The unexpected economic slowdown that started at the end of September delivered another surprise after IHS Markit reported the biggest drop in the Russia Services Business Activity PMI Index, which tumbled from 53.7 to 46.9 in October – the biggest one-month fall since the pandemic broke out in Russia in May, Markit said in a press release on November 5. Any result under the 50 no-change market represents a contraction.

The services result follows on from a disappointing figure for the manufacturing PMI, which also slid from 48.9 in September to 46.9 in October.

Taken together, the composite PMI went back into the red and posted 47.1 in October, reversing the expansion of 53.7 in September and going back into the red.

The contraction in the services sector was unexpected, as while manufacturing has been spluttering for the last few years, unable to build up any momentum, even when the manufacturing PMI got back into the black, services have held up much better, partly helped by the flourishing online business.

“The October PMI data signalled a renewed contraction in business activity across the Russian service sector. The decline was driven by weaker demand conditions, as a resurgence in coronavirus disease 2019 (COVID-19) cases and restrictions weighed on new sales,” Markit said. “New orders from abroad continued to fall as key export destinations also re-imposed tighter virus-related measures. As a result, pressure on capacity remained subdued, and firms cut their workforce numbers further. At the same time, pandemic uncertainty dragged expectations down, as service providers were their least optimistic of a rise in output over the coming year for five months.”

The number of daily new infections has soared and is approaching 20,000 per day as of the first week of November, almost double the infection rate in the early summer when the first lockdown was imposed. Despite the increasing risks to public health the Kremlin is equally worried about the economic damage done by the first lockdown and has chosen not to impose a second lockdown as autumn sets in and the heating season starts. Instead, the government is attempting a “lockdown-lite”, where those over 65 years old have been told to stay home, and mask and glove rules are now being stringently enforced.

The fall in business activity due to the rapidly accelerating second wave of the pandemic in Russia is understandable, but analysts were taken by surprise when the economy had already started to slow in September. The second wave only really took off in the last week of September but industrial production and other indicators from earlier in the month were already dropping before the second wave of the pandemic appeared.

After crashing by 10% in April, industrial production began to recover over the following months, rising to a contraction of 3.3% in July, but in August it turned and began retreating again, first to -4.1% in August and then -5% in September, according to preliminary results. Based on the PMI date trend industrial production can be expected to shrink further when the October numbers come out.

What brought the services indicator down was the evaporation of new business, including exports. Surprisingly, manufacturing export orders held their own, but in services they fell sharply as Russia’s economy is increasingly affected by the fate of the other countries in Europe, which are also suffering from a second coronavirus wave.

“October data indicated the first contraction in new service business since June. The solid decline in new orders was much slower than April's nadir, but marked a notable contrast to expansion seen in September. Panellists often stated that greater restrictions linked to efforts to stem the spread of COVID-19 weighed on client demand and stymied new sales,” said Markit.

Increased measures in key export destinations such as those in Europe dented foreign client demand, with new export orders falling at a sharp rate that was the quickest for three months, according to Markit’s panel.

The slowdown is also weighing on employment as companies continue to cut their workforce to match the declining orders. Unemployment was at record post-Soviet lows of around 4.3%-4.5% for most of 2019, but rose to 6.4% in August and will be maintained at these levels for the foreseeable future, say experts as firms cut back their workforce numbers in October at the fastest pace since June.

Costs are also going up, partly due to the dramatic weakening of the ruble, which broke through the RUB80 to the dollar mark in recent weeks. Higher input prices were linked to greater import costs, report Markit’s panellists, following unfavourable exchange rate movements.

“Service sector firms were still able to partially pass on higher costs to clients through increased selling prices. The rate of charge inflation was solid overall, despite easing slightly from that seen in September,” Markit said.