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The jewellery business in Russia is losing its attractiveness, but this is not due to sanctions

19 december 2022

The conditions for doing jewellery business in many ‘friendly’ countries today are much better than in Russia. Even in the post-Soviet countries like Kazakhstan, Kyrgyzstan, Armenia, and Uzbekistan, these conditions are much more favourable. Therefore, it is not surprising that many Russian operating jewellery companies are either relocating to ‘friendly’ countries or at least considering the possibility of relocation.

Why did it happen?

The purpose of regulating the PMPS (precious metals and precious stones) market in Russia

The common-sense logic suggests that state regulation of activities in any industry is carried out for achieving a balance of interests of the state and society in this area. The society includes both the end users of goods and businesses on the market. Their relationship is also one of the goals of the state regulation of the industry.

Obviously, the state should be interested in the development of any industry and in obtaining the financial results from its functioning both directly, through taxes, fees, duties and indirectly, through the subsequent civil circulation of goods produced in the industry, through taxes on labour income of citizens involved in it.

It makes no sense to justify that the development of an industry requires sufficient economic freedom, and obtaining a financial benefit from an industry requires control. It seems that everything is clear and understandable. But let’s see to what extent these obvious things are implemented in the Russian state policy of regulating the PMPS market.

The legal regulation of the PMPS sphere in the Russian Federation is one of the most stringent in the world, probably, the toughest in the world.

What countries require that a participant in the jewellery market should not only register as a legal entity or an individual entrepreneur (individual undertaker; this is the case all over the world), but also register with the control and supervisory authority (Federal Assay Chamber), as well as with a special information system (GIIS PMPS) and even provide detailed information about internal operations constantly in the course of its operation?

Where in the world, except for Russia, is it also necessary to go through a separate so-called state control in addition to the usual customs control (as if customs control is not a state on) when exporting and importing the PMPS, even as part of the Internet trade in jewellery involving private individuals?

In what other country do the FATF international requirements have more stringent national standards and jewellers have to submit so many reports as they submit to Rosfinmonitoring (Federal Financial Monitoring Service of the Russian Federation)?

Which of the countries contains as many as three specific articles in its criminal law aimed at punishing for the violations of the established rules while working with the PMPS?

There is a great imbalance in the regulation of the PMPS sector as for the control and supervision. Moreover, this imbalance between the economic freedom and control in the market increases over the years.

The list of the ‘regulatory achievements’ should also include the discrimination against the business environment of small-scale companies in any single area of the PMPS sector - the introduction of a ban on the use of special tax regimes by small-scale businesses that will come into force on January 1, 2023.

There are also some quite surprising things. It is no secret that a number of countries have imposed sanctions on the jewellery from Russia. So, the regulatory framework obliges to put the Russian state assay mark on all jewellery pieces, including those sent for export. Is it to make it easier to ‘identify’ our companies that try to evade sanctions?

By the way, some words about the sanctions. It would seem that under the sanction pressure on Russia as a whole, and on the PMPS sector in particular, businesses in this sector should be given maximum economic freedom. And the President of the Russian Federation declared the providing of maximum economic freedom to businesses to overcome the sanctions imposed. But this solution, certainly a welcomed by the PMPS sector, is not implemented for some reason. The regulatory legal framework in the PMPS field remains extremely difficult for market participants and, most surprisingly, becomes more stringent! And not only in terms of taxation. In our country, such an approach is called an ‘attempt to improve’.

It is clear that the sanctions complicate the work of the PMPS sector in the international market. But there is a domestic market. However, so little is allowed on the PMPS market for individuals in the Russian Federation that it is not difficult to immediately give the full list of what is allowed:

- make transactions and own jewellery (the only objects from the PMPS for which free civil circulation is allowed);

- buy ingots and coins made of precious metals from banks, own them and sell them only to banks;

- use pieces made of precious metals for domestic purposes and sell their scrap (dentures, etc.) to precious metal scrap dealers;

- buy, own certified cut and polished precious stones and sell them to dealers or pawn to the pawnshop as collateral.

And that’s all. It seems that it is planned to launch the sale of certified cut and polished precious stones without a VAT to individuals, with all transactions made through banks, as is the case with bars, including their sale and buying out. But the question is why do citizens need them (as well as gold bars without a VAT)? After all, it will be possible to sell them only to the banks (if they agree to buy back, not every bank buys back even bars). And if these certified items are bought back, will the discounts be huge? After all, these items cannot be exported from Russia, and these precious stones cannot be legally handed over even to dealers. It’s a ‘suitcase without a handle’, which not all investors even guess about yet as it is a new tool.

The opportunity of selling investment precious metal bars without a VAT to jewellery manufacturers (the main consumers of precious metal in production) is totally out of the question - after all, it was for the sake of depriving the market players of such an opportunity that Articles 2 and 3 of the ‘much-talked-of’ Federal Law 47-FZ dated March 9, 2022 were adopted.

But everyone understands that when ‘something is not allowed - one has a great wish- then it is allowed”! Investors are inventive and always find a way to solve their problems. But why does the state need to drive an investor into the ‘gray’, if not the ‘black’ market and make all investors at least lawbreakers, if not criminals?

It is easy to see that the Russians have legal access to precious metals and precious stones (except for jewellery) exclusively through banks. It’s even surprising that the state hasn’t come up yet with the idea of selling jewellery through banks… But precious stones and precious metals - not jewellery but mineralogical specimens for private collections (cultural values) - are legally inaccessible to the Russians at all.

Even just storing a sample of a rough precious stone or a precious metal nugget by an individual in a mineralogical collection, or even a cut and polished but not certified precious stone, is recognized a priori illegal in Russia, and under paragraph 4 of Article 191 of the Criminal Code of the Russian Federation, an individual can face up to seven years in prison for that.

No one knows the size of the domestic demand ‘killed’ by this monstrous approach to collection samples. Well, our state is not interested in this, no one has analyzed this. The Russian authorities believe that the Russians do not need precious stones at all and the entire industry of precious stones in Russia has always been focused exclusively on exporting the precious stone. Even polished diamonds manufactured in Russia were mainly exported, and for the domestic needs of the jewellery industry, lower-quality Indian stones were imported...

It is worth mentioning the production of the PMPS. Several attempts were made to legitimize the voluntary selling or artisan mining of precious metals and precious stones. Everything was in vain.

Meanwhile, the expert estimates of illegal gold production make up to 10% of legal one! Such data was provided in the Explanatory Note to bill No. 01/05/02-21/00113290 dated February 16, 2021. This bill on the liberalization of a criminal law in the PMPS field developed by the Ministry for the Development of the Russian Far East was introduced together with the bill “On Mining Activities”. But it wasn’t discussed even at the first reading... even though paragraph 2 of List of Instructions of the President of the Russian Federation No. Pr-2196 dated October 25, 2019 and made on the results of the meeting with the representatives of the public of the Far East ordered the Government of the Russian Federation to submit the proposals for the legislative regulation of activities for mining of alluvial gold by individual undertakers!

But the way of bill No. 429535-5 on the extraction of alluvial gold by individual undertakers was most difficult and it took up to 8 years, from 2010 to 2018, to develop it. This bill was approved at the second reading! And, in the end, it was not adopted. By the way, Rough&Polished wrote about this bill some time ago.

Why is everything going this way?

No matter how sad it is, our Russian traditions are like this - to ban as much as possible to be on the safe side. It is not so important for the state what the turnover in the PMPS sector is, it’s important what the illegal turnover is. That is, it is better to let the market make up 50% of its potential, but several million roubles would not fall into the ‘unworthy hands’. For us, this approach has been a historical reality since the Soviet days.

Unfortunately, when the entire economy of the new Russia was liberalised, while experiencing the inherent economic difficulties of the transition to a market economy, the precious metals and precious stones from the inventories were used by the authorities for emergency sales. So, this understanding of the purpose of the PMPS was reflected in the minds of high officials, they understood their tasks in storing and protecting the valuable PMPS in any form and in any place from being ‘stolen’ by the population. Moreover, regardless of whom these valuable PMPS belong to - to the state, a private company, or to an individual. Sometimes, such a care about the ‘things that do not belong to them’ looks even funny. It can’t be helped as the ‘historical memory’ works!

During the launch of the ‘regulatory guillotine’, this sad tradition was reflected even in the official justifications for the goals of regulating the PMPS market. As stated in the document “Target Structure of Normative Legal Regulation ...”, “the subject of administrative and legal regulation of the PMPS sphere are the key values protected by the law in the PMPS sphere”. And the ‘key risks’ that the regulation should minimize include the use of the unaccounted PMPS in production and the movement of illegal and counterfeit goods, the use of the PMPS for the purpose of legalising (laundering) illegal earnings, illegal VAT refunds, tax gaps and shortfalls in duties, substandard quality products on the PMPS market, unlawful competition due to a lower product quality, and consumer fraud”.

And not a single word is said about the goal of developing the PMPS sector, as well as developing the domestic and international markets! In short, all the PMPS sector regulation in our country has (and always had) a pronounced fiscal and, most importantly, law enforcement bias. It is no secret that, in fact, not the regulator (the Ministry of Finance of Russia), but the law enforcement authorities have the last word in approving or disapproving the bills related to the PMPS.

What is needed today is the development of the domestic market. And as noted, this is absolutely impossible without economic freedom.

Vladimir Zboykov for Rough&Polished