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Jewelry industry and the state: not a priority area

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A hope for a thaw - the “regulatory guillotine”

It should be noted that the entire sphere of precious metals and precious stones (PMPS) was unlucky from the very arrival of capitalism to the space of the former USSR. 1993 gave the start to the “diamond scam” as it was later called, the main figure of which was Andrei Kozlenok, the founder of Golden ADA, Inc. The history of plundering Russia’s diamonds and other valuables to the tune of $ 90 million, in which the pinnacle of Russian power was mixed up, could not fail to affect the formation of the industry regulatory framework.

It doesn’t matter if it was a really planned scam, or it was a common management mistake due to inexperience, but unlike all other sectors of the economy, the PMPS sphere did not receive that degree of freedom, which all other areas had from the very beginning, when the country’s economic legislation was liberalized during the ongoing privatization.

Moreover, the Federal Law “On Precious Metals and Precious Stones,” fundamental for the entire Russian sphere of PMPS, was passed in March 1998, precisely at the time of negotiating the deportation of fugitive Kozlenok to Russia. The entire business press, and not only it, but all the national media tirelessly wrote and talked about the “diamond scam” at that time, and the topic of precious stones and precious metals as an absolutely criminogenic zone was discussed in every way by all TV channels. Could the adopted law on PMPS be liberal in such conditions? It is surprising that at least the right of private ownership regarding PMPS was enshrined in this law. But individuals received the most minimal rights to “communicate” with precious metals and stones - at the level of ownership of jewelry, no more.

The PMPS sphere had a chance of liberalization in 2005 and in 2008 when a number of bills were drafted expanding the rights of individuals to own precious metals and stones when the free transfer of gold and colored precious stones mined by citizens was discussed. But at that time, the power structures (the Ministry of Internal Affairs and Federal Security Service) were already overgrown with subdivisions supervising the PMPS sphere, and the last word, of course, was theirs, so liberalization did not take place.

In fairness, in Soviet times, the PMPS sphere was even more distant from popular use, and there were even more prohibitions than now. But then, socialism was there — many things were prohibited, in everything... However, history moves in circles — at the dawn of Soviet power, the new government also began with sales of the precious inheritance of the tsarist regime. So, first we plunder, and then we ban everything - this is our tradition as far as PMPS are concerned!

What can the PMPS sphere expect from the state today?

First of all, such expectations are governed by general trends of the Russian economy. And these include a sharp increase in the administrative impact on the industry, stricter control over taxes, increased responsibility for offenses and crimes in this area. “Everything is similar to other sectors of economic activity”, but with specific features inherent only in the field of PMPS that strengthen the control and supervisory functions of the state.

The main and the saddest industry feature is the presence of Instruction of the Russian Federation President No. Pr-2167 of 10.25.2017. The status of the document, “For Official Use Only” does not allow discussing it in detail, but a completely open source, the website of the Federal portal of draft laws and regulations is regularly uploading new bills citing the said Instruction as a basis for their developing (see, for example, https://regulation.gov.ru/projects#npa=90778). From this, even without seeing the Instruction itself, it is easy to understand that this document is about the need for a sharp tightening of control in the field of PMPS.

Interestingly, from the totality of bills referring to the mentioned Instruction, it is clear that introduction of a state integrated information system (SIIS) mandatory for all participants of the Russian market for the control over the circulation of precious metals, precious stones and goods containing them at all stages, is to become the most important result of the execution of this Instruction. In other words, this will be an IT-control system based on labeling goods taking part in the turnover, the creation of which was previously proposed by jewelers themselves. The introduction of the SIIS for precious metals and precious stones would be enough to restore full order on the market, to eliminate all “gray” flows, increase consumer confidence, etc.! However, this key goal set in the Instruction has acquired a mass of other, additional tasks to tighten control, which is not difficult to see from the list and content of all the draft documents on the same website, regulation.gov.ru, which refer to the Instruction.

But now there is another hope looming for a thaw, which is the “regulatory guillotine”! For some industries, maybe it will become a guillotine, cutting off all that is unnecessary and hindering their development, but not for the PMPS sphere. Alas, commenting at the Forum of Opora Russia (whose activity is aimed at resolving the most pressing issues faced by Russian entrepreneurs) last October, Vladimir Putin cut off the PMPS sphere from extending the moratorium on conducting scheduled inspections and thereby outlined how to treat this industry: “It became clear that we need constant and tighter control in companies with a high-risk profile, whose activities directly affect the lives and safety of people, as well as in specific areas, for example, the turnover of precious metals and stones”. Obviously, after such words of the president, no “guillotine” can reach the PMPS sphere anymore...

As it was already more than once, the opinion of the security and law enforcement agencies on the need to “tighten and strengthen” turned out to be a priority, taken into account and supported at the highest level. Once again, alas.

Gold without VAT to the people - problems for jewelers

The idea of ​​selling gold bars to citizens without VAT has been discussed for a long time, either for the sake of replacing greenbacks in thrift boxes kept by people or for the sake of concentrating precious metals among citizens, indicating their full names and residential addresses. At the same time, the possibility of selling gold without VAT to legal entities, including jewelry manufacturers, is considered unacceptable by the government.

The conditions for this innovation turned out to be a novelty – to prevent gold bars sold without VAT to be bought by jewelers for production purposes, the Federal Tax Service set forth a condition - simultaneously with the introduction of sales of gold to natural persons without VAT - to eliminate the possibility of using preferential tax regimes by small jewelry businesses and small jewelry retailers, including the simplified tax system (STS) and the unified tax on imputed income (UTII).

The STS and UTII are the most comfortable regimes for small businesses, and these same tax regimes are convenient for the state — they are transparent, easy to administer, and the taxes themselves are the easiest to collect. Due to this, tax collection from businesses operating under the simplified tax system in Russia is higher compared with tax collection from businesses using the ordinary tax system (OTS).

The root of the problem for the state is not in the existence of special tax regimes in the jewelry sphere, but in the unjustified use of optimization schemes by those fairly large jewelry enterprises that operate according to ordinary taxation patterns. What kind of marginal revenue can the state garner from the abolition of special tax regimes in the PMPS segment, if the level of VAT refund in the gold market reaches 40 billion rubles, while the share of jewelry businesses operating under the simplified tax system accounts for only 4% of the total taxable base for gold turnover?...

But if the preferential taxation regimes for small jewelry businesses will be abolished, a blow will be dealt primarily to the social policy of the state, since small jewelry businesses deprived of the opportunity to work under the STS and UTII will simply fail to survive in the face of falling purchasing power among consumers. This will give a comprehensive negative contribution to the implementation of national projects, including the deterioration of employment, reducing the investment attractiveness of the jewelry industry as one of the sectors of the national economy.

And then, the thing for the sake of which everything is being started - mass purchasing of gold bars by the population - will not happen anyway. After all, gold without VAT in Russia can be bought even today - these are gold coins that are in circulation. But only the spread set by banks between the sale and repurchase of these coins without VAT is so large that such coins cannot withstand any competition with respect to other investment instruments, and rational interest in them may be only on the part of coin collectors.

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Thus, with the abolition of VAT on gold bars for individuals, the sales of these bars to people will not increase much, and today's VAT will simply turn into a margin of banks while maintaining the same gold price.

National goals are not about jewelry

When Russia learned about its new National Goals and National Projects, the country’s business, especially its small and medium segments, turned gloomy. The fact is that on the whole, of course, the strategic course for raising the quality of life of population, which is useful and necessary for Russia, somehow gave very modest support for the development of private entrepreneurship. And for us this is an indicator – because Russia in its recent past was a socialist country, where any private initiative was considered a criminal offense.

First, the most generously funded national projects are infrastructural. This is a theme at least for large-scale businesses, if not for state corporations.

Secondly, the development of medicine and education lies again mainly in the sphere of activity of state structures in Russia. Even the digitalization of economy under National Projects is a large-scale task, accessible only to large businesses.

There are targets in the National Projects that seem to correspond to the interests of small and medium-sized businesses. These are “Small and medium entrepreneurship and support for individual entrepreneurial initiatives”, “Labor productivity and employment support”, “International cooperation and export”. But government policy measures to support these projects look very modest and somehow secondary.

And the key, most important positions on the management of systemic changes in the business environment like “Transformation of Business Climate” and the improvement of control and supervisory activities for the business in the field of PMPS come to nothing knocking up against the above-mentioned Presidential Instruction.

And thirdly, and this is the most important thing for jewelers – the National Goals in their essence consider the task to ensure sustainable growth of real incomes of citizens not through direct growth of their income in monetary terms, but as an increase in the volume and quality of state services they receive. In short, this is about fighting poverty.

But jewelry is in no way essential goods and is not even included in the consumer basket of Russians*, so there is no reason to expect jewelers to receive state support within the framework of National Goals and National Projects. Maybe they will get it in terms of assistance in the export of jewelry.

Vladimir Zboikov for Rough&Polished