Russia’s services sector remained under pressure in July as weak consumer demand and falling purchasing power continued to weigh on business activity, while fuel shortages pushed up transport costs and renewed inflationary pressures across the economy. (chart)

The latest S&P Global Russia Services PMI Business Activity Index rose to 49.0 in July from 48.2 in June, signalling that activity continued to contract, albeit at the slowest pace in three months. A reading below 50 indicates a contraction in activity.

Russia's manufacturing sector expanded at its fastest pace in 18 months in July as stronger domestic demand lifted output and new orders, although weakening exports, fuel shortages and deteriorating business confidence pointed to a fragile recovery. The seasonally adjusted S&P Global Russia Manufacturing Purchasing Managers' Index (PMI) rose to 50.7 in July from 50.3 in June, its highest reading since January 2025. A reading above 50 indicates expansion.

Across the wider economy, the S&P Global Russia Composite PMI Output Index rose to 49.6 in July from 48.9 in June, indicating that private sector output continued to decline, although only marginally.

"Overall business activity fell at a fractional pace," the report said.

Services struggling

The survey suggests that Russia's economy remains split between a manufacturing sector that is still benefiting from state spending, particularly on defence-related industries, and a consumer-facing services sector that continues to struggle with subdued household demand.

"The latest contraction, underpinned by another monthly fall in new sales, was weaker than the month before, however," S&P Global said in its monthly survey.

New business declined for the fourth consecutive month, although the pace of contraction eased to the weakest in three months. Survey respondents said weaker purchasing power among consumers continued to suppress demand for services.

"Lower purchasing power at customers and subdued demand conditions weighed on total new sales," the report said.

The survey comes as Russia's economy continues to slow following two years of rapid wartime expansion. The Central Bank of Russia has maintained relatively tight monetary policy to combat inflation, although it has begun gradually reducing interest rates after price pressures showed signs of easing. High borrowing costs and slowing real wage growth have increasingly weighed on consumer spending.

One of the most notable findings in the July survey was the renewed acceleration in input costs caused by fuel shortages.

"July data saw a renewed acceleration in the pace of input price inflation at Russian service providers. Hikes in operating expenses were often attributed to fuel shortages which pushed up supplier and logistics costs."

Russia has experienced periodic regional fuel shortages over the past year as refinery outages, Ukrainian drone attacks on oil infrastructure, seasonal agricultural demand and government efforts to balance domestic fuel supplies with profitable exports have tightened diesel and gasoline availability in parts of the country.

Although input cost inflation accelerated from June, S&P Global noted that it remained below the long-run average for the survey.

Companies responded by increasing prices charged to customers.

"Service sector firms raised their selling prices at a faster pace, in line with a sharper uptick in costs in July."

However, firms were unable to pass on all higher costs.

"Companies sought to pass through greater input prices to customers, but the rate of charge inflation was still historically muted amid some reports of discounting to drive new sales."

Employment also continued to weaken. Service companies reduced staffing levels for the sixth consecutive month, although the pace of job cuts moderated compared with June.

"Headcounts were reportedly reduced due to the non-replacement of voluntary leavers, with firms some also mentioning shorter working hours more generally amid weak demand."

Businesses also continued working through existing orders as subdued demand left spare capacity across the sector.

"Panellists noted that sufficient capacity and subdued new order inflows had enabled the processing of unfinished work."

Despite the difficult operating environment, business confidence improved modestly.

"Expectations regarding business activity levels in the coming year improved at the start of the third quarter."

Firms said they expected stronger client demand, new product launches and investment in facilities over the coming year.

Nevertheless, S&P Global cautioned that "the level of optimism was well below the long-run series average amid concerns regarding customer purchasing power."

Composite PMI

The composite data highlighted an increasingly divergent economy. Manufacturing output continued to expand, while services remained in contraction. Manufacturers also recorded growth in new orders, whereas service providers continued to report declining sales.

The survey also showed that fuel shortages were affecting businesses beyond the services sector.

"Reports of fuel shortages across the private sector in part pushed up input costs at an accelerated pace during July."

Companies responded by passing some of these higher operating costs on to customers through higher selling prices.

At the same time, businesses across both manufacturing and services continued to reduce staffing levels as subdued demand limited pressure on capacity.

Taken together, the July PMI surveys suggest Russia's private sector remains close to stagnation. While government spending continues to underpin manufacturing activity, the services sector is struggling against weak household demand, restrained consumer spending and rising operating costs, leaving overall private-sector output marginally below the threshold separating expansion from contraction.