is primarily due to falling new orders, financial difficulties, cost-cutting measures, economic slowdown, and supply-side constraints. New sales contracted for the fourth time in five months in July, with the pace of decline accelerating sharply, reflecting weak client demand and lower inflows of new orders. Companies face challenges securing financing and receiving payments, contributing to lower output.
The Central Bank of Russia's historically high interest rates, although recently cut from over 20% to 18%, have raised borrowing costs, stifling investment and consumption. Firms are retrenching on employment and input buying, depleting stocks, and operating below full capacity as part of cost-cutting measures amidst economic uncertainty. Rising costs from inflation and supply chain disruptions also weigh on margins.
The broader Russian economy has slowed markedly, with annual GDP growth dropping to an estimated 1.4% year-on-year in early 2025, reflecting pressures from sanctions, labor shortages, and inflation control efforts. These factors have constrained manufacturing and other sectors, leading to a decline in business confidence. Sentiment has fallen to its lowest level in nearly three years due to ongoing economic difficulties, uncertainty, and the cumulative impact of the above stresses on operations and expectations.
While export demand rose slightly, offering limited relief, it is insufficient to offset domestic demand weakness and financial constraints. In July, the service sector activity index (PMI Services) also dropped to 48.6 points, the lowest figure since Moscow launched its full-scale war against Ukraine. July marked the first month this year when demand in the services sector fell in Russia.
The coal industry in Russia is in the midst of a severe crisis, described as the worst since the 1990s. Russian banks are becoming increasingly concerned about the amount of bad debt on their balance sheets. The manufacturing sector index (PMI Manufacturing) also fell to 47 points in July, the lowest figure since the same period. The IBC business climate indicator fell from 3 to 1.5 points in July in Russia.
Despite these challenges, companies in Russia are attempting to offset rising costs by raising retail prices. The Kremlin plans to cut defense spending, which has reached record levels since the days of the USSR, as part of efforts to address the economic slowdown. Analysts at Promsvyazbank and the Institute of Economics of the Russian Academy of Sciences highlight that economic demand is weakening more than in 2016 and 2020. The Central Bank of the Russian Federation acknowledges the decline in business activity but calls it a "slowdown in growth" rather than a recession.
[1] Source: Russian Manufacturing PMI [2] Source: Russian Manufacturing Sector Report [3] Source: Russian Economic Outlook [4] Source: Russian Central Bank [5] Source: Russian Economic Reports
- The challenging financial landscape in Russia, marked by deficits and high borrowing costs, has led companies to invest less in both production and consumption, as evidenced by the decline in business activity, according to the Russian Central Bank.
- The slowdown in the Russian economy, as indicated by the Manufacturing PMI, has impacted various sectors, including finance, business, and science, as companies strive to maintain profitability amidst escalating costs and reduced demand, a trend broadly documented in Russian economic reports.
