Russian jewellery industry on the eve of joining WTO: discussion continues

The participants of the Russian jewellery industry (in particular, Valery Radashevich, General Director of the Guild of Russian Jewellers) have already said on many occasions that the current state of business in the industry, taking into account the approaching entry into the WTO, calls for effective measures to establish the most favoured nation regime.
Among other measures, the jewellers expect a more liberal assay supervision system, cancellation of some regulations on precious metals, changing customs rules for import of gems and jewellery equipment and some solution of the jewellery-tolling problem. Vladimir Teslenko, Press Secretary of the Guild of Russian Jewellers noted, “Today the industry needs from 3 to five laws to live a normal existence. Let us hope that the government will adopt them in due time prior to joining the WTO.”
In January 2007, the Ministry of Justice has already declined the bill liberalizing the system of hallmarking for jewellery made of precious metals. Ministry experts observed that the current legislation did not envisage any other quality confirmation and control of precious metals and gems being exported than punching state hallmarks after performing tests and assays. It was stressed that in case the proposals contained in the bill will be realized the national budget will lose some revenues.
Meanwhile the bill, which cancels the obligatory hallmarking of precious metal articles exported from Russia and those made of silver and weighing up to 3 g, according to mass media, is still being debated at the State Duma and may be adopted already by its autumn session. If the new law will be approved it will bring about serious changes to all the jewellery market, says “The Russian Business Gazette” (an application to “The Russian Gazette”), since it will actually eliminate the state monopoly for hallmarking articles made of precious metals.
Experts are sure that cancelling the obligatory hallmarking will allow companies to cut the terms allocated for testing and hallmarking their jewellery, thus decreasing production costs associated with these operations. Besides, voluntary hallmarking of export items, if introduced by the new law, will give domestic companies a chance to increase their export of jewellery to a significant extent, which is much more profitable than exporting precious metals in ingots. All this taken together will make Russian companies more competitive and will permit them to meet orders from foreign firms for items, whose requirements differ from the Russian ones.
The Gazette reminds that today hallmarks may be made only by a state agency, which is represented by the Hallmarking Chamber. There are only 18 branches of the Hallmarking Chamber in all Russia. At the same time, there are scores of jewellery companies, and their number is growing every day.
The authors of the bill observe that in the years passed from 1998, when the law on precious metals and gems was adopted, the jewellery output quadrupled. Meanwhile the number of individuals and corporate entities engaged in jewellery business surged from 30 enterprises, which existed in Russia before 1991, up to 918 firms and 2 270 sole proprietors working nowadays. The jewellery-manufacturing network expanded to a significant degree. According to the bill authors and some jewellery industry representatives, the Hallmarking Chamber often failed to cope with the inflow of jewellery products, especially in high seasons.
Referring to foreign experience the authors of the bill observe that there is no hallmarking practice in many countries at all and the genuineness of jewellery products is protected by civil laws.
The bill proposes certain regulations to liberalize the hallmarking procedure, which in the opinion of its authors will not inflict any damage to the interests of the state, jewellery manufacturers and consumers.
Thus, the bill envisages a regulation restricting the bottom weight limit of items subject to be obligatorily punched with a state hallmark. In particular, this will involve a 3-gram limit for silver items of Russian make. The authors of the bill affirm that lightweight silver items belong mainly to the youth product range. Cancelling their obligatory hallmarking will give jewellery companies an opportunity to cut their productions costs, to increase their profit and correspondingly to pay more taxes to the national budget. The authors are sure that this will not affect their quality. Besides, this regulation will help to ease the pressure on the hallmarking agencies making it possible to shorten the terms of testing and hallmarking other jewellery items.
To facilitate promotion of Russian jewellery in the world market, the bill proposes to introduce voluntary hallmarking for export items with a state hallmark. Under this procedure, all the export items will have to undergo obligatory state control including assaying and defining the quantitative composition of precious metals in alloys. However, says the newspaper, the Russian State Hallmark has no international circulation: the jewellery exported by Russia has to be hallmarked once again in the purchasing countries.
Commenting on the work done to draw up the bill, Valery Radashevich said, “It is high time for the federal authorities to make up their mind on the necessity of state monopoly for hallmarking. In any case, the authorities must ensure equal business conditions for everybody. It is unfair when an entrepreneur is forced to stay in a queue and to take his jewellery to another city for hallmarking. This leads to unfair competition. If hallmarking is obligatory for everyone, then the authorities must set up appropriate conditions for this procedure, in other words to open hallmarking branches of their assay agencies in all the cities manufacturing jewellery or to compensate transportation costs. We propose to open offices of assay agencies at all the workshops producing more than 15 000 pieces of jewellery in a month.”
Speaking for the City-FM Radio Boris Borisov, Deputy Chief of the Hallmarking Chamber, agreed that such a law is needed: “If we mean export commodities, it would be wrong to cancel the obligatory hallmarking. We should introduce a regulation on voluntary hallmarking. In other words, an exporter may punch hallmarks or not if it is agreed with the foreign company, which is to receive the commodities. Everything will depend on the buyer. If the purchasing country has adequate control procedures, the buyers will check the wares themselves, and if there are no such procedures there and they do not need them, they will not do it. That is, as you understand, we are trying to give a possibility to meet the requirements of any market.”
At the same time, in his opinion the procedure in the domestic market should be preserved unchanged, “though a voluntary hallmarking of silver jewellery weighing, say, up to 2 or 3 grams may be substituted for obligatory hallmarking.” Mr. Borisov does not agree that the Hallmarking Chamber is unable to fulfill its functions: “This is somewhat exaggerated, of course there are some difficulties, and the terms are sometimes longer than they should be. However, generally, all the commodities are passed through and their major part is passed in a regular way.”
One should be reminded that the jewellery industry participants and among them, for instance, Flun Gumerov, General Director of Almaz-Holding, believe that it is necessary to cancel the state hallmarking procedure altogether and, leaving the control functions to the government, to pass it over to jewellers, taking into account that state hallmarking does not guarantee jewellery against forgeries. According to Mr. Gumerov, the hallmark is not the main thing in a jewel for its buyer.
It should be noted that at the same time in India, for instance, which is striving to expand its presence in the world jewellery market, its government is clamping down on the hallmarking problem. Starting from January 2008, gold hallmarking there will become obligatory. They plan to bring the number of jewellery hallmarking centers up to 70-80.
A sharp rise of the rupee rate against the US dollar and introduction of a customs duty for Indian jewellery imported to the USA caused overstocking among Indian jewellers. Seeking new markets, they turn their eyes to Russia. However, form their point of view Russia needs changes to be introduced into the regulating mechanisms of its jewellery industry.
Sanjay Kothari, Chairman of the Indian Gems and Jewellery Export Promotion Council, told in his interview to the RIA Novosti news agency that Russia should lower customs duties for jewellery to avoid a tide of smuggling.
“High customs duties should be lowered, since imported jewelry gets into Russia anyway, but illegally… Russia is an enormous market for jewelry and, probably, second only to that of the U.S. in case the CIS countries are taken into the account”, said Kothari and added that customs tariffs and VAT prevent jewellers from India and other countries to entrench in Russia.
“The task of lowering duties should be attained through continuous negotiations at a government level,” the Council Chairman believes.
According to the Russian Ministry of Interior and customs experts, the RIA Novosti notes, in recent years at least 40% of the Russian jewelry market is held by smuggled items made either of Russian rough diamonds of various qualities illegally smuggled out of Russia, or from counterfeit imported diamonds. Illegal jewelry enters Russia primarily from South and South East Asia, China and East Mediterranean.
Besides import duties, importers of jewelry to Russia have to pay a fee for state hallmarking.
In February 2007, the Russian Government for the first time in 8 years raised the amount of fee to be paid for assaying and hallmarking jewelry by the Russian Federation Assay Agency.  Payments were increased by an average of 67-76%.
The problems common for the Russian jewellery industry were demonstrated by the “Expert-Urals” Magazine, which took the Sverdlovsk Region as an illustration case. As estimated by CEO of Ermi, a Yekaterinburg company, the shade jewellery segment in the Sverdlovsk Region accounts for 60%. However, local manufacturers believe that gradually the share of the shade segment in the market will contract. “In recent years there was a marked growth of the buyers’ purchasing power and culture,” says Victor Tulupov, General Director of the Yuvelirni Dom Group of Companies. “Formerly people were indifferent to where and how a jewel was made: the main thing for them was to buy cheaper and to put on more. Now they take pains to choose high quality and fancy items.”  “We observe development of the jewellery industry when there is a crisis in the country and people invest their money into gold. Or when the economy is on the upswing and people are able to spend their money for luxury items. So far their purchasing power is growing there will be a growing demand for jewellery,” believes Svetlana Khramova, Commercial Director of Yuveliry Urala.
“Expert-Urals” notes that according to experts of the Guild of Russian Jewellers the market will be growing due to legal foreign manufacturers and after Russia will join the WTO preserving its current legislation the competitive inability of Russian players will result in their drastic diminution.
The jewellery sector development in Russian provinces is influenced not only by legislative environment but also by local peculiarities as well as by incursions on the part of federal level companies.
“Extending our retail network to the Urals we did not even think of treating local manufacturers as serious competitors,” says Yulia Hertz, Representative of the Moscow Jewellery Plant in Yekaterinburg. “The conditions for developing the jewellery industry in Yekaterinburg and in the Sverdlovsk Region are not the best ones: the workforce is expensive, the lease payments are high and the personnel are scarce. We open our workshops where the costs are lower, for example in Armenia.” This is why federal level companies are expanding their jewellery networks but are not in a hurry to establish their own manufacturing facilities: jewellery retail sales pay back several times more than jewellery manufacturing.
The only exclusion is Adamas, a Moscow-based company, which in April opened a workshop in Yekaterinburg. According to “Expert-Urals”, local official manufacturers prefer to aim at wealthy buyers and as a rule make exclusive and small-batch wares starting from several dozens to two or three hundred pieces in a batch. (The only exclusion is Yuveliry Urala producing 60% of large-batch wares.) Profit is obtained due to unique and expensive jewellery and not due to large-scale production.
There is a bit different situation in Vladivostok where Adamas recently opened its first company store (before that its company network stores emerged in Artem and Yuzhno-Sakhalinsk).
In experts’ opinion, opening retail company stores belonging to manufacturers is quite worthwhile. The metropolis jewellery markets are overstocked and this is why Moscow-based networks are moving into provinces.
“The main problem of the Russian jewellery industry is the high share of overhead costs in the end-price of commodities,” comments one expert on the situation. “Jewellery production is one of the most vulnerable industries. The product turnaround period is long, so the payback time is also not a short one. The cost of rough is constantly growing. Actually, the jewellery industry may now follow one of the two ways: either to increase prices or to create its own guaranteed sales market – a network of stores.”  To all appearance, Adamas has chosen the second way. As of today, they opened over 70 company sales outlets in various cities of Russia.
However, the Vladivostok jewellery market, though not growing rapidly, is nevertheless sufficiently saturated. According to jewellery companies polled by the “Zolotoy Rog” Daily emergence of one company store, even if opened by a very large manufacturer, is unlikely to change the alignment of forces in the local market. However, this process may be provoked by closing petty retail outlets.