Crisis: View from Moscow

If it is to judge by reports broadcast by the Russian TV channels, the global economic crisis is something happening far away, oversees. In printed media the key points are highlighted otherwise.

On the background of slumped markets and growing inflation gold turned into the most remunerative tool, says the TVC channel. This opinion is backed not only by U.S. business persons, but by rank and file Americans too. They are literally cleaning out jewelry store showcases. There is also panic purchasing of gold ingots and coins going on in the United States. Some places feel real scarcity of these products. And merchants stopped to accept orders for them.

Such reports are aired by the Vesti channel and by the news programs of other federal TV channels. Luxury merchants pin their hopes on Russia, mass media say.

And not in vain, judging by an article in the Vechernyaya Moskva daily, describing the most expensive things given as gifts in the Russian capital.

These presents are able to shock both by their price and their content, the daily says. They are given of course by the most affluent and generous Russians. The newspaper asked the owners of Moscow-based boutiques and jewelry houses about extravagant gifts bought by their VIP clients.

Although it is possible to buy anything in this white-stone metropolis, the majority of mediocre and rich Burratinos still prefer threadbare “baubles” as gifts, buying jewelry, cars and real estate. However, customers paying unheard-of money are offered appropriate goods in return. For instance, sales clerks at the Aesthete Jewelry House confirmed that a very substantial client cannot be surprised by a “simple” diamond jewelry piece.

“VIP-class buyers more often order jewelry stud with diamonds of rare hues – pink, blue and yellow,” says Dmitry Gavrilenko, Chief of the VIP Department of the Aesthete Jewelry House. “Such stones are very scarce in nature; this is why they are much more expensive than regular gems. Sometimes it happens that buyers ask for stones of a certain size and shape. This is even a more complicated affair. We have to seek such stones in different parts of the globe. Nevertheless, people are ready to pay any money for their caprice. And money, as you know, works miracles, so the order is completed virtually always.”

The world discovered that the “new Russians” had enough money to meet any whim as early as 2003, when one our fellow countryman skipped bargaining and shelled out $100 million for the world’s largest pink diamond weighing 70.39 carats at the exhibition held by London’s Mercury. The stone was intended as a gift. To whom, it was not known. The billionaire’s name remained a secret as well.

The operators of the famous Graff boutique told that a well-heeled ladies' man may plank down an average of $1,000,000 for earrings or a ring graced with a bright yellow diamond meant as a present for his ladylove. The luckiest young ladies get the most expensive kind of diamonds – blue. The swankiest necklace made of such diamonds costs €9,000,000.

However, party-colored little stones do not at all put the limit to millionaires’ imagination. And since there is demand, there is supply to quickly meet it.

“Some day one of our customers asked us to make a rose… of pure gold and in life size,” Gavrilenko says. “He wanted to give it as a gift to his fair one, which was not too difficult to guess. The complexity of work was that the man requested that the rose should match the original one to one. The work done was literally of a highest jewelry class in a direct and figurative sense of the word. But the customer remained content. In one case, we received an order for a gold crown bestrewn with gems. As it appeared, it was meant as a gift to the general manager of one of the Moscow factories for his jubilee. So we made it. But it turned out such a weighty chunk that even craftsmen could hardly lift it. I can’t imagine how the owner could try it on.”

- And still, do you come across impossible orders?

“More likely, these are orders, which we do not want to fulfill. The only order we gave up was to make a gold handgun with a set of gold bullets. The client also asked that the model be made exactly to the original and besides that it should be in operating condition. The last request embarrassed us very much and we decided against taking up the job. No one could guess to what fatality this insane idea might have lead! Though theoretically, it could be quite possible to put it into life.”

However, a slump of interest may as well await foreign players on the luxury market in Russia, which has not been skirted by the crisis. “On the background of the currently very unstable economic situation, the entire demand for goods, which do not belong to prime necessities, luxury items included, is subject to substantial diminution,” Maxim Klyagin, a Finam analyst, told RB.ru. The expert explains this may happen because purchasing of such expensive goods has mainly been funded by credits. “Although in Russia’s luxury segment this trend has been so far less expressed it may well happen that we’ll see there negative movement as well,” the analyst predicts.

 

When financial markets or economy as a whole are ruffled by crises, only utterly secure investments do not betray us, the Vedomosty daily says. The sociologists of the National Agency for Financial Studies tried to find out what kind of investments were considered by the Russians as the most secure. During the summer 2008 survey, the agency polled 1600 persons from 153 Russian localities. A similar survey was undertaken by VTSIOM (the Russian Public Opinion Research Center) 10 years ago on the eve of the default, on August 15, 1998.

It turned out that, as 10 years ago, real estate bears the palm in the reliability rating among the country’s population. This type of investments was named by 45% of respondents in 2008 and by 47% in 1998.

Unlike in 1998, today the population is increasingly trusting in Sberbank. At least this year, 23% of those surveyed named deposits with Sberbank as the most reliable kind of investments. Ten years ago, only 9% of respondents were ready to confide their money to Sberbank. People’s trust to cash sharply went down. Whereas in 1998 currency notes were named as the most reliable way to invest by 39% of respondents, this year there were only 9% of such adherents.

In people’s eyes, gold too receded from its positions. People’s savor for buying gold and jewelry as a reliable investment fell from 26% to 15%. Experts believe that a major part of respondents while speaking about investments in gold meant jewelry purchases.

 

In the Soviet time, precious metals were available for private persons exclusively as jewelry adornments. Only on the verge of the 1990s people got a possibility to buy gold in ingots and coins, says the Kommersant-Dengi weekly. Panic gold buying occurred during the 1998 crisis. Then the Russians trying to rescue their savings bought almost all the gold available at banks and got their money’s worth.

During the current crisis, gold purchasing is also considered as one of the most reliable ways to keep one’s savings. This March, gold quotes on world markets reached their historic maximum – the price of one ounce of gold exceeded the $1,000 level. Prices for other precious metals were also close to their maximum. For the first time in 30 years, silver moved close to $21 per ounce. Platinum and palladium scored $2,273 and $582 accordingly. However, this hasty growth changed for no less hasty decline. Starting from March, palladium and platinum were more than halved in their price, followed by silver – to a lesser extent. The gold price slump was not that serious on the background of other precious metals reaching about 13%. “There is no serious price drop for gold, so one may say that gold is still a “quiet harbor” amidst strong fluctuations on financial markets,” believes Alexander Tikhomirov, Chief of Precious Metals Department, Rosbank. At that, experts reckon that current gold prices, very high as they are, will not subside in the future. And the most audacious forecasts say that gold may even break the March records by the end of this year.

Vyacheslav Vassilyev, heading the foreign currency directorate of the Bank of Moscow, noted a significant increase in demand for off-the-shelf metal: “According to our data, currently there is a sharp spurt in demand for off-the-shelf precious metals in ingots and investment coins. The greatest demand is for 100, 500 and 1000-gram ingots.”

“The demand for precious metals on the part of private clients has undoubtedly increased. It has gone up approximately in equal parts for digital accounts and for precious metals in physical form. Currently, the stock market is not living its best days – on repeated occasions pace-setting trading floors suspended their operations and some part of investors preferred to move their investments into precious metals,” agrees with him Vladimir Ustimenko, Lead Specialist of the Precious Metals Department, Nomos-Bank.

Vladimir Korytkovski, Deputy Director of the Foreign Currency and Non-Commercial Operations Department of Sberbank, says, “One of the indicators of precious metals demand is the number of digital metal accounts opened with the bank and their balances. As is usual under crisis conditions, people’s interest to gold should be high, although now, according to our information, there are just tiny upward shifts in transactions involving non-physical precious metals. Simultaneously, there is a significant growth in sales of investment and commemorative coins (20% up as compared with this August). If we take bullion sales, they do not exceed 10% of digital sales.”

Valeri Lebedev, Chief of Precious Metals Department, Project Financing Bank, explains investors’ behavior this way: “Today, gold continues to stay at a sufficiently high price level, though never reaching the March boundaries; this is why those who bought this metal at its spring peak hope for its appreciation. Others abstain from entering the market due to high volatility of metals and are ready to make up their mind about further actions if there is a stable trend.”

 

A private person has several ways to acquire his or her own gold reserve. The least liquid method is to buy jewelry, the publication says. The cost of an item will include its labor component, while it may only be sold via a pawnshop, where its weight will merely be taken into account. One may buy gold in bullions, but the profit of this investment remains doubtful since a VAT will be imposed on this kind of purchase and the bullion will virtually cost by 18% more than its initial price. “Currently, purchasing physical metal to diversify one’s investment portfolio is economically inexpedient, since the investor’s losses while buying and selling the metal will exceed 18% of its cost,” Alexander Tikhomirov explains. The VAT problem, being a needless obstacle in physical metal transactions, has been raised on repeated occasions, but the tax rate has only been decreased from 20% to 18%.

As likely as not, soon the Russians beware of the crisis but not ready to save their hard-won money by way of gold investments may accomplish their intentions to rescue their savings without too much loss on taxes, the Profil weekly writes. President of the Russian Federation Dmitry Medvedev speaking at a visiting meeting in Magadan strongly recommended to the Ministry of Finance to review the 18% VAT problem for gold purchased by physical persons.

As far back as three years ago, ex-President Vladimir Putin spoke for making this tax lower. However, up to now the “precious” VAT problem has not been solved, and gold in Russia has not become a popular asset with private investors. But the world financial crisis made the problem of safeguarding people’s savings by way of purchasing precious metals especially pressing. In a tense banking environment and slumped stock market, the Russians need an alternative to preserve what they have earned. It seems that their President got the message. Many are already rubbing their hands anticipating liberalization of the Russian bullion market and expecting the VAT for precious metals sold to physical persons may go down this year to 10%. Still, there is hardly anyone to guarantee that the once disregarded President’s decision will not be neglected again. Besides, it should be kept in mind that the tactics of saving money by investing in jewelry may be profoundly corrected. This year brought a ban on tolling schemes for jewelers (taking precious metals abroad to process them in jewelry articles). In this context experts predict a 30-40-percent rise in prices for jewelry.

 

The emergence of digital metal accounts as a technologically more sophisticated tool made the necessity of a lower tax less urgent, the Kommersant-Dengi believes. “VAT cancellation now may be attractive to those who buy bullions for gifts or do not trust banks and prefer to keep their metal at home. All the other transactions may be done with digital metal,” Vladimir Korytkovski says. Besides, the price of metal in ingots may go up as it is purchased depending on its weight. “The cost of bullions straightly depends on their weight. The less they weigh, the higher the unit cost of metal they contain due to labor expenses and hence the higher the final price of gold for buyers. This is why it is more paying to buy the heaviest bullions for investment purposes,” Vyacheslav Vassilyev warns.

Be as it may, bullions may be considered as a full-fledged accumulation means only if bought for long-term investments. Besides, one may run into difficulties trying to sell gold back to the bank. Only a few banks may buy out bullions from public due to a complicated pattern of expert evaluation. It is worth mentioning that a bullion owner should not only take care of its safe but also cautious way of keeping. Even the least defects make the bullion lose some of its value.

 

Digital metal accounts (DMA) are devoid of drawbacks related to owning physical metal. No VAT is levied to open them since the metal as such does not leave the bank’s vault. The amount credited to DMA is calculated into grams of metal and the account owner is given an adequate account statement. Depending on market fluctuations, the DMA owner may buy and sell metal at prices quoted by the bank. Like in the case of a regular bank deposit, one may open both a current metal account and a call metal account. Banks award interest on current metal accounts. However, there are mainly call metal accounts being opened and in this case the account interest depends on the fluctuation of precious metal quotes on world markets. Thus, the DMA owner may not only accumulate for a rainy day, but to try on the role of a speculator. Dealing with such transactions, one should pay attention to the difference between inner bank quotes for sold and bought metal set by every bank individually.

Nevertheless, DMA also have their own drawbacks and the major one is that such accounts are not rated as bank deposits and thus are deprived of the state guarantees to pay back funds. “Under the current conditions, one should take heed of how reliable a bank is, since metal accounts are not covered by the law requirements on bank deposit insurance,” Vladimir Korytkovski reminds.

 

Purchasing investment coins is also free of VAT. The only coin of this kind issued by the Bank of Russia is the gold coin bearing an image of Saint George the Triumphant. Its cost is maximally close to the cost of metal proper due to the great number of copies released and a relatively low-quality minting job. “In my view, investment coins are the most liquid tool. When purchased, they are free of VAT and the coins are easily sold since banks are buying and selling them on the secondary market,” Valeri Lebedev says. Commemorative coins are yet another type of high-quality coins issued in limited numbers. Although the transactions involving such coins are subject to VAT, they often have a greater value-adding potential than investment coins. Such coins quickly vanish from the primary market settling down in numismatic collections. As a result, their price shoots up several times and one may only negotiate their collection value.

In the opinion of Olga Anikeitchik, Chief of Precious Metals Department, Promsvyazbank, irrespective of the way you invest funds into precious metals such investments should be made for a long term to derive a more or less solid profit: “Gold should be considered as a long-term investment for a period exceeding two years. This does not mean that it’s no worth putting up money for shorter terms, but you have to be aware that such investments may not bring perceptible profit due to exchange rate fluctuations.”

 

The Komsomolskaya Pravda daily tried to find out how the problems experienced by the financial system were affecting consumer tastes in the Russian capital.

At a large jewelry boutique located in Tverskaya Street, the daily says, you may see emerald earrings, sapphire pendants and ruby bracelets exposed in the showcases. There are jewelry pieces for any taste and wallet. However, most buyers are flocked at the shop window displaying diamonds.

“Would you please give me that ring looking like a flower,” asks a man around forty. Incidentally, the ring is sold at RUR40,000 - not a trifling price. “Well, if not for the crisis I wouldn’t even think about buying it,” the man sighs. “Last week, they cut my salary by as much as 20 percent! Plus two employees were fired from our department. So I decided to buy some jewelry for a rainy day.”

There are quite a few of such buyers.

“October has always been a dead month for sales,” says Svetlana Semina, General Manager of one of Moscow jewelry stores. “As a rule, by this time people who spent all their money for summer vacations do not anticipate any festivities coming soon. But this October, our sales grew about 15 percent! Muscovites have decided to invest their savings into gems. And they are going mostly after diamonds.”

“Diamonds are always pricy,” explains Anna Zametayeva, General Manager of another jewelry store. “Customers prefer carat-heavy gems. For example, if earlier they could buy a ring studded with a scattering of small diamonds, now they ask for rings bearing one big diamond. In a word, they perceive jewelry as a way to accumulate money.”

 

One month ago, we already noted that Russian jewelry companies had abruptly lowered their activity in attracting buyers. Possibly, one partial explanation is that customers fearing the crisis are anyway driven to jewelry stores without any advertising. Maybe the tolling problem produced another impact on the situation.

 

However, there is also an exception. Jewelry holding Altyn has not only resumed it practice of publishing advertising releases in the Moscow and Saint Petersburg issues of the Komsomolskaya Pravda, but also engaged television for advertising purposes (and a bit earlier the company employed street billboards as well). Altyn’s social activities and awards remain the main themes in the company’s advertising, while Antonina Babosyuk is still its major advertising image. As before, promo actions and bonuses serve to stimulate purchases.