Russia's Manufacturing Contraction Eases, But VAT Hike Drives Inflation

Overview of Russian Manufacturing Trends

MOSCOW, Feb 2 (Reuters) - Russia's manufacturing sector showed signs of stabilisation in January, with the pace of contraction in output and new orders easing, although a recent increase in value-added tax (VAT) drove inflationary pressures higher, S&P Global said on Monday.

The S&P Global Russia Manufacturing Purchasing Managers' Index (PMI) rose to 49.4 in January from 48.1 in December, indicating a marginal decline in manufacturing health but marking the weakest downturn in the current eight-month sequence.

A PMI reading below 50.0 indicates contraction, while above 50.0 signals growth.

Impact of VAT Hike on Costs

Despite a softer decline in output and new orders, the VAT hike led to the steepest increase in input costs in a year.

"A historically elevated rise in input prices following VAT changes led goods producers to increase their output charges during January," the report noted, with firms passing on higher costs to customers.

Employment Trends in Manufacturing

Employment fell at the fastest rate since last June, as firms cut staffing to manage costs amid reduced working schedules. However, optimism for the year ahead improved slightly, driven by hopes of new product releases boosting orders.

Export Challenges and Supply Chain Issues

While new export business saw a modest decline, subdued demand in neighbouring markets continued to weigh on sales abroad. Supply chains faced disruptions, with delivery times lengthening to the greatest extent in nearly a year due to logistics challenges.

Overall, the data suggested that while the Russian manufacturing sector is experiencing a less severe contraction, inflationary pressures remain a concern due to tax-driven cost increases.

(Reporting by Gleb Bryanski; Editing by Toby Chopra)