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Will precious stones in Russia be set “free from restraint"?

20 january 2020

Speaking skeptically about the liberality of Federal Law 41-ФЗ “On Precious Metals and Precious Stones” (hereinafter referred to as “Law 41-ФЗ”) enacted on 03.03.1998 with respect to the circulation of precious stones, I allowed some simplification in my previous articles without going into the smaller details of the legal regulation governing this industry branch. In fact, the main prohibitive role in this regulation was played not by Law 41-ФЗ itself, but by-laws adopted on its basis and with a purpose to further develop it. This simplification did not have much significance, because the effect was still integral in nature.

But when the “regulatory guillotine” came into the scene, it became clear that this project is a unique “window of opportunity” for eliminating the entire regulatory overlay, which makes the conditions for real work on the market of precious metals and precious stones entirely improper, however using for this the relatively decent legislative industry norms. So, it becomes all the more urgent to raise these “nuances” now, when the Ministry of Finance of Russia itself proposes to add the by-laws that actually block the normal retail circulation of precious stones in the Russian market to the list of decrees, which cease to be in force.

To assess the prospects for the future, let us turn to the history of how the legal norms governing the circulation of precious stones in Russia were transformed, for which we will look at the text of the very first edition of Law 41-ФЗ.

Law 41-ФЗ introduced progressive standards for its time endowing those engaged in mining precious stones with the right to sell them to any legal entities and individuals (Paragraph 5 of Article 20 “Disposal of mined and produced precious metals and precious stones”). In 1998, Russia witnessed the emergence of many new commodity exchanges, which were popping up like mushrooms after the rain - the country's economy was moving to market rails. Therefore, it is not surprising that at that time many thought of a coming boom in establishing exchanges dealing with precious metals and precious stones.

Moreover, the provision of the possibility to sell any product through the exchange was considered not as a duty, but as a liberal right stipulated not by a state order, but by a free market, and this looked good then. Thus, the first edition of Law 41-ФЗ contained Article 3, “Exchanges of precious metals and precious stones” later recognized as redundant, which among other things stipulated the right to sell “sorted uncultivated precious stones” and "certified processed precious stones" on such exchanges.

Another liberal feature of the upcoming “free” circulation of precious stones in 1998 was the seeming possibility of their pre-sale certification. The fact is that by this time both ordinary citizens and Russian officials have already managed to travel a bit around the world, including the countries of Southeast Asia, where they were able to observe mass retail trade in rubies and sapphires packed in boxes with accompanying pieces of paper bearing the name of “certificates.” In fact, all these certificates were not certificates at all, but simple expert opinions, not even always from gemological laboratories. That is, in fact they were just a seller’s description accompanying a stone. But these pieces of paper generated an additional appeal to such stones and the illusion of customer protection, so it was decided to broadcast such a practice on the Russian market.

And this measure was considered at that time as unconditional protection of buyers’ interests and rights, and not at all as restrictions. It should be noted that in the very first edition of Law 41-ФЗ, the protection of buyers’ interests was treated as having important significance, if not the utmost significance within the entire newly created regulatory base of the Russian market for precious metals and precious stones. Thus, Article 13 of Law 41-ФЗ described the essence of federal assay supervision as follows: “1. The federal assay supervision is carried out in order to protect the rights of consumers buying jewelry and other household goods made of precious metals and precious stones and the rights of manufacturers producing these goods from unfair competition, as well as in order to protect the interests of the state.”

Interestingly, the latest version of Law 41-ФЗ, in which this fundamental norm for the existence of federal-state assay supervision was still present, was its version No. 12 of 05/02/2015. After that, the norm protecting the interests and rights of buyers in Law 41-ФЗ was eliminated by the adopted Federal Law dated 02.05.2015 No. 111-ФЗ (both laws have the same adoption date). Probably, this norm was liquidated as morally obsolete, as the supervision should take care of other things... It is curious that Revision No. 12 of Law 41-ФЗ was valid for only four and a half months, until October 30, 2015. So, you can guess how difficult the discussion about renewing Law 41-ФЗ was.

Turning back to the problem of gemstone certification, we have to note that this norm introduced in the first edition of Law 41-ФЗ was precisely meant to create and develop a retail market for gemstones in Russia. Moreover, the law did not introduce any prohibitions - it was understood that certificates, being a purely market-based tool providing guarantees of authenticity, will simply allow the gem exchanges to more successfully sell processed gemstones to both individuals and legal entities. And unprocessed gems at the same exchanges were supposed to be sold, again to individuals and legal entities, but only on one condition – such gems were to pass sorting. What is more important - it did not follow from the law that selling precious stones to individuals and legal entities is possible only on the stock exchange. It was viewed otherwise – it was also possible to sell them on the stock exchange! Under the conditions stated above.

In pursuance of the norms laid down in Law 41-ФЗ, the Russian Federation Government issued Decree No. 372 on April 5, 1999, “On certification of precious metals, precious stones, and products from them” and the “Rules for the sale of certain types of goods” approved by Decree No. 55 of the Russian Federation Government on January 19, 1998, included new paragraphs, 61 to 66. And it is here, at the level of by-laws, we see the emergence of restrictions on the circulation of precious stones.

Firstly, the list of precious stones subject to certification in the Russian Federation, approved by Decree No. 372, indicated not the cases of their circulation that were prescribed in Law 41-ФЗ. While Law 41-ФЗ stated that the processed gemstones intended for transactions on the exchange by legal entities and individuals are subject to certification, Decree No. 372 of April 5, 1999, said that the certification procedure was meant for “faceted gemstones if sold to individuals in retail trade”. Obviously, this is a very distorted interpretation of the law. The law said that certificates are to be used (and this was not mandatory) for transactions through the exchange, not through retail outlets. It was evident that these restrictions were not stipulated for by Law 41-ФЗ.

Secondly, the same conditions for the retail sale of precious stones (contrary to the provisions of the current Law 41-ФЗ) were established in the "Rules for the sale of certain types of goods ..." introduced by Resolution No. 55. Paragraph 61 of the Rules for Retail Trade in force at the time of adoption of Law 41-ФЗ said, “The sale of faceted natural precious stones (diamonds, rubies, emeralds, sapphires and alexandrites) shall be carried out only if there is a certificate for each stone or set of stones sold”.

In all fairness, we should note that the launch of precious stones in retail trade was an innovation in itself and the authorities had difficulty imagining how to do this. “The Rules for the sale of certain types of goods ...” were introduced on February 12, 1998 by a resolution of January 19, 1998, i.e. even before the adoption of the very first edition of Law 41-ФЗ. And these rules were based on the norms previously set by Decree of the Russian Federation Government No. 684 of June 15, 1994, “On approval of the rules for the sale of products made of precious metals and precious stones”, in which the retail sale of precious stones not set in jewelry was not provided for at all. In addition, Law 41-ФЗ immediately provided for the possibility of a “protracted preparation”: final Article No. 32 of the law prescribed that “before organizing and starting work on the exchanges of precious metals and precious stones provided for in Article 3 of this Federal Law, transactions with precious metals and precious stones will be carried out in accordance with the legislation of the Russian Federation.” The legislators did not forget about the lag for the introduction of certification. In the same Article 32 of the law, they wrote: “The certification established by Article 14 of this Federal Law will be introduced after certification centers are organized and after they receive the relevant licenses.”

However, the justification of the restrictions imposed by the Russian Federation Government on the retail sale of precious stones not provided for by Law 41-ФЗ came from another law, which was at that time in force, Law No. 3615-1 of October 9, 1992 - “On Currency Regulation and Currency Control”. According to Article 1, the law viewed as hard currency “natural gems - diamonds, rubies, emeralds, sapphires and alexandrites in raw and processed form, as well as pearls, with the exception of jewelry and other household products from these stones and scrap of such products.” Under paragraph 2 of Article 3 of this law, the procedure for transactions with natural precious stones and pearls in the Russian Federation was established by the Government of the Russian Federation.

Which, in fact, gave rise to a legal conflict - Law 41-ФЗ did not introduce the restrictions on the retail sale of precious stones, but using the right to regulate transactions with natural precious stones given to the Government of the Russian Federation by another law - on foreign exchange regulation - the Government introduced such restrictions in the form of a requirement for certificates to be issued for processed stones if they are sold through retail outlets. And in fact, this eliminated any possibility of selling rough stones in retail - simply by not providing such a legal opportunity.

However, on June 10, 2004, Law on Currency Regulation No. 3615-1 dated October 9, 1992, lost its force, but at the same time another Federal Law On Currency Regulation and Currency Control, No. 173-ФЗ dated December 10, 2003 was enacted, in which precious stones were removed from the list of foreign exchange equivalents. Thus, strictly observing the legal technique, both of the aforementioned resolutions of the Russian Federation Government establishing the requirements for certification of precious stones sold in retail trade should have been adjusted to the requirements of the current version of Law 41-ФЗ by June 10, 2004, i.e. by the time the new law on currency regulation and currency control came into force, which no longer gave the right to the Government to establish the procedure for transactions with precious stones, but this was not done then.

Later, the norms of Law 41-ФЗ and the mentioned by-laws governing the turnover of precious stones in the retail market were repeatedly adjusted. The most revolutionary change in the retail trade dealing with precious stones (after the abolition of their foreign exchange status) was... the abolition of their mandatory certification!

The fact is that on December 27, 2002, the legislators adopted Federal Law No. 184-ФЗ "On Technical Regulation," which abolished Law No. 5151-1 "On Certification of Products and Services" of June 10, 1993 making it impossible to establish certification centers for precious stones, which had not begun by that time, but were provided for by Law 41-ФЗ as mandatory for the release of precious stones into retail trade. At the same time, the “Unified List of Products Subject to Obligatory Certification” stipulated by Article 25 of the new law did not include gems under Code 7103. True, the law does not prohibit the introduction of a voluntary certification system, but this is not at all what is stipulated by the norms of the “Rules for the sale of certain types of goods..." Such voluntary certification systems can be created and registered as many as you like, and nothing prevents the creation of such voluntary certification systems for gems, according to which a precious stone recognized within one of the registered certification systems suddenly turns out to be non-precious within another certification system. Not to mention the likely inconsistency in the description of gemstones characteristics in different certification systems.

So, the piece of paper that is applied today to a diamond or emerald in retail sale cannot in any way be considered the “certificate” that was originally envisioned as a permit document for retail.

These years saw some changes in the “Rules for the sale of certain types of goods...” regarding the rules for the turnover of processed precious stones. Decree of the Russian Federation Government No. 81 issued on February 6, 2002 reduced the list of faceted precious stones, the retail sale of which is possible only if they have a certificate, to emeralds and diamonds: “The sale of polished diamonds made from natural rough diamonds and polished emeralds will be carried out only with a certificate for each stone or set (lot) of stones sold.” And this norm is still valid today, although no one knows what a “certificate” for the mentioned stones is and who should issue it and on the basis of which certification system. But, occasionally selling such stones in retail, home-made "certificates" are issued. But it is not clear what has now become with the retail sale of faceted alexandrites, rubies and sapphires - has it been completely banned, or, conversely, has become completely free? Apparently, the issue has been left to law enforcement officers. This is up to them to decide...

It should be noted that over the past years Law 41-ФЗ itself experienced transformations. Interestingly, it was remaining liberal enough regarding the turnover of precious stones. For example, its Article 22 acquired Clause 4, where the restriction on the circulation of precious stones is prescribed in principle: “Transactions with precious stones, the classification characteristics of which are not defined, with the exception of the agreements specified in the second paragraph of this clause, are not permitted.” But this norm does not prevent the normal, civilized circulation of precious stones, even in the retail market, and does not require any mythical certificates.

With the adoption of Federal Law No. 184-ФЗ “On Technical Regulation”, Article 14 “Certification of Precious Metals, Precious Stones and Products from them” in Law 41-ФЗ changed its name for “Confirmation of Conformity of Precious Metals, Precious Stones and Products from them.” With the traditional indication that “before the enactment of technical regulations, the list of precious metals, precious stones and products thereof subject to mandatory confirmation of compliance will be determined by the Government of the Russian Federation.”

The section "Exchanges of Precious Metals and Precious Stones" has disappeared from Law 41-ФЗ due to their actual irrelevance. However, Article 32 of this federal law said that “before the organization of exchanges trading in precious metals and precious stones” provided for by Article 3 (which has lost its force!), transactions with precious metals and precious stones will be carried out in accordance with the legislation of the Russian Federation."

Bottom line

As a result, we have a unique opportunity for New Russia, within the framework of the “regulatory guillotine,” to demolish by-laws that impede the free retail circulation of faceted gemstones and possibly to give green light to the circulation of unprocessed gemstones, the classification characteristics of which have been determined, that is to materials for mineralogical collections of individuals.

However, there is a real danger that all or any of the norms contained in by-laws will flow into Law 41-ФЗ itself, including the norm requiring to have something called a certificate for the retail sale of precious stones. But there is hope that this situation is understood by the Ministry of Finance of Russia.

Vladimir Zboikov for Rough & Polished