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The life of jewellers under sanctions: what will it be like?

11 april 2022

On February 24, 2022, the jewellery business, like any other business in Russia, was divided into “before” and “after”. Without an actual suspension of the circulation of the main currencies (dollar and euro), the events led to the de facto return of the currency status to precious metals, primarily gold. While before February 24, jewellers considered gold exclusively as a raw material for jewellery manufacturing, after this date, Russian jewellers have to reckon with the virtually new status of this precious metal.

"The objects of increased concentration of value"

A short excursus to the history of the issue is required, otherwise, it is difficult to assess the prospects for the Russian jewellery market in the current conditions. Precious metals have inherited a currency status from the USSR days when all the precious metals and precious stones (PMPS) were regarded as currencies. A state monopoly was established for their mining, manufacturing, circulation and use, and citizens had the right to own only jewellery pieces. The actual supervisor of the PMPS sector was the KGB (Committee for State Security) of the USSR. In the new Russia, after the collapse of the USSR, industry regulatory legal acts of the USSR continued to operate in the field of the PMPS, just their names were adjusted. Thus, the status of the PMPS as currencies ​​was immediately confirmed by Law of the Russian Federation No. 3615-1 “On Currency Regulation and Currency Control” dated 09.10.1992.

The development of new sectoral regulatory legal acts in the field of the PMPS began only in 1988, and soon, Federal Law No. 41-FZ “On Precious Metals and Precious Stones” dated March 26, 1998 was adopted. The need to develop this sectoral law was explained by the liberalization of the PMPS market, but with the preservation of the currency status of the PMPS. Moreover, Law 41-FZ repeatedly referred to another Law of the RF No. 3615-1 “On Currency Regulation and Currency Control” dated 09.10.1992.

The currency status of the PMPS was cancelled in Russia only as a compromise in order to meet the requirements set by the World Trade Organization (WTO) for the Russia’s entry into the World Trade Organization (WTO). From June 18, 2004, all the PMPS were removed from the list of currency values ​​​​by Federal Law No. 173-FZ “On Currency Regulation and Currency Control” dated December 10, 2003 (the law retained its former name, but its number was changed).

However, the Ministry of Finance of the RF did not want to significantly change the previous existing legislation in the field of the PMPS due to the fact that the PMPS lost their status of currency values ​​and the Ministry just made some technical revisions of the text of the Federal Law “On Precious Metals and Precious Stones” and its by-laws. From their texts, only references to the norms of Law of the RF No. 3615-1 “On Currency Regulation and Currency Control” dated 09.10.1992 were removed, and this was done only a year later through Article 5 of Federal Law No. 90 “On Amendments to Certain Legislative Acts of the Russian Federation” dated 18.07.2005.

Currently, strict regulation of the PMPS in Russia is carried out on the basis of the current version of the Federal Law “On Precious Metals and Precious Stones” and numerous by-laws. At the same time, the rigidity of regulation is justified by “taking into account the special properties of precious metals and precious stones as certain “values”, “objects of increased concentration of value”, as they were defined by Yuri Zubarev, the then Deputy Minister of Finance of the RF and now the Head of the Federal Assay Chamber.

Thus, to restore the recognition of all the PMPS again as “currency values” in Russia, just some “rebranding” is required  because all the regulatory legal framework necessary for strict control of the PMPS circulation has been preserved.

Gold as a new non-alternative Russian currency

To better understand a new role of gold in the Russian economy, it makes sense to briefly mention the measures taken by Russia due to the sanction-induced problems of the dollar and euro circulation. Immediately after the collapse of the USSR in the early 1990s, a dollar served as a solution to save and preserve the Russian economy in the conditions of hyperinflation. In those years, retailers and sellers indicated the prices of almost all goods, from household appliances to cars, real estate, and ready-made businesses exclusively in dollars, which, according to media, were brought in cash to Russia by cargo planes.

Today, the situation is reversed as the RF Government proposes to amend Articles 317 and 424 of the Civil Code of the RF by introducing a ban on specifying the price of transactions in foreign currency. Due to the sanctions, Russia lost half of its gold and foreign exchange assets overnight, at least, temporarily - the very dollars and euros that are on its accounts. Making transactions in these currencies has become extremely difficult, and a number of the largest Russian banks are completely disconnected from the SWIFT system. Against this background, Russia obliged exporters to sell 80% of their foreign currency revenues, banned the Russian banks from selling currencies in cash, limited the export of currencies by citizens from Russia to $10 thousand in cash, limited the payment of the citizens’ bank deposits in foreign currency to $10 thousand, limited the outflow of capital and prohibited non-residents from selling their shares in the Russian companies, as well as introduced a 12% commission on the sale of currencies through brokerage companies, and announced new rules for the sale of Russian commodities to “unfriendly” countries - it can be done for Russian roubles only. So far, the talk is about gas, but, perhaps, fertilizers, grain, vegetable oil, oil, coal, metals and timber will be added.

What does it mean for the “unfriendly” countries to buy Russian raw materials for dollars and euros at a fixed price for these raw materials in roubles? It means that buying Russian roubles for their own currency, in the event of a decrease in the rouble price of these currencies in the Russian market, the cost of raw materials will increase for them! Plus, the currency conversion costs. Moreover, for the Russian side, a decrease in the internal exchange rate will be beneficial, since it will lead to an increasing amount of currency coming from buyers of raw materials. But there is a strong chance that the economic entities of the “unfriendly” countries will not agree to buy the Russian raw materials for roubles, for political reasons, which, in turn, can almost stop the flow of dollars and euros to the Russian companies and to the Russian budget. The representative of the European Commission announced the EU’s refusal to pay for the Russian gas in roubles, and the G7 countries took a similar decision. Obviously, such a development of events was also envisaged by the Russian authorities, but in any case, the choice is up to the companies of the “unfriendly” countries.

But how valuable the dollars and euros remain to be for Russia taking into account all the imposed sanctions? The “unfriendly” countries are allowed to pay off their debts in Russian roubles on non-alternative terms. Due to the refusal of numerous companies from “unfriendly” countries to supply goods and services to Russia, little can now be bought from them in principle - even for foreign currency. It seems that the value of a dollar and euro for the Russian economy as a whole and for Russian companies falls substantially under the current conditions. This confirms the dollar depreciation from 120 to 86 roubles, and the euro depreciation from 132 to 96 roubles made by the RF Central Bank from March 11 to March 30.

Of course, the depreciation of the currencies is a multifactorial problem, including a reduction in demand for currency both from exporting companies (due to the difficulties of transferring the currencies to the banks of foreign sellers, more complicated logistics, and replacing the former suppliers with new ones), and a reduction in demand from the population (due to reduced possibility to travel abroad and the lack of a legal opportunity to buy currency). It should be taken into account that the foreign currency flow to Russia from the importers who are obliged to sell 80% of their foreign exchange revenues for roubles is still high, the outflow of capital is very limited, and the available currency is still enough for the state and companies to do the most important transactions. But the fact is that the foreign currencies in Russia has become less needed, and therefore cheaper.

Nevertheless, you can’t buy much with Russian roubles on the eastern market, either. Of course, something can be purchased in the national currencies of the parties, but not all goods. And what payment means remain universal (other than extremely unreliable bitcoins and other cryptocurrencies)? Of course, gold! Really, the purchase of gold by the “unfriendly” countries, of course, was also affected by the sanctions on Russia. But for all other countries, gold retains its value with a clear London fixing for it.

After imposing the sanctions, gold in Russia began a “second life”, if the abolition of the “gold standard” in 1971 in the United States is considered to be the death of its “first life”. However, it is obvious that the use of the London fixing for gold on the domestic market is hardly expedient for Russia today as it is also pegged to currencies that lose economic sense for Russia. Being a gold mining country, it is much more expedient for the domestic market to be tied to the cost of gold mining, which is calculated in roubles (although, of course, there is also a foreign exchange component in the cost of gold mining).

Therefore, the RF Central Bank took an unprecedented step - from March 28, 2022, it actually untied the internal price of gold from the London fixing, setting the purchase price of gold from credit institutions at a fixed price of 5,000 roubles per 1 gramme, until June 30, 2022. After the specified period, the purchase price of gold can be adjusted taking into account the emerging balance of supply and demand in the domestic market.

The fixed price set by the RF Central Bank for the specified period is approximately 17% less than the price of gold according to the London fixing:


The decision on a fixed purchase price for gold was announced by the RF Central Bank on March 25, and the day before, gold was $63.18 per gramme (London fix). If the fixed purchase price for gold by the RF Central Bank is 5,000 roubles per gramme, the dollar exchange rate is 79.14 roubles per dollar (5,000 divided by 63.18). By this date, the rouble had already been strengthening for two weeks and at that moment was about 100 roubles per dollar. Does this mean that the RF Central Bank estimates the expedient strengthening of the rouble and the exchange rate to be about 80 roubles per dollar? Perhaps, and in this case, when this exchange rate is reached, it will be possible to expect some currency regulation easing, for example, the abolition of the 12% commission for the sale of currencies through broker companies or its reduction.

To what extent can banks be interested in selling gold to the RF Central Bank at the stated fixed conversion price? As long as the RF Central Bank’s official price for gold is higher than the fixed purchase price, the banks’ interest looks doubtful. Moreover, as part of the replacement of the dollars and the euros possessed by the Russian citizens, i. e., individuals, a change in subparagraph 9 of paragraph 3 of Article 149 of the RF Tax Code was made on March 4, 2022 to cancel the VAT on precious metals when they were sold to individuals.

On the first day of the sale of refined gold bars to individuals without VAT, the price for them in commercial banks did not look attractive. For example, Sberbank sold refined gold bars at a price equal to a mark-up of plus 33.5 to 38 percent to the RF Central Bank’s official price. The peak mark-up of the bank was reached on March 9, ranging from plus 47.1% to plus 51.6%.

However, by March 11, the Sberbank’s margin had declined significantly, from a mark-up of plus 3.5% to plus 6.7%. It was even less on March 29, when it was possible to purchase a bar of refined gold at a price plus 2.8% to the official price for gold set by the RF Central Bank. But on March 30, 2022, the Sberbank’s mark-up was from plus 6.5% to plus 11.1%, depending on the weight of a gold bar.

Purchase and sale prices for refined gold bars at Sberbank


The selling of refined precious metal bars to individuals had been discussed at the Russian Ministry of Finance and the Government of the RF for a long time, and the discussions became more active in 2018. But the law enforcement officers had fear of the flow of precious metals from individuals to legal entities, which did not allow a final decision to be made; there were only discussions, and drafts were prepared. Everything changed due to the sanctions that resulted in the de-dollarization of the population’s investments. The issue was resolved very fast, it passed through all instances within one day.

Time will show how attractive the investments in precious metals will be to the population, and to what extent they will replace the usual investments in dollars or euros. In any case, the volatility of precious metals and gold, in particular, is higher than that of currencies, as in this case, the volatility of the dollar exchange rate is added to the volatility of the metal price on the London PM fix.

In addition, the efficiency of using the non-cash currencies on bank accounts is much higher than when using the physical precious metals in bars. And the population also has a lot of problems to store these bars. However, when there is no possibility to acquire dollars or euros, the choice turns out to be limited, unless, of course, citizens would like to invest in Russian securities or cryptocurrencies. But that is quite a different issue.

Sanctions: what has come and what has gone on the Russian jewellery market

Unfortunately, the appearance of refined precious metal bars for citizens without the VAT resulted in very significant losses for legal entities and individual entrepreneurs working with precious metals. The same amendment to the Tax Code of the RF, which removes the VAT from refined gold bars when sold to individuals, articles 34612 and 34643 were supplemented with new rules prohibiting the use of simplified and patent taxation systems in the manufacture and wholesale, as well as in retail trade in jewellery. These new rules will come into effect on January 1, 2023.

This is a very severe blow to small-scale and micro businesses in the jewellery industry. The transition to the general taxation system will require small businesses to have an accountant without whom entrepreneurs will definitely not be able to cope with full-fledged accounting, and - most importantly - all transactions performed by these business entities are subject to the VAT in this case, which, of course, greatly reduces the profitability of their business. In fact, Russian jewellery market share reallocations are expected when the share of small-scale and micro businesses will probably decrease by several times, giving up their share to medium and large-scale businesses that currently operate using the general taxation system.

It can be said that depriving small-scale and micro businesses of the opportunity to continue their work using the patent and simplified taxation systems is the main loss of the market due to the imposed sanctions, because if there were no sanctions, there would be no urgent need to immediately remove the VAT from gold bars, making them an alternative to dollars and euros for the population, and the decision would still be under discussion between the regulator and public business organizations for many years to come. Certainly, a compromise acceptable to both sides would have been found. But the sanctions did not give time for looking for the compromise and adopting it.

It is likely that the purchase of gold by the RF Central Bank at a fixed price below the accounting rate may reduce the profitability and, consequently, the attractiveness of doing business for gold miners and refiners. However, taking into account the sanctions restrictions on the export of gold from Russia, the situation is not so simple. But that is quite a different issue.

The problems of implementing the State Integrated Information System in the control over the circulation of precious metals, precious stones and products from them at all stages of their circulation (GIIS PMPS) still remain in the Russian jewellery market. After the registration in the System and transferring the information about the residual stock of the PMPS, semi-finished products and finished jewellery to the GIIS PMPS, the participants of the PMPS market must now submit updated and detailed information about these residual stocks of the PMPS to the GIIS PMPS by April 1, 2022.

However, the regulator (Ministry of Finance of Russia) proposes to the Government of the RF to postpone the stages of implementing the system for six months due to sanctions. However, the next stage begins on April 1, and the decision has not been made yet as of March 31. Of course, postponing the stages of the implementation of the GIIS PMPS would make the jewellery business’s work easier, but two opposite trends intersect here: on the one hand, under the sanctions, the government seeks to facilitate control and supervisory administrative measures, but on the other hand, the growing role of gold as a new and now the only currency in Russia, on the contrary, requires more strict control over its circulation.

As for the sanctions imposed by many countries to ban the supply of luxury goods to Russia, including expensive jewellery, these sanctions are very beneficial to the Russian jewellery manufacturing companies. On average, consumers of jewellery in the Russian market are not wealthy, and the disappearance of high-end jewellery brands from the jewellery stores will not be noticed by 99% of the population. In addition, the suspension of jewellery supplies from Turkey, precious stones from India and other countries of the East, is not expected because of the sanctions imposed, and the Russian jewellers are interested in these goods only.

On the whole, it can be stated that the jewellery sector is the manufacturing sphere where historically everything went well in Russia, and the import substitution has long been achieved. So, the reduction in imports due to sanctions is rather a boon for the Russian jewellers and not a disaster. There exists the issue of equipment, consumables for manufacture. But as for their supply, the companies hope for the countries of the East, especially China.

Another thing is the expected very significant reduction in the income of the population as a whole. Nobody doubts that it will be, the question is how big the reduction will be. If the population’s income - due to the sanctions - is sufficient to buy the essentials (food, clothing, utilities) only, the jewellery business, of course, will see a catastrophic decline in demand. In this case, only the largest and very successful jewellery designers will survive who, in fact, will replace the foreign jewellery brands that left the Russian market.

But there is a reverse side of the sanctions pressure on the jewellery business in Russia: due to restrictions on foreign outbound tourism, due to the disappearance of many high-end foreign goods from stores, and other consequences of the sanctions - up to the lack of interesting new foreign films in cinemas - the choice of what customers can buy for their disposable money, most likely, will be small. As it used to be in the USSR, the choice of gifts, especially to women, was very limited in stores, which contributed to the popularity of jewellery to a large extent.

But in general, the crisis, as you know, is the time of new opportunities.

Vladimir Zboykov for Rough&Polished