Russia's manufacturing sector returned to modest growth in June after more than a year of stagnation, as improving domestic demand offset a renewed deterioration in export markets, although businesses remained cautious over the outlook amid weak consumer purchasing power and continued logistical disruptions.  (chart)

The S&P Global Russia Manufacturing Purchasing Managers' Index (PMI) rose to 50.3 in June from 48.8 in May, crossing above the 50-point threshold that separates expansion from contraction for the first time since the start of the year. While the improvement was marginal, it marked the strongest reading since January and suggested that activity in the goods-producing sector may be stabilising after a prolonged slowdown.

The rebound was driven by the fastest increase in factory output since January 2025, alongside the first stabilisation in new orders after 12 consecutive months of decline.

Manufacturers attributed higher production to signs of improving customer demand, while some companies reported securing successful tender contracts that helped underpin sales. Although overall new orders stopped falling, the recovery remained heavily dependent on the domestic market.

Exports continued to deteriorate. New export orders fell at the fastest pace since September 2025 as manufacturers cited a weak international trading environment. The decline highlights the increasingly bifurcated nature of Russia's economy, where state spending and import substitution continue to support domestic industry while external markets remain constrained by sanctions, logistical bottlenecks and subdued global demand.

The latest survey suggests Russia's industrial sector is continuing to benefit from government spending on defence and infrastructure, but broader manufacturing activity remains uneven. As IntelliNews reported, the Russian economy has been split in half: the military industrial complex is flourishing, while the civil sector is stagnating.

Since the full-scale invasion of Ukraine in 2022, production has increasingly shifted towards sectors linked to military procurement, while civilian manufacturers have struggled with labour shortages, high borrowing costs and restricted access to imported components.

Despite the improvement in activity, manufacturers continued reducing headcount during June as spare production capacity remained available.

Companies reported that employees leaving voluntarily were generally not replaced, allowing firms to process existing workloads without hiring additional staff. Outstanding business declined again during the month, although the pace of backlog depletion slowed from May's record rate.

The survey also pointed to a modest easing in inflationary pressures.

Input costs continued to rise sharply as firms faced higher supplier prices, fuel costs and raw material expenses. However, the rate of cost inflation slowed from May and remained below the long-run survey average. Output prices also continued to increase, but manufacturers indicated that competitive pressures prevented them from fully passing higher costs on to customers.

"Greater costs were largely passed through to customers, but some companies mentioned that competition and efforts to drive new sales moderated the pace of increase," S&P Global said.

Supply chains remained under pressure.

Suppliers' delivery times lengthened at the fastest pace since January, with respondents pointing to logistical difficulties and fresh challenges importing components following the conflict in the Middle East. Those disruptions encouraged firms to increase purchasing activity and build inventories in anticipation of stronger demand later this year.

Input buying rose for a second consecutive month, supporting the fastest accumulation of pre-production inventories since February 2023. By contrast, manufacturers continued reducing stocks of finished goods as they relied on just-in-time production techniques to minimise holding costs.

The willingness to accumulate raw materials suggests companies expect demand to strengthen further, although confidence has become slightly more subdued.

Businesses remained optimistic that production will expand over the coming 12 months, but overall sentiment slipped to a three-month low and remained weaker than the historical average.

According to S&P Global, companies expressed growing concerns about the purchasing power of customers despite expectations that new orders will improve.

The latest data are consistent with a broader picture emerging across the Russian economy. While activity continues to be supported by record government expenditure, particularly on defence-related industries, high interest rates maintained by the Central Bank of Russia to curb inflation have increasingly weighed on private investment and consumer demand. Manufacturing appears to be stabilising, but the recovery remains modest and heavily dependent on state-driven sectors rather than a broad-based revival in private economic activity.