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The Guardian - UK
The Guardian - UK
Business
Phillip Inman

Russia’s services sector shrinks amid western sanctions over Ukraine

A shopper looks towards closed McDonald's and KFC restaurants at the Mega Mall in Khimki, outside of Moscow, Russia
Many western companies such as McDonald's and KFC have pulled out of Russia. Photograph: Konstantin Zavrazhin/Getty Images

Russia’s services sector has suffered the worst slump in activity since the Covid-19 pandemic hit in 2020 as consumers and businesses cancelled orders amid increasingly severe western sanctions after the invasion of Ukraine.

A closely watched business survey showed that new orders during March dived as restrictions on imports and exports began to bite and inflation raised the price of services at the fastest rate on record.

The S&P Global purchasing managers’ index (PMI) collapsed to 38.1 in March from 52.1 the previous month, sliding well below the 50 mark that separates expansion from contraction.

While businesses in the survey did not mention the Russian invasion of Ukraine and the impact of sanctions, domestic manufacturers and services firms cited “greater economic and geopolitical uncertainty” for the dramatic reversal of fortunes last month.

The US government cranked up the pressure on Monday, stopping the Russian government paying holders of its sovereign debt more than $600m (£457m) from reserves held by US banks.

Oil, inflation-sensitive bond yields and stocks edged higher on Tuesday as global financial markets anticipated another round of sanctions from western governments.

Inflationary pressures soared across the services sector to register arecord rise in prices charged to consumers, which followed a rise in production costs that was also at the highest rate since the survey began in October 2001.

Unemployment increased after a wave of job cuts “as expectations regarding the year-ahead outlook slumped to their lowest in two years”, S&P Global said in the report.

“Pessimism reportedly stemmed from greater economic and geopolitical uncertainty,” the PMI report said.

A survey last week of Russia’s manufacturing sector also revealed activity dropped during March at its fastest pace since the early stages of the Covid-19 pandemic in May 2020, most likely after a collapse in business confidence linked to the invasion of Ukraine.

Inflationary pressures also weighed heavily on eurozone countries, but they were able to maintain a strong recovery during March as they emerged from restrictions linked to the Omicron variant.

According to S&P Global surveys of business activity in the services sector in France, Germany, Italy, Ireland and Spain growth was maintained after the PMI was 54.9 in March, only slightly down from 55.6 in February.

However, the prospects of a long and costly war sent levels of business confidence crashing. France and Ireland recorded the biggest increases in activity and new orders, but were not immune from waning business confidence linked to pessimism over the war and steeply rising inflation.

The UK’s services sector also maintained a strong recovery last month, registering its fastest growth in 10 months. The PMI rose for the third consecutive month to 62.6, up from 60.5 in February.

Yet businesses reported that output was restricted after severe staff shortages and a rapid increase in the prices charged by firms “linked to higher salary payments and increased prices paid for energy, fuel and raw materials”.

About 65% of UK services firms reported a rise in their operating expenses in March, while less than 1% noted a decline.

“The latest index reading signalled the second-fastest rate of input cost inflation since the survey began – exceeded only by the record high seen last November,” said S&P Global.

Tim Moore, the credit agency’s economics director, said: “There were widespread reports citing a boost to business and consumer spending from the roll back of pandemic restrictions.

“Survey respondents commented on stronger demand arising from the return to offices, alongside a resurgence in the travel, leisure and entertainment sectors.

“However, the near-term growth outlook weakened, with optimism dropping to its lowest since October 2020 as the war in Ukraine and global inflation concerns took a considerable toll on business sentiment,” he said.

• This article was amended on 5 April 2022 to remove incorrect references to Airbnb in the standfirst and main article

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