Russian market of precious metals and stones

In Russia according to the Union of gold miners, in the first quarter of 2007 domestic companies cut back gold mining and production against the similar period of last year by 6%, to 21 047.6 kg. Meanwhile gold mining went down by 6,8%, to 16 810,4 kg, by-product production by 8,8%, to 3043,9 kg.
According to experts the trend of the production cutback will remain based also on performance in 2007: approximately by 3-3,5 tons to nearly 160 tons. The cutback will be caused by the reduction of mining in placer deposits.
Generally, industry experts are of the same opinion that there is a need of a new Federal program which would serve the interests of all market participants: from the state to people since the previous federal gold industry development  program developed as far back as in the 1990s (adopted in 1996) had disputable objectives and was not implemented, nor plans were performed of exploring 22 largest gold deposits, reconstruction and technical retooling of seven operating plants using new technologies and equipment etc.       

Nevertheless, according to experts the Russian market size is about 4 billion US dollars per annum[1].

Top positions in the gold market (except loans) are occupied by Sberbank of Russia which makes practically all precious metals transactions. More than 8,5 thousand of its branches and structural units offer retail customers various goods made of precious metals. At present it is successfully implementing two of its projects –“Affordable precious metals” and “World coins through Sberbank of Russia”.     

For Russians one of the most financially attractive instruments based on precious metals are presently investment coins. Sberbank cooperates with 14 foreign partners from whom in 2006 more than 200 thousand coins were purchased made of precious metals dedicated to different themes. Among them are Australia, Austria, Britain, New Zealand, Solomon Islands, China, Poland and some other countries. In 2006 the share of foreign coins in the bank’ transactions reached 20%. The aggregate weight of precious metals realized in coins by Sberbank of Russia in 2006 was 16,5 tons.     
At present more than 96 thousand impersonal metal accounts are opened in Sberbank of Russia and their balance exceeds 16,3 tons (in gold equivalent) or 9,2 billion rubles.
Apart from an absolute leader – Sberbank of Russia, top positions in the gold market are occupied also by Gazprombank, Bank of Moscow, HOMOS-bank, Rosbank, VTB, Soyuz bank, Lanta bank, Khanty- Mansiysk bank. However, most of them receive principal profits by granting credits to users of the interior of Earth, rather than precious metals sales to customers. 
There is an increasing number of banks that obtained licence for the attraction of money to accounts and allocation of precious metals: last year their number grew up to 189 (as of the beginning of 2006 this figure was 179) and their “metal” product range is also being developed.
Banks are creating products not only on the basis of gold and silver, but also platinum and palladium. They are interested in precious metals transactions, considering them, first of all as an image asset, especially while entering the international loan market.
Maybe for that reason an actual competition in the retail market is declining, since banks not associated with production, industrial consumption of precious metals do not deem this market to be interesting to them.
It is not uncommon that commercial banks in order to maintain their image state that they carry out transactions in the precious metals market, but in reality make single transactions for individual clients. Such a state of affairs and also a low level of the interbank competition in the retail market of precious metals seriously prevent it from being developed. 
Nevertheless, the demand for precious metals in Russia has exceeded the supply by several times. The purchase of gold, silver, platinum and palladium by bullions and on a cashless basis, investment and memorable coins is not only a more reliable alternative to bank accounts, but due to the gold price rise also brings good speculative gains[2].
Based on 2006 results, the maximum profitability was brought by “silver” accounts, the second profitable accounts are “palladium”, in this case savings were not only preserved, but increased. Investments in gold also enabled savings to be preserved as their profitability exceeded the inflation rate, and only platinum showed the negative profitability against the inflation rate. However, by opening accounts in all types of metal one could get profitability at the level of   16,5% which practically twice as much as the inflation rate in 2006. Meanwhile ruble deposits hardly exceeded the inflation rate and currency accounts proved to be unprofitable.  

Gold mining in the Russian Federation

	2001	2002	2003	2004	2005	2006
Gold mining. Total	154,4	170,9	177,1	180,5	168,1	165,6
Gold mined	141,5	158,5	158,1	158,8	152,1	148,8
Accompanying Gold	11,1	9,9	12,0	10,4	11,1	11,9
Secondary gold	1,8	2,5	7,0	11,3	4,9	4,9

 Profitability of investments in impersonal metal accounts

Maximum, US dollar/troy ounce		Minimum US dollar/troy ounce	Profitability per annum %
Gold	725,0	524,8	11,5
Silver	14,9	8,8	34,5
Platinum	1355,0	982,0	5,8
Palladium	404,0	261,0	14,2

It is worth mentioning that if in 1997 100% gold transactions were cash metal transactions, now per 1 gram of cash gold there are 14 grams of cashless gold (purchased by opening the impersonal metal account (IMA)) in a bank. 
Besides the effectiveness of the IMA as a real means of protecting savings from inflation, Mass media point out some problem issues: 

- The lack of legal safety. The IMA is not subject to the bank accounts insurance law. By this reason there is no access to the IMA as a perspective financial instrument for pension funds and insurance companies, while the largest American pension, hedging funds, investment, insurance companies hold up to 30-40 % of their assets in gold and during crises even more. It enables them to significantly reduce the financial, stock, currency, goods market risk of loss.

- Inconvenience for clients. In case of relocation and change of registration, the account can not be transferred to another place or bank branch. While serving the account the account holder is attached to one place i.e. can not remotely give any instructions, issue any power of attorney.     

On May, 22-24 an All-Russia conference “Sberbank of Russia – 10 years in the market of precious metals”[3] was held in Yekaterinburg.

On May, 22 Alexander Zakharov, deputy chairman of the Management Board of Sberbank of Russia told a news conference that it was advisable to invest in precious metals from 5 to 15% of spare money[4]: “Under the conditions of a stable weakening of American dollar, a price increase in primary goods markets that we witnessing now, investments in precious metals remain a sort of “pacific harbor” which may enable an investor not only to save his/her capital, but also realize a profit from investments”. 
Zakharov announced the proposal of Sberbank of Russia for the development of the internal precious metals market:

- To create the demand for precious metals inside the country. All mined metal purchased by commercial banks may be sold or issued in the form of loans to jewelry and processing enterprises, purchased by the Bank of Russia for creating a “gold” constituent in the gold and currency reserves structure.

- To develop the cooperation between Sberbank of Russia and the Central Bank of the Russian Federation. “For example, the Bank of Russia may determine forward rates for gold like it determines now for rubles”.    

- To develop the domestic production. In Russia only 25% of the mined metal is intended for jewelries, while worldwide this figure is more than 90%.

- The export of precious metals should decline and be replaced by finished products sales.

The discussion of issues regarding the Russian market of precious metals and stones continued on May, 30 during the meeting of the “round table[5] on the eve of inauguration of the International jewelry exhibition that gathered more than 300 leading domestic jewelry companies and the same number of foreign.
The round table participants raised the following main problems and methods of solving them:
- alarming growing trends for gold “processing” outside the country run counter to the national interests; in a country mining the largest quantity of gold the jewelry industry declines;
- such situation is also in the diamond industry, the diamond processing inside the country becomes “nonremunerative”; it is more profitable to export outside Russia rough diamonds which Russia has as much as the rest of the World. In Russia out of over ten earlier operational largest manufacturers only Smolensk “Crystal remains;
- the revision of the regulation on export/import of finished jewelries made of customer-owned raw materials could have redressed this situation, in particular it is necessary to equalize import duties on them with imported jewelries – up to 20%. 
- Russian jewelers “in their struggle for a domestic producer” were supported by the State Duma deputies; provided that legislation is reasonable they are determined to process 100% of gold mined inside the country.