Business activity in Russia’s private sector fell sharply in September, reaching its lowest level in three years, as weaker demand and high borrowing costs weighed on output, according to data from S&P Global released on October 3, reported The Moscow Times.

The S&P Global Composite Purchasing Managers’ Index (PMI) dropped to 46.6 in September from 49.1 in August, well below the 50-point threshold separating growth from contraction. The reading reflected a fourth consecutive monthly decline in manufacturing and the steepest drop in services activity since December 2022.

S&P Global said the downturn was driven by a third straight fall in new orders, with firms citing shrinking client bases and weaker consumer purchasing power. Businesses also reported rising costs for wages, utilities and raw materials, with input costs increasing at the fastest pace in five months. However, many struggled to pass those higher costs on to customers, leading to tighter margins.

While separate data from the Russian Central Bank indicated a slowdown rather than a contraction — its business climate index eased to 1.8 from 2.0 in August — economists warned that the PMI reflects conditions in the civilian economy, excluding defence-related sectors that continue to expand.

The Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF) estimated output in civilian industries had fallen 5.4% year-to-date and 6.3% over the past 12 months, citing high interest rates that have hurt profitability and stifled investment.

Economist Dmitry Nekrasov of the CASE think tank said the private sector is under pressure as resources shift to the military-industrial complex, while the Central Bank’s steep rate hikes — aimed at curbing inflation driven by wartime spending — have further weakened private demand.

President Vladimir Putin has acknowledged that tight monetary policy is dampening growth but defended the measures as necessary to control inflation. The government now expects the economy to expand by 1% in 2025 and 1.3% in 2026, while T-Investments’ chief economist Sofia Donets predicts GDP growth of less than 1% in both years.