Dynamics Of Jewelry Manufacture In Russia
The dynamics of Russian Jewelry manufacturing between 1999 and 2004 is remarkable. (Table 2). Figures from the table 2 testify that the annual production gain for Russia jewelry in 2000-2003 was nearly   30%. That was four times greater than GNP growth rates for the same period. However, the gain in production and jewelry sales volumes in 2004 was lower than in 2003, reaching  22% for gold items and 25% for silver. At the same time, owing to some changes in the market, amount of the palladium items almost doubled, but platinum item volume fell to half of 2003 numbers.

Year	Gold item		Silver item		Platinum item		Palladium item
	Pieces,mln	Mass,t*	Pieces, mln	Mass,t*	Pieces	Mass,kg*	Pieces	Mass, Kg*
1999	6,792	17,36	5,080	27,01	10800	49,9	156	0,6
2000	9,480	23,9	6,828	32,04	22944	104,2	103	0,3
2001	13,072	33,46	8,448	43,51	16476	84,03	331	1,133
2002	17,525	42,11	10,53	50,28	19560	109,3	897	6,11
2003	22,107	53,4	13,478	69,58	29396	160,737	4365	22,97
2004 operative data	26,514	65,41	17,11	87,23	16980	88,5	9190	38,16

* - ligature

Such parameters were achieved due to the implementation of recommendations written in the “Concept…” concerning perfecting taxation schedules and the reduction of the tax burden for jewelry enterprises. In particular, it’s a result of canceling a 30% excise on jewelry. Certainly, such rapid production growth is evident of corresponding increase in jewelry sales dependent on the well-being of the domestic population.   

At the same time, Russian jewelry firms achieved the above-mentioned gains despite considerably higher tax payments, duties and credit rates, compared with the world’s leading jewelry producing countries. In Italy (second place after India in the world in volume of gold consumption for jewelry production), for example, the VAT on purchase of gold is not collected In addition, the VAT payment for gold is delayed until shipment of finished jewelry; the duty is not collected for all imported stones. Russian jewelers pay full cost for gold (including a 18% VAT) before shipment, and all imported precious stones (except diamonds) are assessed with a 20% duty based on the stone’s price. Hence, as soon as Russia enters the WTO, domestic products will become noncompetitive.

The cutting industry continues to develop according to the planned rates. Not only the quantitative points written in the “Concept…” have been achieved, but the quality of diamonds cut at the leading domestic plants, such as at Smolensk Crystal, has essentially improved. These diamonds are called “Russian goods” because they are produced completely in Russia. However, it is necessary to notice that the cutting plants buy not only Russian diamonds, but also import a significant amount of diamonds from abroad. Therefore, one should not think that approximately half of diamonds extracted in Russia are cut at the Russian plants, as the majority of Russian diamonds are still exported. That can be explained by the preference of Russian cutting plants to process diamonds within a price range of 400 to 600 USD per carat. Such rough is rarely found in the extracted lump. 

Those facts do not mean that the lack of necessary rough will limit volumes of the cut. World experience in cutting shows that, in some countries (India, China, etc.), profitable rough costs up to or so per carat. As the Russian jewelry enterprises buy great bulk of diamonds for production of jewelry sold on the inner market, the further increase in volumes of the Russian cut stones is surely expected.

The volume of diamond extraction slightly lags the parameters given in the “Concept.” At the same time, the largest diamond miner ALROSA has already considerably exceeded the parameters planned for 2005.

What are the reasons for the diamond miners’ shortfall from the planned parameters? While there are many reasons, it does not make sense to analyze the whole Russian diamond mining industry in the article devoted to realization of the “Concept”. Instead, we shall concentrate on non-realized provisions of this document.
The following is written in the “Concept”:
“Reforming and developing the diamond complex, primary goals should be achieved:

• to create a market infrastructure corresponding to the given sphere of economy;
• to create conditions for further development of market relations between the subjects of the DC by means of further perfection of the legal base.”

Thus, it is offered to the diamond-mining enterprises “To provide in the priority order the domestic cutting plants with the rough profitable for cutting in the Russian Federation …”.

Simultaneously, “To reduce the cutting plants’ unjustified financial losses, the legislative decisions concerning the exemption from the value-added tax on the diamond rough turnover in the inner market, should be accepted faster…”.

The last from the listed provisions of the “Concept” is fully realized in the “Tax Code of the Russian Federation” (art.149, p.3.10). However, such a decision, without compensation from the VAT to the diamond-mining enterprises which sell production to the domestic cutting plants, does not correspond either to principles of market economy or to conditions for the further development of market relations. It is discrimination, since the privilege is given to one managing subject (a cutting plant) at the expense of another one (a diamond-mining enterprise).

Taking into account that the “Tax Code of the Russian Federation” stipulates compensation from the VAP to the diamond-mining enterprises selling diamonds on the world market without collection of the VAT, it becomes obvious that sale of diamonds in the home market without collection of the VAT and without compensating the sum of this tax paid by the diamond-mining enterprises for materials, equipment and so forth, is less favorable. ALROSA loses annually (in comparison with diamond sale in a foreign market) about mln. If ALROSA received this money, the expected parameters of 2005 would exceed the “Concept” forecast. This situation does not stimulate the diamond-mining enterprises “to provide the domestic cutting plants with the rough in priority order…,” but, on the contrary, stimulates the sale of diamonds in foreign markets.

Analysis of the implementation of the “Concept” shows that many of its provisions are realized completely. Among the realized provisions, except for those mentioned in detail above, the following are of the greatest value:

• Special customs posts registering all export-import transactions with jewels and products of their processing have been established in Moscow, St. Petersburg, Yakutsk and Ekaterinburg;
• Licensing of the export of jewels was cancelled;
• Systems for effective state control over final sorting and pricing of diamonds have been made in the domestic market;
• For diamond manufacturing subjects
  
•    rigid restrictions on export of natural diamonds are revoked,
•    licensing and restrictions on diamond export are cancelled, and
•    preconditions for rational redistribution of rough among the Russian cutting plants are created;
  
• Changes to the “Tax Code of the Russian Federation” solved questions of
•    duty-free import of the natural rough diamonds into the Russian Federation,
•    exemption from the value-added tax on the diamond rough imported in and exported from the RF territory,  and
•    reduction of taxation base on property of the cutting enterprises which earlier included costs of the processed precious metals and stones; and
  
• State control over work of the large diamond-mining enterprises is kept, management  of the state shares is improved at these enterprises (ALROSA is meant here), and volumes for the manufacture and marketing of natural diamonds are defined at the sessions of the Supervisory Council of ALROSA and representatives of the State.
  One of the provisions of the “Concept” – “The decision of the RF Government on the natural rough diamonds quotas should be taken not later than a month prior to the beginning of the next year” – is even “overfulfilled”: Decree № 1373, signed by the President of the Russian Federation on 30.11.2002, except for obligatory implementation of recommendations given in the “Concept”, authorized the RF Government to set export quotas for a 5-year term.
  The most significant among non-realized provisions of the “Concept” are the following:
• “Priority development of searching and prospecting works with the purpose of maintaining a mineral-raw base of Russian DC”;
• “… to deliver significant volumes of diamond jewelry to the world market”;
• “Development of a foreign marketing and advertising network for selling more diamonds and especially diamond jewelry”;
• “To carry out a complex of measures preventing introduction of illicit and illegally made jewels into the domestic market”;

The problem of the raw mineral base decreasing annually holds first place in the list of non-realized provision of the “Concept”. It can have large negative consequences for the whole Russian DC in the nearest future. Therefore, concrete measures for increasing entrails stocks were provided in the “Concept.” The author of this article is concerned about withdrawal from “Concept” recommendations that compel the diamond-mining enterprises to invest rather significantly in searching and prospecting works, and to perform the work in their own prospecting divisions. Only ALROSA, after a cancellation of deductions, did these works in the following amounts (million roubles): 2002 – 1003, 2003 – 1146,8. Investments in searching and prospecting works are expected to total 1375 mln roubles in 2004 and 1630 mln roubles in 2005. Th validity of the “Concept” expires in 2005. The mentioned data show that the “Concept…” has already positively influenced development in the Russian DC. While many of the provisions of this document have been realized, new problems have appeared. Therefore, a meeting of the DC subjects took place on December 22, 2004, and was devoted to continuing realization of the “Concept.” The group recommended to address the Government with a petition to draft “The Concept of development the DC through 2010m,” taking into account new issues such as the forthcoming entry of Russia into WTO.
 
Katsman Y.E.
General director of
Almazzolotoprogress, Professor,
Honorary Academician of
the Russian Academy of Natural Sciences