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11 march 2019

eduard_utkin_xx.jpgEduard Utkin, General Manager of the Russian Jewellers Guild Association, which is a member of the Russian Federation Chamber of Commerce and Industry, answers the questions from Rough & Polished regarding the activities of the country’s professional jewelry community and the transformations in the jewelry industry.

Recently, the Budget and Financial Markets Committee of the Federation Council held a meeting on taxation of precious metals and precious stones, including changes in taxation in the sphere of their turnover. What are the options and when are the results to be expected?

The past year ended with an unfinished dispute over the fate of special tax regimes in the jewelry industry, and the discussion continued this year with a new force and at a new level. The main issue on it was the introduction of amendments to the Tax Code of the Russian Federation in order to abolish the VAT on refined gold bullions. The discussion touched upon the existence of special tax regimes in the jewelry industry, which create the risk of tax evasion schemes. The Ministry of Finance supports the abolition of VAT when refined gold is sold to individuals but opposes the abolition of VAT on gold used in jewelry manufacturing. The need to abolish special tax regimes in the turnover of precious metals (given the abolition of VAT on refined gold bullions) was strongly supported by the country’s Federal Taxation Service and by the banking community interested in creating a new investment instrument. A representative of the Ministry of Industry and Trade supported the idea of ​​abolishing the VAT on refined gold bullions and the Department of State Regulation in the Production, Processing and Circulation of Precious Metals and Gems and Currency Control favored the idea of ​​separating the turnover of investment gold and gold intended for the production of jewelry.

The Russian Jewelers Guild proposes not to associate the abolition of VAT on refined gold with the need to eliminate special tax regimes in the industry - it is much more productive to focus on dividing the flows of investment and industrial gold, the more so that investment gold will be sold in the form of certified bullions in some package, which is quite likely to abide to certain security requirements. The goal pursued by the abolition of VAT is focused on the creation of an investment instrument as an alternative to cash. This is a good undertaking, but it cannot be done at the expense of eliminating the benefits for small businesses. By and large, the elimination of special tax regimes would be equal to the elimination of small and microbusinesses. The right to apply special tax regimes is one of the main competitive advantages of small companies over large firms. If for large businesses different conditions for the acquisition of precious metals seem unacceptable, then it is easier to find a mechanism in which the cost (including VAT) of these metals will be the same for all market stakeholders.

The first major change in taxation that the Ministry of Finance is preparing to make is the abolition of VAT on refined precious metals. Here, two options are possible: cancellation of the VAT for sales to individuals, or to both individuals and legal entities. Depending on this, there are various risks. If only individuals will be able to buy metal without VAT, then this metal can flow into the sphere of jewelry production. If it affects both individuals and legal entities, there is another risk, which is splitting large-scale production into smaller ones in order to get unjustified tax advantages that small businesses can use. In this regard, there are such ideas as to prohibit the use of a special tax regime in our industry in order to neutralize these risks. But then there is the next risk, which is making jewelry manufacturers and vendors switch to the shadow economy. At this meeting, we discussed where there is a greater risk, because for law-abiding market stakeholders it is important to understand the environment in which they will turn out to be and what risks they will bear. At present, no decision has been made yet, the bill has not yet been prepared, and there is no version to submit.

It is known that the Guild of Jewelers made a survey among the managers of jewelry companies regarding the industry problems they consider to be of high priority. What did this survey show as a result?

Important for all is the issue regarding the cancellation or preservation of the tax regime. All the industry leaders unanimously agreed that the tax regime should be maintained in the field of trade.

But jewelry manufacturers also complain about tightening state control, including endless tax dues and duties, laws to counteract the laundering of illegal incomes and financing of terrorism...

This is about strengthening control measures by the Assay Supervision Service. We cooperate with the Assay Chamber: its task is to identify illegal manufacturers, illegal importers, and we are obliged to help them. There is disagreement regarding the laundering of proceeds from crime. We believe that jewelry can in no way be used for the purpose of money laundering and for financing terrorism. No one can cite such examples, but the control measures are very strict, the penalties are very high, and the responsibility for implementing these measures is very serious. We would like to have a significant relaxation in this field. We see that market stakeholders, as well as control agencies are wasting their time and money.

It's clear. But there is still the issue of illegal jewelry import, in particular from India and China. Is this a serious threat to the domestic market?

If products are imported with hall marks corresponding to those stated, they are not dangerous. But in China, production costs more than in Russia. Problems begin when goods are delivered with understated hall marks – these are counterfeit goods.

And what about diamond goods?

Diamond synthesis technologies are currently developing, and naturally, polished diamonds manufactured from synthetic rough diamonds are much cheaper than natural polished goods. Taking into account the fact that the major amount of diamonds - 90 percent - are imported from India, there has recently emerged a tendency on the part of diamond suppliers from India to often admix synthetic diamonds to the parcels of natural diamonds - when they are small, it is impossible to identify where they are natural, and where synthetic. And since not all the stones go through the state control procedure, they are quite difficult to seize, because there are certain ways to import them across the Russian border, and you can still get them through the countries of the former USSR - Kyrgyzstan, Kazakhstan, Armenia, as there is no such procedure there. These countries have a quite liberal legislation on the circulation of precious metals and gems. And this will certainly affect the competitiveness of our Russian manufacturers.

What do you think about the domestic diamond manufacturing? What kind of prospects it has?

Regarding the diamond manufacturing business, I believe that it is better for Russian diamond cutters to concentrate on cutting large-size and high-quality stones. Unfortunately, it is loss making to manufacture here diamonds weighing less than 0.3 carat, as our diamond manufacturers are not competitive in these small fractions compared to their Indian counterparts. Therefore, it does not make any sense. In India, it is cheaper, the tax system is completely different there, so they will win in terms of price, and given the fact that some unscrupulous manufacturers admix synthetics (which is impossible at a Russian factory), they have yet another competitive advantage. According to statistics, 90 percent of stones set in jewelry are imported from India. Today, there is no clear understanding around the world, which manufacturer is producing jewelry with natural stones. And our diamond cutters can guarantee that polished diamonds manufactured in Russia are made from natural rough diamonds. And this is a competitive advantage in the international market, because not everyone can give such guarantees. One way to save our diamond manufacturers working with small-size diamonds is to improve technology. When they will master unmanned machine-cutting technologies for small stones, we will get here an indisputable competitive advantage. For this we need re-tooling. And then we can win over the Indians, where cheap manual and sometimes child labor is used.

Do such machines exist?

Of course. I have already seen equipment that is able to cut and polish such stones – as a result, you have good quality and large yield of suitable stones made from natural rough.

Which of the jewelers making diamond adornments are now in a better position?

Those who buy diamonds cheaper - as small in size as possible and as low in quality as possible. Because consumers buying small diamonds do not care about their quality: it is difficult to see such diamonds with the naked eye, while their price is visible without a magnifying glass. At the same time, diamond jewelry graced with large stones of high-quality cut are a completely different market governed by completely different laws. The consumer in this market does not view the price as the main criterion when choosing a jewelry piece. And manufacturers of premium products are in an advantageous position - in the premium segment, sales fell not as much as in the mass consumption segment, as their consumers stand firmly on their feet.

What are possible - if they are possible - joint actions of the jewelry market stakeholders to counter the economic recession and decline in the purchasing power of the population?

And what can be done if consumers have low purchasing power? We cannot increase demand in the market. We can say that in an environment of decreasing demand it is necessary to create more favorable conditions for jewelry manufacturers, so that they do not become extinct - this is what we are doing. But it depends on the regulators. The next thing you can do is to remove the barriers that exist on the way to export our products to the external market, and there are a number of these barriers. This would also help the industry to exist. Well, the third thing we ask from the State is to facilitate popularization of domestic jewelry products in the domestic market. There are good prospects and the State is ready to support us, but the problem is that all the changes in the legislation, both for the better and for the worse, are prepared and implemented in the course of many years. For example, there are a number of issues to be solved in the field of export: we need to be able to sell jewelry for cash, and for this we need to make changes to the law on currency control - there are no special objections from the regulators or regulatory bodies, it just takes time. We ask to cancel import duties on what we use for production - the documents to this effect are under consideration, but this cart is moving very slowly. Or it is necessary to lift the restrictions associated with online jewelry sales - all this is also in the work, all this is running.

How successful was the activity of the Russian Jewelers Guild in the past year? What has been done and achieved?

Our activities last year can be considered successful. First of all, the number of association members increased. Secondly, a lot of work was done in the field of legislation regulating the circulation of precious metals and precious stones, and there were launched many projects that will benefit many market stakeholders in the future. There are plans to complete the launched projects, the work on which is in full swing.

Does this mean that the members of the Guild are full of enthusiasm?

If you are in a boat in which there is a hole, and you have no enthusiasm to bail out water, you will simply die. Therefore, enthusiasm cannot disappear. But everyone's mood is different. Some market stakeholders are in a depressed state, close to panic. Especially recently, the retail trade complains about a very sharp drop in sales. If earlier they complained about the lack of buyers in stores, now they complain about the lack of visitors. This is especially true of street retail, when it’s not a store in a shopping center, but an outlet on the street: people have less money, and in a shopping center, customers going by may drop in and buy something. However, others are full of vigor and energy - they are looking for opportunities to enter the external market, because they understand that it is more capacious, and the jewelry goods produced in Russia are quite commendable.

That is, there are reasons for optimism?

I communicate a lot with people from other industries, and I understand that the current situation, which is very difficult in the jewelry industry, is still much better than in others. You see, the truth is that we know how to make world-class goods, that is, our jewelry can be sold on foreign markets. And now, when it is stormy here, when there are problems with domestic sales, if we can enter foreign markets, we will be able to develop successfully, since we are able to create goods that are competitive on foreign markets. But our car manufacturers, for example, cannot boast of this. And the manufacturers of clothes or shoes find it even more difficult: they have to master the production of high-quality goods that can be adequately represented in foreign markets. There is no need to be sad: everyone has problems, but at least we see the light at the end of the tunnel, and this is export. There are plenty instances of the success Russian jewelers enjoy abroad: they work there, go to exhibitions where they receive prizes and recognition. The only trouble is that our legislation is greatly lagging behind them – our jewelers have already gone far ahead, while the country’s export legislation is still suffering from rudiments and atavisms: it is like a log on the road making it difficult to drive through. When they say "sanctions," sometimes you think that our government itself has introduced them against our manufacturers. The regulators themselves agree that everything needs to be changed, but the legislation, as an ungreased mechanism, wouldn’t turn over. We want to move faster, and for this we need to be able to sell our goods at exhibitions directly to consumers - but we don’t have this opportunity because we need a simplified export procedure and a simplified import procedure to take back unsold goods, we also need to create trade and logistics centers in potential sales markets so that they contribute to the development of these markets - a lot of things are needed. And speaking of e-commerce: we are ready to ship jewelry to customers - I have met with many trading companies that are asking for deliveries of our goods to Australia, Austria, Germany... Individual customers find us on our websites, but we are forbidden to do this, and we cannot ship jewelry to private persons from Russia. But in this country - in Yekaterinburg, in St. Petersburg - there are many firms that are in high demand in overseas markets, firms that supply goods to overseas markets, like Alfa-Karat, TULUPOV Jewelry or Chamovskikh Jewelry House. There are about thirty companies that exhibit their jewelry at Junwex Premium and all of them happen to be successful exporters.

Galina Semyonova for Rough & Polished