As expected, Russia’s services IHS Markit Russia Services Purchasing Index (PMI) crashed to its lowest level on record in April and was far worse than the manufacturing index reported at the start of the month, dragging the composite index result down with it to a new all-time low.

The seasonally adjusted services PMI fell to a stunning 12.2 in April, down substantially from 37.1 in March, and signalled the steepest contraction in business activity since data collection for the series began in 2001.

The index reflects the stop-shock following a nationwide lockdown on retail services that started with shuttering Moscow on March 30 due to the growing coronavirus (COVID-19) epidemic and was then quickly applied to another 53 regions in Russia. Even remote and sparely populated regions like Yakutia have introduced travel and movement restrictions.

The service result comes on top of a collapse in the manufacturing PMI, which also posted 15-year low of 31.1 at the start of this month, down from the modest contraction of 47.5 in March, just below the 50 no-change mark.

The combined crash in manufacturing and services dragged the composite PMI output index down to a mere 13.9 at the start of the second quarter, dropping from the already very bad 39.5 in March.

“The latest figure signalled the sharpest contraction in private sector business activity since data collection began in October 2001,” Markit said in a note.

According to the PMI results the current crisis is far worse than the one that followed the 2014 oil shock and is on a par with the 1998 financial crisis that saw Russia default on its debt and destroyed the top tier of the banking sector.

“The decline in services in output was widely linked to a slump in client demand following the implementation of emergency public health measures. Some firms also noted that lockdowns and quarantine procedures had reduced their ability to operate,” Markit said in a press release.

After the stay-at-home orders were issued, the restrictions on movement were rapidly tightened. Residents were ordered to stay indoors and only allowed out to take out the rubbish, walk the dog, or go to the local shop. Dispensations were made for those that had to go to work, but they needed to apply for permission online and a QR code system was introduced to regulate movement.

Half of Russia’s infections are concentrated in the capital, but some three-quarters of a million Muscovites decamped to their dachas on the eve of the clampdown to sit out the lockdown. In the meantime there are reports of the virus arriving in the regional cities and rapidly moving through the population. The isolated mono-cities are particularly vulnerable.

The result is also worse than the collapse of China’s PMI during the peak of its infection phase, when its PMI fell to 35. In China’s case the PMI rebounded to just over 50 the following month, but as the number of infections in Russia is still accelerating and adding 10,000 new officially confirmed cases a day for the last few days, the PMI is unlikely to recover in May.

The authorities had tentatively scheduled May 12 as the beginning of easing restrictions, but that date is almost certain to be pushed back and if anything, the restrictions may be tightened next week.

Both temporary business closures and a substantial drop in client demand drove the decrease in service business activity, says Markit, with customers holding back on spending and postponing order placements.

The slowdown is already having an impact on employment as companies have cut pay, put workers on obligatory unpaid leave or simply sacked superfluous labour. Russia had been enjoying record-low post-Soviet unemployment levels in March of 4.7%, but the jobless rate could soar to over 10% now, according to the latest estimates.

“Firms cut their workforce numbers markedly amid burgeoning spare capacity. Service providers also remained pessimistic towards output over the coming year, despite confidence improving slightly from that seen in March,” says Markit.

As the streets of Moscow emptied and residents worried about losing their jobs, new business for service providers plummeted in April, as lockdown procedures led customers to cancel or postpone orders.

“The downturn in new orders was the most marked in the series history, with foreign client demand also contracting sharply,” says Markit. “New export orders declined at the fastest pace in the series history (since September 2014), amid the escalation of the COVID-19 outbreak across Europe.”

Business managers had been optimistic about 2020 after the year got off to a strong start, but that enthusiasm has all but evaporated now. As bne IntelliNews reported, the Rosstat business confidence survey took an unseasonal dive in March, falling to -7, whereas confidence has risen to -1 or -2 each year for the last three years in the spring and sentiment usually only turns sour in the autumn months.

“Firms’ expectations towards business activity over the coming year remained pessimistic in April. Although the degree of confidence increased slightly from that seen in March, it was nonetheless the second-lowest in the series history. Firms noted that the slump in customer demand and worries surrounding the speed of any recovery drove negativity,” said Markit.

Lower new business inflows led to greater spare capacity at Russian service sector firms at the start of the second quarter. Excess capacity largely stemmed from the drop in client demand, with the level of outstanding business declining at the sharpest pace in the eighteen-and-a-half year survey's history.

Another worry for business owners is the feed-through into inflation from the devaluation of the ruble that is associated with the collapse of oil prices at the start of March, although the Central Bank of Russia (CBR) says this will be mitigated by the collapse in demand, and so chose to cut rates aggressively by 50bp at the start of April to 5.5%.

On the ground managers are already seeing prices rise, despite the radical fall in demand, although these increases may be a one-off due to changes in work practices.

“Cost burdens faced by Russian service providers rose at a solid rate [in April] that was the second-fastest since last July. The increase reportedly stemmed from costs associated with the transition to working from home and negotiating logistical challenges during the outbreak of COVID-19. That said, in an effort to retain clients and [to] try to attract new customers, firms recorded a renewed decrease in output charges. The fall was the fastest since October 2009,” says Markit.

Commenting on the latest survey results, Siân Jones, economist at IHS Markit, said: "The impact of the COVID-19 outbreak had a hugely detrimental effect on the Russian services sector, as lockdowns and other emergency public health measures imposed operational challenges for service providers. At the same time, client demand tumbled at an unprecedented rate amid the global nature of business closures. The sudden shock to business operations became blatantly apparent in April, as new order inflows dried up and firms cut employment at the sharpest rate in the series history. Pessimism felt across the manufacturing sector towards output over the coming year was reflected by their service sector counterparts. In line with negative expectations among private sector firms, we currently forecast a 3.6% contraction in GDP in 2020."