After the disappointment of the continued slide in the Russian manufacturing PMI at the end of April, the release of the services PMI on May 6 was a welcome relief as the service sector has passed its nadir and is growing at its fastest pace since March 2013.

Russia's manufacturing PMI index fell to its lowest level in eight months in April, pointing to an intensifying slow down in industry, said Markit. But the growth in the services PMI is rising and gathered momentum in April, rising fast to 54.2 from 52.0 in March m/m. Any number over 50 represents growth.

"The upturn in Russia's service sector gained greater momentum during April, as output expanded at the sharpest rate in just over three years. The rise was driven by solid growth in new business intakes. However, job cuts were still reported and volumes of incomplete work continued to deteriorate. Price pressures were again evident in the sector, as both input costs and output charges increased," Markit said in a press release.

Services PMI in Russia averaged 51.61 Index Points from 2010 until 2016, reaching an all-time high of 57.60 Index Points in May of 2011 and a record low of 41.30 Index Points in February of 2015. 

Russia's manufacturing sector in general has been having a hard time with a few exceptions, notably agriculture. Part of the problem is falling demand, depressed by falling real incomes. That has lead to falling investment, which is currently contracting at a rate of 8.4% m/m in February, the last month for which data is available. It is this vicious circle that is Russia's main macroeconomic issue today and will lead to years of stagnation unless the cycle can be broken.

However, there is some breaks in the clouds after real wages went back into the black in March, rising by 1.6% m/m mainly thanks to a rapid fall in the rate of CPI inflation from 12.9% in December to 7.3% in March and April. However, as the change in inflation in the last two months has been flat, the fall in inflation seems to have reached a plateau and so the associated small rise in real incomes that has clearly boosted the services sector will probably limit more big increases in the services PMI going forward.

Despite the gains in the service sector, companies are still feeling under pressure and are seeking to boost profits by improving efficiency and cutting costs. Markit observed that service companies are still firing people and that "the rate of job shedding accelerated from March and was strong in the context of long-run historical data." This is part of a general trend: unemployment has been running at a historically low 5.8% for most of the last year, but ticked up to 6% in March. But it is the manufacturing workers that are taking the brunt of this pain, not the service sector employees.

"Manufacturers also recorded a reduction in staffing levels [in April], extending the current sequence to 34 consecutive months. Capacity pressures in Russia's manufacturing and service sectors meanwhile continued to wane, as highlighted by a further fall in business outstanding," Markit said.

Although the rate at which incomplete work deteriorated at service providers eased to the softest in four months, it remained relatively marked. Moreover, services firms have reported falling backlogs in each of the past 65 survey periods. As has been the case throughout the survey history, Russian service sector businesses registered higher input prices again in April. The rate of inflation quickened to a three-month high, with panelists linking the rise to an increase in the price for fuel, Markit reports.

Service companies have been meeting the rising costs with rising prices, which is also contributing to the flattening in the rate of the fall of inflation and have been consistently for 77 consecutive months, says Markit. However, the size of these increases has reduced significantly in recent months and barely increased at all in March.

Companies in the survey remain fairly pessimistic about the rest of the year and their outlook turned negative in April, but remains only slightly lower than March.

Commenting on the Russia Services PMI survey data, Samuel Agass, Economist at Markit, which compiles the survey, said: "April survey data again highlighted a diverging performance between Russia's struggling goods producing sector and its recovering service sector. Behind the rise in service sector activity was a further robust expansion in new business intakes, pointing to improvements in demand conditions. However, the sector is not yet firing on all cylinders, as backlogs continued to deplete and job shedding is still evident."