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Jewellers’ costs for self-control are rising

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Will the rouble be backed by gold?

The fact that there is an intention in Russia to replace traditional currencies - the dollar and euro - for gold as an investment tool for the population became clear even when the Tax Code of the Russian Federation was amended to allow the sale of refined gold bars by individuals without a VAT.

Now, the idea of ​​a more global replacement of the dollar and euro with gold has been further developed. N. P. Patrushev, Secretary of the Security Council of the Russian Federation told this in his interview with Rossiyskaya Gazeta (Russian Newspaper) to confirm these intentions of the State. He said that in the project proposed by the scientific community to create a two-circuit monetary and financial system in Russia, the rouble will be backed by gold, as well as by a group of goods that are currency assets, in accordance with the real purchasing power parity. However, E. S. Nabiullina, Chairwoman of the Central Bank of the Russian Federation, made a statement later “As for the pegging of the rouble exchange rate to gold, this is not discussed in any way.” That, however, does not mean that this will not be discussed later.

Today, however, according to Federal Law No. 173-FZ “On Currency Regulation and Currency Control” dated December 10, 2003 and amended on July 2, 2021, there are no goods in the list of currency valuables. In this law, currency valuables ​​are foreign currency and external securities (for details on the metamorphoses of the Russian concept of “currency valuables”, see Rough&Polished).

Most likely, the status of “currency valuables” is supposed to be returned by law not only to gold, but also to other precious metals (platinum, palladium, and silver); and perhaps, also to rough diamonds, and even all other precious stones (which would be completely irrational because of their insignificant contribution to the general basket of currencies).

How full can be the backing of the rouble by gold in the monetary and financial system of Russia? All the data necessary for the estimation are available on the Bank of Russia’s official website (https://www.cbr.ru/hd_base/). The example is April 28, 2022, and for ease of comparison, the calculations will be made in dollars.

On that day, the London fix price of gold was $1,895 per troy ounce, or $60.93 per gramme and $60.926 mn per tonne. The stock of gold in the Russia’s gold and foreign exchange reserves amounted to 2,296 tonnes, with the London fix prices of $139.9 bn. A similar picture was obtained when taking into account the official price for gold of the Central Bank of the Russian Federation (4,463 roubles per gramme), so the total value of gold was 10,247 bn roubles, or it was $140.6 bn at the official dollar rate of the Central Bank of the RF.

Information about the monetary aggregates of Russia given on the RF Central Bank’s website and converted from roubles into dollars at the current exchange rate, gave the following picture:

- M0 money supply is $190.9 bn,

- M1 money supply is $511.1 bn,

- M2 money supply is $914.7 bn,

The broad money supply is $1175 bn.

Thus, the gold available in the Russia’s gold and foreign exchange reserves provides almost 74% of the cash in circulation (M0). But the total money supply emitted by the Russian Federation (M2) backed by gold is at the level of 15.3% only. And the broad money supply backed by gold is 11.9% only.

Not being a specialist in the banking sector, the author of this article cannot give an expert assessment of how sufficient such backing by gold is for the normal functioning of the monetary and financial system of Russia. But the possible consequences of using gold for these purposes for the jewellery industry in Russia can be discussed.

However, large quantities of gold are mined in Russia every year, and there are flows of secondary gold, which allows the State to intensively increase the stock of gold in reserves. According to the Union of Russian Gold Producers, the total gold production in Russia in 2021 was 363.5 tonnes for a value of $22.1 bn as of the date mentioned (https://www.interfax.ru/business/831780).

Implications for the jewellery market: is there no such thing as an excessive control?

Can the interests of the jewellery market be affected due to the new status of gold in Russia? Probably, they can be affected. The most radical change in the legal regulation of the industry has already taken place; as noted in Rough&Polished, simultaneously with the new law of removing a VAT from refined gold bars intended for sale to individuals, the norm on the prohibition of the right to apply Special Tax Regimes (STR) from January 1, 2023 by small legal entities and individual entrepreneurs operating in the field of PMPS was put into effect to combat the possible flow of the VAT-free gold from individuals to legal entities.

Thus, while jewellery produced today by small enterprises enjoying the STR can be made from the VAT-free gold purchased from gold-buying offices, from 2023, all manufactured items will contain gold purchased with VAT. Naturally, this will lead to a general increase in the jewellery price, which is undesirable for the Russian jewellery market, especially in the context of the expected decline in household incomes due to the pressure of sanctions. However, the main problem of the small-scale jewellery businesses lies elsewhere as the transition to the Main Taxation System (MTS) from the simplified one entails the need to increase the businesses’ costs for accounting. It is clear that the costs for the STR are one thing, and the costs for the MTR are quite another one! The expected result is the increased cost of jewellery, and the price will grow. The competitiveness in foreign markets will decline, and exports (already small) will decrease, and the number of market participants (and all those employed in the jewellery sector) will be reduced by a factor. The total amount of tax revenues from the jewellery industry to the budgets will also decrease. Regional budgets will especially suffer.

The revival of the currency status of gold and the possible pegging of the rouble to gold in the paradigm of traditional state regulation provides for the inevitable strengthening of control over its circulation. Thus, in case of pegging the rouble to gold, we should expect increased control over the circulation of the precious metal, which will result in the further tightening of industry mandatory requirements for jewellery market participants.

But maintaining industry mandates always means expenses to the business. At the same time, in the face of sanctions pressure, the only way for the country’s economy to survive is to maximize the efficiency of everything and everyone, including increasing the labour productivity, reducing unproductive costs of all processes and operations to zero.

Is it possible to combine the tightening of industry mandatory requirements and the strengthening of control over their implementation with a reduction in the unproductive costs of processes and operations in the field of PMPS? No, it is impossible. Compliance with mandatory requirements cannot be free of charge, because any such requirement entails the need for the business to choose not optimal, but appropriate technological solutions. And at the same time, the cost risks to pay possible fines connected with control increase.

Whatever the share of the costs in the commodity composition aimed at maintaining mandatory requirements and control, this share does not give any advantages to the product from the consumer’s point of view. When paying a share of the value of the goods attributable to the costs borne by the goods manufacturers and/or suppliers for the fulfillment of mandatory requirements by them, the buyers, in fact, pay “for air”. It is also obvious that with an increase in the cost of a product, the capacity of its market falls, which, in turn, further increases the product cost.

Therefore, in order to maintain the industry business efficiency, the regulator should strive to ensure that the fulfillment of mandatory requirements in the field of PMPS, even in the event of revival of the currency status of PMPS and the pegging of the rouble to gold, would not lead to additional unproductive costs for market participants.

The technological basis for the organization of control in the field of PMPS in Russia is the State Integrated Information System in the control over the circulation of precious metals, precious stones and products from them at all stages of this circulation (SIIS PMPS) that is under introduction. The SIIS PMPS, in principle, is already operating, well, with certain “teething troubles” typical of starting the system, but it works.

Initially, the system was based on the redundant idea of ​​duplicating the jewellery marking by entering a unique product identification number (UIN) in the DataMatrix code printed by the manufacturer or importer on a tag inseparably attached to the product, and in the DataMatrix code applied directly to the jewellery piece in the Federal Assay Office. This technological solution initially looked strange: why is it necessary to put a micro DataMatrix code containing the UIN on the product itself reducing its aesthetics, if the same DataMatrix code is on a tag inseparably fastened to a jewellery item?

Moreover, the system does not provide for the DataMatrix code reading from the goods at any stage of their circulation after they leave the manufacturing factory or the importer’s office, including their retail sale. But the laser equipment for applying the DataMatrix code to the product is a heavy government expense, and, which is most frustrating for the business, jewellery manufacturers need to purchase expensive equipment (scanners) to read the micro DataMatrix code upon the goods’ arrival from the Federal Assay Office. It should be noted that within the framework of another Russian system for marking other goods - the Centre for Advanced Technologies Development’s “Fair Mark” - marking can be applied either to the product itself or to such things not attached to it (packaging, etc.).

Excessive technological solutions related to the State’s control functions, which were acceptable during the “easy life”, become a great burden in a crisis and they would need to be canceled. In this case, there is no harm to the efficiency of control, because duplication of the marking is just the case when there is a clear redundancy of a control measure. No one needs to mark jewellery on metal, it is quite enough to apply a DataMatrix code on a tag that is inseparably attached to the products!

The redundant list of mandatory requirements related to the control over the jewellery market in Russia now is surprising. The businesses consider that the fulfillment of the current mandatory requirements entails the costs that are completely unjustified. Using norms, the State decides for private jewellers where and how they should buy raw materials, how the raw materials and finished products should be stored, accounted for, and transported. Yes, even the fulfillment of the requirements regarding the mandatory state assaying and hallmarking of jewellery also means expenses to business to carry out self-control, which the market players are not in any way interested in.

Jewellers would like the need for all these mandatory requirements to be re-evaluated in the crisis conditions of functioning the jewellery industry. Although, it is clear that in the case of using gold to back the rouble, the likelihood of revising the industry mandatory requirements and business control standards to ease them looks very unlikely. Much to the business’s regret.

One of the most redundant mandatory requirements for business in the field of PMPS is the fulfillment of the Rosfinmonitoring’s (Federal Financial Monitoring Service of the Russian Federation) instructions to combat money laundering. Why is a duplicate control over jewellery buyers necessary if they pay with a bankcard issued by a bank that has already identified its clients and controls all their cash flows? How does all this duplicate control relate to the “digital revolution”, in the framework of which the databases of all market participants seem to have already been combined? However, servicing the Rosfinmonitoring’s requirements by the PMPS market participants are unproductive business costs that reduce its efficiency. Again, in the context of using gold to back the rouble, the chances of jewellery withdrawal from the Rosfinmonitoring’s requirements become even less.

And there is also duplication of control in the regulation of the Russian PMPS market during importing and exporting any PMPS. This is the so-called “state control” in addition to the usual customs control when PMPS cross the external EAEU borders. At the same time, state control is not only an unproductive cost for business (freezing goods for the period of state control) but, what is most harmful for businesses, it is also a huge barrier to the development of Internet commerce with parcels addressed to individuals abroad, because few people are so patient as to wait for the parcels of jewellery. Obviously, with the change in the status of precious metals, the situation with excessive “state control” will not become easier for business…

The share of the cost of maintaining the mandatory requirements and self-control in the total cost of jewellery seems to be small due to the high cost of the raw materials. However, the jewellery manufacturer earns income from the added value that his work generates. And in this case, the share of costs for fulfilling mandatory requirements and control is significant! This, in its turn, results in a decrease in the Russian-made jewellery competitiveness in foreign markets. It means, that the export potential of the industry suffers from the need to comply with the industry mandatory requirements and control in the industry. Theoretically, Russian jewellery could be absolutely competitive globally. They could be competitive but they are not due to unequal price points due to the aggregate costs for administering the mandatory requirements.

It is not a fact that all new measures to strengthen control over the PMPS circulation are explained by the plans to peg the rouble to gold and other currencies. Perhaps, their introduction unfortunately is simultaneous with this event, and the intention to peg the rouble to gold will certainly simplify the passage of all industry “punitory” new laws through the authorities.

At present, a project to strengthen liability for administrative offenses in the field of PMPS is under discussion. The statute of limitations for them is established by the Code of Administrative Offenses, and it is planned to increase the statute of limitations from today’s two months to two years. Obviously, such a measure will lead to a significant increase in penalties, and, therefore, to an increase in the average share of expenses in the cost of the products made from PMPS.

Another norm-setting initiative is considering manufacturers, precious metals users and those participating in precious metal circulation and mining, as well as precious stones users and those participating in precious stone circulation as the subjects of regulation by the Federal Law “On Ensuring the Uniformity of Measurements”. The scale of possible problems from this new law is still being assessed by the jewellery community, but it is already clear that in this case, there will be more expenses than the additional costs for doing business.

Will the jewellery business be able to take all these control burdens on its “shoulders” in an time of sanctions? It’s unlikely possible… Maybe, after all, the regulator should once again analyze what is really needed in the industry regulation, and what needs to be immediately eliminated so that the business could “breathe easier”?

It is important to note that the Russian leadership understands that in the face of the sanctions pressure, the conditions for doing business need to be eased. Vladimir Putin, President of the Russian Federation, declared the need for maximum economic freedom for people engaged in business. But new regulatory legal acts that complicate and increase the cost of doing business in the field of PMPS are still made and passed. And local inspectors are hardly ready to change their approach – there’s a reason that V. I. Matvienko, Chairwoman of the Federation Council of the Federal Assembly of the RF, publicly promised two months after the President’s statement to go to the House of the Government of the Russian Federation for a single picket with a poster, if business is not given freedom ...

Vladimir Zboikov for Rough&Polished