When Federal Law “On Precious Metals and Precious Stones” No. 41-FZ was adopted in 1998, it was a progressive decision introducing the private property for precious metals and precious stones. Probably, it was not yet clear at that time which of the PMPS sectors would flourish and which one would decline. All sectors were expected to flourish. Since then, a quarter of a century has passed and we see now that, in principle, the law works effectively, the PMPS sector in Russia is developing.
But there is one segment in the PMPS sector in our country, which is stagnating and even disappearing. This is the mining and processing of coloured gemstones/precious stones. Surprisingly, having introduced 25 amendments to the abovementioned law over 25 years, practically nothing has been done to stop the degradation of the mining and processing of coloured gemstones. It is necessary to reverse this process and to start developing the sector of coloured gemstones.
The PMPS sector’s red-headed stepchild
The state doesn’t neglect the PMPS industry and lawmaking is in full swing in this industry. However, the state mainly improves its control over the PMPS production and circulation through establishing the Federal Assay Office and introducing the State Integrated Information System in the Sphere of Control over the Circulation of Precious Metals and Precious Stones (SIIS PMPS). Apparently, it is believed that the industry will continue to develop on its own thanks to entrepreneurial initiative. Indeed, the capitalist approach, certainly, works, but only in cases when business sees enough profit from its efforts. Otherwise, it is no longer a business.
It is logical to assume that if the number of companies in the production and processing of the coloured gemstones is steadily declining, this means that this area of activity does not look very attractive for business ...
But interestingly, when there is no struggle in the market for ‘something pleasant’ and no offended players it means there is no problem for the regulator. The writer of these words has tried for the quarter of a century to address all branches of government at all available platforms (practically alone) at various round tables, meetings and hearings to draw attention to the legislative problems of regulating the coloured gemstone sector and called for liberalizing the circulation of coloured gemstones, without which the Russian market for coloured gemstones would not develop in any way. My words were listened and ‘taken into account’. In principle, there were no objections, there were even promises from time to time to ease the regulations. But nothing has changed for the years. And only once, in 2005, at the hearings at the State Duma of the Russian Federation, I was given a clear answer in an extremely unpleasant form “Someone is trying to destroy the system of state regulation of the market for precious stones...” Has the system of state regulation of anything an intrinsic value if the state regulation does not result in the development of the sector and does not bring any benefit to the society or the state?
In part, the very name of the Federal Law “On Precious Metals and Precious Stones” played a trick on the coloured gemstones. If it was called “On Precious Metals and Rough Diamonds” (which the writer of these words called for all the time), then there would be no problems! And in this case, since there are not only diamonds, but also coloured gemstones/precious stones in the list of gemstones generally accepted in the world, it means that the state intensively dealt with them, too.
But de facto, not business dealt with these coloured gemstones but the GOKHRAN (Russia’s State Precious Metals and Gems Repository). It has been a problem even to put the issues of the circulation of coloured gemstones on the agenda of the meetings held by industry business associations for years as no one was interested in the coloured gemstones. There are very few industry market players in Russia who are interested in these issues.
And, in fact, what industry market players are still on the Russian market of coloured gemstones?
Firstly, this is the Mariinsky Priisk (Mine) JSC (mining emeralds and alexandrites) owned by Rostec (State Corporation for Assistance to Development, Production and Export of Advanced Technology Industrial Product ‘Rostec’”.
Secondly, less than 98 micro-businesses and 2 small businesses that, according to Rosstat (Russian Federal State Statistics Service), have declared their activities under code 32.12.4 “Processing of Precious, Semi-precious, Ornamental and Synthetic Stones, Except for Diamonds”; it makes less than 100 companies, including those engaged in the processing of not precious stones, but of semi-precious, ornamental and synthetic ones. Moreover, they declared working in this area, which does not mean that they actually work in it. And in 2001, there were 305 such entities in Russia, according to Rosstat, which is not a great number, of course, but three times more than today.
Apparently, “Rostec” is quite satisfied with regulating the market of coloured gemstones. And what the tiny Mariinsky Priisk JSC mean for the giant Rostec Corporation? it is just a small non-core asset, the existence of which the head of Rostec, perhaps, hardly remembers.
And the aforementioned micro-businesses operating in the coloured gemstone market are certainly not able to defend their interests seeking help from the state. They need to make both ends meet...
So, it turns out that there are two players in the coloured gemstone market in Russia - GOKHRAN, i.e., the state, and the Mariinsky Priisk emerald mining company, which is able to continue its operation for a long time thanks to its parent company’s subsidies in any market or non-market conditions. But we will talk about this company another time.
If you delve into the details of the regulatory framework for the practically non-existent Russian market for coloured gemstones, you may get the impression that the market is still alive. And how could it be otherwise when coloured gemstones exist by the law, and the department has the function of regulating their circulation. So, the regulatory framework for the circulation of coloured gemstones is being updated.
Rough&Polished has already discussed some positive new norms of law in the latest version of Federal Law No. 41-FZ “On Precious Metals and Precious Stones” that were adopted to regulate the precious stones market. It is worth repeating - for the first time in history, citizens of the Russian Federation were indirectly allowed to own loose precious stones. It was allowed indirectly, because this was not specified in the text of the law using a direct norm of law like, for example, “Individuals have the right to make transactions and own cut and polished precious stones”, but it was allowed through a definition of what buying-up is and what can be bought-up from individuals. But it was specified, at least, this vague way. It is better to have it specified this way than to have a legal vacuum in an environment where, in fact, the rule saying “not allowed unless permission is explicitly expressed” applies.
And despite the fact that the norm of law will come into force only almost a year later starting from March 1, 2024, immediately after the publication of the updated bill, there appeared quite a lot of announcements from individuals and legal entities on websites (like Avito) on selling cut and polished gemstones. The market is still tiny, but began to grow immediately. A private commercial initiative is a great thing if it is not completely discouraged by state prohibitions!
The by-laws have also begun to be updated to develop the updates to the main sectoral legislation. Instead of the current rules for the purchase of PMPS approved by Decree of the Government of the Russian Federation No. 444 of June 7, 2001, a draft of the updated ones has been worked out - https://regulation.gov.ru/projects#npa=136289.
Today, buying-up is a very important - if not the only - tool for the development of the domestic market of precious stones. This is almost the only way to create their secondary market today. Without knowing how a precious stone can later be sold for decent money, very few people in Russia are ready to buy it for a good sum of money, even if the gemstone is much more expensive by world standards. Unfortunately, first of all, thanks to state regulation of the market, almost no one in Russia sees intrinsic value in coloured gemstones.
It would seem that it is the time now to take advantage of updating the document and eliminating all existing weaknesses of regulation, in particular, those relating to the rules for buying-up coloured gemstones. Unfortunately, this is not appeared in the draft law.
There are no tools to make measurements, but you should make measurements, and you will be responsible for their correctness
In the updated “Rules ...”, it is planned to keep the requirements for indicating not only the names, but also the characteristics of the bought-up gemstones. It would seem that the requirements are normal. But the point is that gemstone sellers and buyers would need to know the gemstone characteristics only for correct gemstone grading and determining the price of the buying-up transaction based on certain price lists. However, the regulator establishes the responsibility for a buyer-up for the “correct assessment of prices in accordance with the legislation of the Russian Federation”. And how can a buyer-up “correctly” evaluate a gemstone, if the most important components of a gemstone evaluation are its colour and purity usually estimated by a gemologist in accordance with the legislation of the Russian Federation according to the reference collection of the corresponding precious stones, and the sets of these gemstones are available at the GOKHRAN and at specialized customs stations only? These parametres are estimated “by the eye”, in the literal and figurative sense of the word.
All these 25 years of law No. 41-FZ, some kind of magical solution helping in the instrumental assessment of the reliable characteristics of coloured gemstones was expected, but the magic did not take place, and the requirement from the old document is now transferred into the new edition of the buying-up rules, including the responsibility for the “correct” estimation of the gemstone characteristics. By the way, according to the current Russian legislation, the mandatory requirements for business, including the requirements for the mandatory determination of the characteristics of precious stones, should be realizable. And the requirement under consideration cannot be fulfilled in principle due to the lack of tools!
Even the most highly qualified experts in gemological centres are usually cautious and tentatively indicate charactreistics related to precious stones, if they are not completely sure that the characterestics are correct. And in this situation, a legal, and not commercial responsibility is mentioned for the “correct” estimation of the characteristics!
Another thing is in cases when a buying-up centre informs the seller about the characteristics of the gemstone at its reasonable discretion. That is, this option should be a buying-up centre’s right, but not its obligation, the centre shouldn’t bear the responsibility before the seller for the estimation of the gemstone characteristics.
‘Your gemstone is expensive, but we can buy it cheap’
Let’s suppose that each buying-up centre has an experienced gemologist able to estimate the characteristics “by the eye”, without standards, and to accurately assess both the colour and purity of precious stones. But in this case, in accordance with certain characteristics, the prices of gemstones being bought up should also be calculated based on the price lists in force in Russia, that is, they should be calculated on the basis of the GOKHRAN’s price lists (we have no other ones), the effect of which supposedly should apply to the GOKHRAN only. And would buying-up centres like to buy gemstones from individuals at the GOKHRAN’s prices? No buying-up centre would like to do this, and never. Therefore, with a “correct” evaluation of precious stones, no buying-up centres will ever buy precious stones or the transaction price will be used, as it is specified in the draft buying-up rules.
But if the price of the transaction between the seller and the buyer-up can be negotiated, then why the buying-up centre should be obliged to estimate the characteristics of precious stones at all? Should it be done to honestly inform the sellers by telling them anything like “your gemstone is worth 50 thousand roubles, but we, unfortunately, offer you 5 thousand for it”? Does the regulator really believe in this? In fact, it is clear that the “correct” amount of 5 thousand will be told to the seller. What are all these manipulations with the estimation of characteristics and the price lists for? And what can these fractions like 3/2 tell the buyer?
Isn’t it better to spell out that the price of gemstones being bought-up is negotiable, but, if the seller wishes, the gemstone can be sent for examination to a gemological laboratory at his or her own expense? That is, a buying-up centre can provide a service to the supplier if required. At least, it will be fair to the seller. In the end, buying-up centres can be placed under an obligation to hang out a sign reading “If you would like to sell a gemstone studded jewellery piece of the significant value, we recommend that you first contact a gemological laboratory for the jewellery piece identification and evaluation” and give the lab’s address.
But that’s not all. Today, an average gemologist at a buying-up centre is unlikely to be able to reliably distinguish a natural diamond from a synthetic diamond. However, the difference in these stones’ price is obvious. With coloured gemstones, it is easier, but synthesis technologies are constantly developing. In addition, a synthetic stone is not a precious stone at all according to Russian legislation. So, perhaps, the definition of the name of the stone being bought-up should not be required to be provided by a buying-up centre? A buying-up centre is not a gemological centre. And to be fair, high-end gemstones are rarely brought to buying-up centres, even in Moscow, so the expenses the buying-up centres should pay for a gemologist’s services and the equipment required are hardly justified.
Another thing is selling the bought-up gemstones at buying-up centres. However, when selling, a buying-up centre can easily use third-party outsourcing services, gemological laboratories and deliver the bought-up gemstones there in parcels.
Buying-up centres as stores on the secondary market of jewellery stones
Buying-up centres may well play the role of stores on the secondary market of gemstones used for jewellery - all gemstones, not just legally precious ones. It is necessary that the new “Rules ...” would give the right to buying-up centres to sell gemstones to individuals. For the most part, legal entities are not interested in purchasing gemstones from buying-up centres, because they need parcels of calibrated gemstones for manufacturing purposes. But it will be quite interesting for individuals to buy a pre-owned good-quality gemstone to have a custom-made jewellery piece manufactured cheaper compared to using a new gemstone, of course, when a buyer is sure that the price is attractive, and the gemstone is real.
As noted, precious stones have already appeared at Avito and similar trade platforms today. But if the idea of promoting buying-up centres as trading platforms for pre-owned gemstones turns out to be feasible and in demand, this will give impetus to the market development. Knowing that a gemstone in a jewellery piece is good value for money, the population’s interest in gemstones will gradually develop. The nearly investment approach of the population (“if anything happens, it could prove useful for a rainy day in the future”) should work in favour of the development of the gemstone market. Even without any advertising aimed at promotion. And buying-up centres, as organizations, should also be interested in the gemstone market development, because this is additional turnover.
Naturally, all of the above should apply to buying-up centres, as well as to to pawnshops that accept jewellery with gemstones as collateral.
And how should a buying-up centre work with certified gemstones?
At first sight, the buying-up centres’ work with certified gemstones may seem simpler because all the gemstone characteristics are known in advance. Yes, but a gemstone can be changed intentionally, and a certificate can be a faked one. And, most importantly, the gemstone price is already known to the seller in advance, although it is the purchase price paid some time ago...
Taking into account all the buying-up centres’ costs and risks, the really low liquidity of such a commodity group on the market, the spread between the purchase and selling prices will, presumably, be extremely high. Will such activity of buying-up centres bring benefit to the gemstone market? I’m not sure, rather, on the contrary, the owner of a certified gemstone can be unpleasantly shocked when facing with an actual price spread. And he or she will never buy a certified gemstone again...
But this does not mean that pawnshops should not have the right to buy-up certified gemstones. On the contrary, the more shops selling pre-owned gemstones, the better for their market. That’s a self-evident truth.
In fact, the problem lies much deeper, it is in the mandatory price lists for precious stones. They were good when almost every gemstone mined in Russia was used for export. And they become a problem when there is a need to develop a domestic market.
And the problem lies even deeper, in a special procedure for regulating the production, cutting&polishing and circulation of coloured precious stones. Only their complete withdrawal from law 41-FZ “On Precious Metals and Precious Stones” will ensure the market demand adequate to business costs, and an increase in production, cutting&polishing and their use in jewellery manufacturing. Of course, the market will not be able to develop without advertising and promotion. But it is the freedom of enterprise in the field of coloured gemstones used for jewellery manufacture that will give impetus to their market development and will bring money into the sector, which will be enough for advertising as well.
Vladimir Zboykov for Rough&Polished
