KEY POINTS
- The downturn in Russia’s manufacturing sector showed signs of stabilizing in January as the rate of contraction eased significantly.
- A recent increase in value-added tax (VAT) has driven input costs to a nine-month high, fueling renewed inflationary pressure.
- Factory owners reported a sharp decline in export orders, highlighting the ongoing impact of international trade restrictions and sanctions.
Russia’s industrial sector is showing signs of resilience despite facing significant economic headwinds. The latest manufacturing data indicates that the contraction in factory activity slowed during the first month of 2026. While the sector remains in a slump, the pace of decline is no longer accelerating.
The Purchasing Managers’ Index (PMI) improved slightly from previous lows recorded at the end of last year. However, any reading below the 50.0 threshold still signifies a shrinking industry. Russian manufacturers are currently grappling with high interest rates and a shrinking pool of available workers.
A major driver of the current economic climate is a recent hike in value-added tax. This policy change has caused a sudden jump in the cost of raw materials and logistics. Consequently, businesses are facing their steepest rise in production expenses in nearly a year.
To protect their profit margins, many factory operators are passing these higher costs on to consumers. This trend suggests that inflation may remain stubbornly high throughout the first half of the year. The central bank in Moscow continues to monitor these price spikes with great concern.
Domestic demand remains the primary engine for the few factories that are still seeing growth. Local consumers are increasingly turning to home-grown goods as imported alternatives become more expensive or unavailable. This shift has provided a small cushion for the internal manufacturing market.
In contrast, the outlook for international trade remains bleak for Russian industrial firms. New export orders fell at one of the fastest rates seen in recent history. Global sanctions and payment difficulties continue to block Russian goods from entering many traditional foreign markets.
Labor shortages are also reaching a critical point for many industrial enterprises. Factories are struggling to find skilled technicians to operate machinery and manage production lines. This lack of manpower is limiting the ability of firms to expand even when demand exists.
Business confidence regarding the future has dipped to its lowest level in several months. Many executives are worried about the long-term impact of high borrowing costs on their operations. Investment in new equipment has slowed down as companies focus on basic survival.
The government is attempting to support the sector through various state-funded industrial programs. These initiatives aim to foster domestic innovation and replace critical foreign components. However, the immediate pressure of rising taxes and inflation is overshadowing these long-term efforts.
