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09 july 2018

By Roman Bizyukov

(Delovoy Peterburg) - The overregulation in Russia’s trade in precious stones and metals has put some part of the country’s jewelry market into the shadow economy, and small workshops are balancing on the edge of ruin. At the same time, the extractive industry continues to grapple with the competing "black diggers" and demands even more tighter legislation. Besides business, this is a no-win situation for the State, as it receives less taxes, and for ordinary consumers as well. The necessity to change this situation has ripened long ago, but the problem is how to observe the interests of all parties concerned.

Conflict of interests: jewelers vs industrialists

The Russian legislation regulating the turnover of precious metals and precious and semi-precious stones is one of the spheres requiring a consistent and thoughtful change. In the current state of affairs, all the parties involved are suffering damage, including the legally operating jewelers overregulated from top to bottom; the business engaged in the extraction and processing of precious and semi-precious stones; and the State that receives less taxes due to the existing situation, as the numerous and meaningless prohibitions always force people to find shelter in the shadow economy. Not to mention consumers who, being fearful of buying fake jewelry, are increasingly opting for beautiful but safe imitation jewelry instead of jewelry made of real precious stones and metals.

The need for legislative changes in the turnover of precious and semiprecious stones has matured for a long time, but to advance the introduction of necessary amendments to the existing laws and by-laws is a difficult task, as there are too many intertwined interests, often mutually exclusive. The situation is exacerbated by the position of the executive authorities, who are accustomed to "cut" the industry in one way or another, and do not want to change anything, fearing a reduction in budgetary - and in some cases personal - incomes. And, unfortunately, the State in most cases prefers prohibitive measures, increased control and penalties instead of making the process more liberal, which will lead to flourishing of the jewelry industry, and, accordingly, to higher state budget revenues.

The position of the authorities in this sphere has been highlighted by the scandal that occurred in the Kostroma Region. Against the backdrop of the downturn and according to the Guild of Jewelers of Russia, the country’s jewelry sales fell by 16% in 2014 to 2016, from 245.4 to 205.5 billion rubles. This stalled the development of Kostroma’s regional brand, "Kostroma - the jewelry capital of Russia." Indeed, it was difficult to expect that a general decrease in incomes of the population would give a chance to Kostroma to stay afloat. When small jewelry businesses began to wind up or diversify and tax revenues decreased, local authorities decided to act by force and initiated inspections on the ground. The jewelers, who showed a decrease in income in their reports, were given a pleasure to face police in balaclavas raiding their offices, searching factories and initiating criminal cases for tax evasion. Several black-market jewelers had to shut up shop as a result paying some 27 million rubles in unpaid taxes. But no one counted how many honest jewelers finally decided to abandon business after these events.

While the Russian jewelry community has been pressing for liberalization of the federal law "On Precious Metals and Precious Stones" (coded as FZ-41) for the past fifteen years and while every jeweler and designer here is dreaming of abolishing it and bringing the classification of minerals to the world standards, the industrial mining companies developing the fields of semi-precious stones insist on the adoption of completely different laws. In particular, they discuss the possibility of expanding the list of precious minerals on the sidelines of the lawmaking process. In particular, they talk about jade, which is currently not attributed to precious stones. The demand for jade is huge, especially in China, and the mineral is being plundered from its fields in Russia and resold, giving even birth to the term of ‘jade wars’ in the local parlance.

The Rough & Polished industry news agency has been often communicating with experts on this subject, and it is possible to notice that despite the problem’s urgency, many prefer to speak anonymously. Here is, for example, what was said by a source close to the administration of the Irkutsk Region: "The owners of the fields are proactive in lobbying to include jade in the list of minerals subject to state control, which will allow them to become monopolists. And this is a precedent, and then other semiprecious stones can also go there. In the worst-case scenario, all the minerals will be "canned" into this law. And this, according to experts, will "throw back the domestic jewelry industry in the Middle Ages." "It is a mistake to believe that liberalization of legislation will lead to a decrease in sales volumes: the more transparent the market, the higher the revenues. They are just sawing off the bough they are sitting on!" Eduard Utkin, General Manager of the Guild of Jewelers of Russia said in a conversation with Rough & Polished.

By the way, attempts to recognize jade as a precious stone, the extraction of which is subject to strict control by the State, have been undertaken more than once. In April 2014, the Ministry of Natural Resources even drafted an appropriate bill, however failed to be implemented, and this makes one think about a possible conflict of interests among the lobbyists themselves, some of whom are clearly interested in keeping jade in the shadows. And while the parties are trying to come to a compromise, the State continues to tighten the screws. In particular, at the beginning of this year the Ministry of Finance prepared amendments to the Code of Administrative Offenses, according to which fines for violating the rules for mining, use and storage of precious metals and precious stones can grow fivefold - up to 250,000 rubles.

What to do?

So, the essence of the problem is clear: the legislation still needs to be changed, otherwise the supporters of power methods will win. The jewelry community has a clear plan of action. In April this year, the Guild of Jewelers of Russia adopted two fundamentally important documents: "The Strategy for Regulating the Jewelry Industry of Russia" and "The Charter of a Conscientious Taxpayer." The main proposal of the jewelers is to take measures to improve the legislative acts regulating the turnover of precious metals, precious stones and jewelry. "To ensure that our appeal does not remain a set of obvious and useless slogans, we have prepared a draft plan of measures to improve the legal regulation of the industry," Gagik Gevorkyan, Chairman of the Guild said.

Most of the questions from specialists are caused by the above-mentioned FZ-41. The major thing that jewelers are fighting for is changing the system of gem classification. As Rough & Polished was previously told by Vladimir Zboykov, who is the director of the Department for Precious Metals, Precious Stones, Jewelry and Folk Arts at Delovaya Rossiya (a non-commercial organization), the civil turnover of precious stones is actually banned in Russia, as faceted precious stones are admitted to civil trade only if certified, while the turnover of unprocessed precious stones in the form of collection samples is not envisaged in Russia at all.

Jewelers suggest making a classification system similar to the one practiced internationally, close to the nomenclature of CIBJO (Blue Books). It describes more than 120 natural formations, including the names of minerals and their varieties, as well as organic substances used in jewelry. "In this respect, we, as in many other things, are different from the world jewelry community. Of all the gems on this list, only diamonds are actually mined in Russia, and in the interests of the State it would be logical to maintain control over diamonds only. As for the rest, it is necessary to bring our classification closer to the international system, which will contribute to the development of the domestic jewelry industry and liberalization of the gem turnover," Eduard Utkin explained.

Of course, there is logic in this proposal. As one member of Russia’s Union of Designers, who wished to remain anonymous, remarked in a conversation with Rough & Polished, the jewelry industry is moved by artists who come up with ornaments and designers who know the technological processes. "This is the locomotive of the jewelry industry in any country. But since free circulation of gems is prohibited, artists must obtain permits, spend a lot of energy, which they often neglect. Hence the conclusion: the market either goes in the shadows, or artists switch over to produce imitation jewelry from other materials, which affects the industry as a whole and hampers its development," he said.

According to Anastasia Pribelskaya, an artist-jeweler, who established the Academy of Glass, many private jewelers have indeed to choose between spending their time for creativity or paperwork, and, of course, many choose creativity and work with non-precious stones. "Strangely enough, it makes sense, because only the most persistent and stubborn ones reach the finish line, that is getting a chance to work with precious stones and precious metals. But, again, our small jewelry workshops produce really unique things, as there are many talented craftsmen in Russia. If a jewelry piece is brilliant, it does not matter what materials it contains. However, if legislative obstacles are mitigated, it is likely that more Russian jewelry stars will enter the international jewelry market," Anastasia Pribelskaya said with confidence.

According to Eduard Utkin, jewelers have many proposals regarding the FZ-41. In particular, now there is a privilege for manufacturers, according to which goods made of silver weighing up to 3 grams are hallmarked in a voluntary manner. "We propose to increase the weight to 100 grams, since there is no sense in such strict control. By modern standards, this is quite a cheap material, and cancellation of mandatory hallmarking will increase the share of silver goods in the market, including those going for export, and this will seriously promote imitation jewelry," he says.

Another important point is the marking system. As the introduction of innovative technologies goes on, including in particular the application of special tags with QR-code to jewelry goods, jewelers hope to raise the issue of canceling the obligatory hallmarking, leaving it to the discretion of jewelry manufacturers. Since June 1, 2018, the country started an experiment on marking precious metals, precious stones and goods containing them with QR codes, and it is already planned to make jewelry marking mandatory starting on January 1, 2019. "These are modern technologies defining the future," Eduard Utkin said.

In his opinion, it is especially important to cancel the hallmarking of jewelry that goes for export: "In some countries, our hallmarks are considered to be a drawback, which affects the demand and, accordingly, the price of jewelry. And, again, this depreciates the very system of hallmarking, which was introduced by the State to protect domestic consumers against counterfeits. So why should we protect foreign buyers, who absolutely do not need it, doing this at our own expense?"

Any excessive regulation reduces sales, investment attractiveness, reduces the number of players in the market. If the State will start to control the turnover of semi-precious stones, the consequences for the industry will be catastrophic. "The adoption of amendments to the FZ-41, which are currently under discussion, will lead to putting, for example, cubic zirconia under control. There was never such a thing in the world! Moreover, the existing state structures for the organization of control over semi-precious stones and associated accounting will not have enough strength or resources," Eduard Utkin said warning the lawmakers against hasty decisions.

However, the main legislative problem hindering the jewelry industry is the FZ-115 "On Counteracting the Legalization (Laundering) of Criminally Obtained Incomes and Financing Terrorism." Why the authorities decided that jewelry can be used for these purposes is incomprehensible, but the fact that this law seriously increases the production costs for jewelers, pushing up the final price of jewelry goods, is absolutely obvious. "The need to provide detailed reports to the Federal Financial Monitoring Service (Rosfinmonitoring) for each operation - and reports are compiled by people who are prone to make mistakes, and this is normal, but this results in severe fines from 50,000 up to 1,000,000 rubles - all this in the end affects the price tag of jewelry goods put on the counter. It is this law that ultimately reduces the attractiveness of investments in the industry and constrains its development," Eduard Utkin said.

He draws attention to the fact that ready-made jewelry can only be resold with a serious loss in price and that buyers treat these goods not as a means of wealth accumulation, but as artistic adornments. Therefore, the regulation of their turnover by this law is inexpedient and if you follow this principle, then any product can be used to "legalize incomes" including home appliances, telephones or furniture. Besides, the level of state control in the industry is extremely high even without it, taking into consideration that under the FZ-41 accounting and control is carried out at all stages - from the turnover of raw materials, precious metals and stones to the creation of jewelry. To ease the situation, jewelers propose to leave under control the sale of jewelry for cash, while raising the bar of "buyer identification" from 15,000 rubles up to 150,000-180,000 rubles, and completely cancel the control over purchases paid for by bank transfers. "This is absolutely an unnecessary measure, because the customer has already been checked by the bank when issuing a bank card. Otherwise, some part of the jewelry turnover will continue to go in the shadows.”