OVERVIEW OF RUSSIAN JEWELLERY SECTOR


  • Foreign trade turnover of raw materials for the jewellery sector
  • Production of raw materials for jewellery-making in Russia
  • Import and export of jewellery
  • Production of jewellery in Russia
  • Import substitution and export support
  • International agreements that may impact the foreign trade in raw materials and jewellery items

Foreign trade turnover of raw materials for the jewellery sector

A slump in economic growth and fluctuations in global prices for raw materials have resulted in a drop in the foreign trade turnover of raw jewellery materials. The drop reached its lowest point in 2015. By the end of the two crisis years, the import value in the sector grew more than twofold, while the export experienced a polar opposite trend, shrinking twofold. Consequently, even though the foreign trade balance remained positive, its value became almost half the one in 2014.

The analysis of foreign trade data shows that, as well as with import of ready-made jewellery items, raw materials import is also experiencing a trend towards centralized supply: over 80% of overall supply (in terms of monetary value) is attributed to a single exporter country: Kazakhstan. Moreover, this trend keeps on strengthening: since 2013, Kazakhstan’s share in foreign trade activity has grown from 2.5% to 82%. The contributions of other exporter countries are relatively small, but overall, 96% of outsourced raw materials for the jewellery sector are provided by 7 countries.

The most dramatic drop in Russian export in 2015 was the result of cutting the supplies of gold to Switzerland. The key domestic factor that impacted gold exports in 2015 was the decision by the Central Bank of the Russian Federation to expand the country’s gold and foreign currency reserves with a record volume of gold, which turned the institution into the largest sovereign buyer in the market. As the Central Bank bought gold in the national currency, this allowed to make half a trillion rubles’ worth of direct investments in the Russian economy, without affecting inflation in any way. In 2015, the volume of raw materials exported to Switzerland decreased twofold, while the value of the said materials became almost five times lower.

Production of raw materials for jewellery-making in Russia

Overall, domestic production appears to experience positive dynamics. According to expert estimates, diamonds and precious metals account for 1% of the mineral and raw material pool in Russia. Russia is one of the world’s largest producers of precious metals and gemstones. Silver production is displaying the most rapid growth (+17% compared to 2014). However, the Union of Gold Producers believes that, by the end of 2016, production may drop by 5%. Since 2013, platinum remains the only precious metal with decreasing production. The examined term is characterized by a negative downward trend in platinum prices. Experts point out that there are only in a limited number of instances when this precious metal is traded lower than gold at the stock exchange. Gold production is enjoying sustainable growth, and, according to some predictions, this trend will remain in 2016 and 2017.

 

Import and export of jewellery

The slowdown of the foreign trade dynamics in 2015 was caused by a number of objective factors shaped in 2014, but with a delayed effect that only became fully evident in 2015. These included:

  • General geopolitical tension, fuelled by the aggravation of the Ukrainian conflict and the western nations’ economic sanctions against Russia; the global deterioration of the foreign trade environment, in particular, the drop in demand for jewellery in the largest markets, such as India, China, and the Middle Eastern countries; the volatility of the global financial market; and the debt-related problems of the euro area and the USA.
  • Slowdown in the economic growth in Russia and other BRICS nations.
  • Fluctuations of global prices for raw materials, primarily the rise of gold prices.
  • Decrease in the purchasing power of consumers in Russia and importer nations, such as Belarus, Kazakhstan, and Moldova.

The crisis manifestations in the economy brought about the decrease of foreign trade activity in the jewellery segment. By the end of the two crisis years, the import value had shrunk twofold, while the export volume had become almost seven times lower. In 2015, the foreign trade balance in the jewellery segment was negative.

The trend towards centralized and clustered supplies in jewellery import intensifies: up to 85% of all imported jewellery comes from 10 leading suppliers. Export, on the other hand, is moving towards diversification: in 2013, over 90% of jewellery items was exported by two key players, while in 2015, the same amount got distributed more evenly among ten major exporters, while the number of Russia’s foreign trade partners also grew, along with these countries’ share of Russian exports.

The “champion” in terms of import drops in 2015 was the import from China and Thailand to Russia. By the end of 2015, the physical volume of items imported from China dropped threefold, while the value of Chinese import decreased by a factor of 5.8, amounting to the record drop of $ 121,231.421 for a single year in the 2014/15. While in 2014, Thailand boosted the physical volume of its supply up to the record 98 tons, by the end of 2015, the same country had cut the amount of decorative jewellery that it exported to Russia down to 16 tons, at the same time taking the lead in terms of revenue for its exported jewellery, as it had dropped twofold compared to 2013, the year before the crisis. Analysts believe that this situation may be explained by the devaluation of the Russian national currency and its unstable exchange rate. As currency exchange has become riddled with risks, Asian exporters have begun to exercise more caution when entering into foreign trade agreements, while Russian importers have been forced to limit their activity due to the slump in the customers’ purchasing ability.

Export volume has been impacted most adversely by a drop in jewellery trade with Belarus and UAE. In 2015, the amount of jewellery exported by Russia into Belarus decreased more than tenfold, while their value decreased by a factor of thirteen. UAE also brought 10 less Russian jewellery in 2015.

We are clearly witnessing a number of trends that may cause a serious crisis in the jewellery sector:

  • crisis manifestations may lead to a higher share of goods with low added value in the foreign trade structure, which, in turn, results in a dramatic drop in export revenue, as the key markets for Russian jewellery (the EAEU members and the former USSR countries) were focused on consuming mid- and low-cost goods even before the crisis;
  • the import structure may also become characterised by a prevalence of low-cost decorative jewellery of lower quality than the domestic and foreign products that are currently present in the market;
  • as the domestic market keeps shrinking dramatically, the limitations concerning export activities (first and foremost, customs clearance of jewellery and control measures imposed by the Federal Financial Monitoring Service of Russia) are turning into cumbersome hurdles in the path of the Russian jewellery sector. An opportunity to access foreign markets more freely will significantly relieve the pressure in the domestic market, allow companies to adapt to a drop in demand, and slow down the decline in the sector.

 

Production of jewellery in Russia

It is quite obvious that the domestic consumption crisis overwhelming the jewellery market in 2015 and early 2016 proved quite destructive for the sector as a whole, pushing the jewellery production back to the level of early 2000s. Along with it, the delayed effect that fully manifested itself in 2016 is likely to loom over the sector throughout the year 2017 as well.

According to the basic macro-estimates up to 2035 made by the Ministry of Economic Development, the industry growth during the period will be quite moderate: no more than 2% per annum. 1.1% growth is expected as early as in 2017. Quality of life expectations are also quite modest so far: even the most optimistic ‘basic +’ predictions stipulate that the population’s actual income will grow at an average rate of around 1.4% per annum, catching up with the 2013 level only in 2021. That said, the nominal size of average monthly wages may grow twofold, from 38.4 thousand rubles to 61.8 thousand rubles in 2025.

Against the frankly depressing background such small improvements may well give reason for positive thinking; in the future, however, counting on the domestic market alone will still be quite risky. The most logical step that can be taken under such circumstances – i.e. expanding into foreign markets – may currently prove quite problematic, due to a number of bureaucratically complex and costly procedures that not every jewellery company can afford. Small and medium enterprises that currently dominate the jewellery production sector are inherently unable to tackle tasks of this scope all on their own. To overcome these issues, as well as associated industry challenges (accessing local resources, receiving government support, streamlining control and financial monitoring procedures, etc.), it may be possible to create new cluster-based structures, which will follow the example of other sectors and support all their members as they strive to develop their business and enter foreign markets.

There is an alternative development scenario concerns the operation of a new sales channel, namely the Internet. In late 2016, the government decided to withdraw the limitations on selling jewellery online, as the Internet, according to surveys carried out by Russian Information and Analytical Agency “RusJewellerExpert”, plays an important role in the 2017 business agenda of almost 20% jewellery manufacturers, as well as of a large number of retailers. The advantages of this sales channel include relatively low operation costs (compared both to traditional domestic trade channels and to foreign export development), which fully complies with the other expenditure reduction measures – one of the key trends in 2016 and 2017. It also has a disadvantage: according to consumers that took part in a survey during the JUNWEX exhibitions, the level of trust towards this channel is quite low.

Import substitution and export support

In 2013-2014, the balance between production and sales was relatively consistent: the share of domestic jewellery amounted to about 44% of the overall sales. The share of import, that accounted for 9% of the overall sales in 2013, reached 10% in 2014. During this period, the influence of exchange rate fluctuations and inflation was not that tangible, as the majority of enterprises were selling goods that they had bought back during the period of stability. But in 2015, negative impact of the crisis, the drop in demand, and the increase in prices for imported goods (brought about by higher exchange rates) already began to disrupt the balance between these two parameters: the share of import in the overall sales plummeted down to 6%, with the import volume decreasing by a factor of 2.5 during the same period. Production volume also dropped, along with its share in the overall sales that decreased by 7.2%, amounting to 36.8% in 2015. This forced all market players, from manufacturers to importers and retail networks and parlours, to raise their prices. A look at the changes in this dynamic in 2015 allows us to conclude that retail outlets have drastically cut the purchases of new batches of both imported and domestic goods, preferring to work with their current stock, with the new pricing principles in mind. During the first half of 2016, yet another surge in the dollar-rouble exchange rate that occurred from late 2015 to early 2016 caused the share of import both in relative and absolute weight and value indices to rise dramatically, while the product types and suppliers experienced a shift from more expensive products that had previously been imported from Europe and that many Russians could no longer afford, to cheaper jewellery from Asia and the former Soviet republics. At the same time, the first half of 2016 was characterized by a more than sevenfold drop in domestic production of jewellery, with domestic supply to retail stores getting cut to a bare minimum. If this trend continues, retailers will keep searching for cheaper products, eventually switching to cheap jewellery from Asia and the former USSR (primarily the Customs Union nations) as a replacement not only for imported items, but for Russian-made products as well. The Russian jewellery market is already experiencing an evident spike of activity coming from suppliers from Armenia, Belarus, and Kyrgyzstan; as these countries and Russia have a shared history of many production processes and consumer preferences, such suppliers are able to offer jewellery that Russian buyers are expecting to see, while maintaining lower prices.

In 2013, the monetary value of exported jewellery reached approximately 48% of all jewellery produced in Russia. In 2014, the amount of jewellery produced in Russia grew by 6% in monetary value, compared to the previous year, while the export share dropped to 35.7% due to a leap in domestic consumption in late 2014. In 2015, the production volume decreased by 12% compared to 2014, while the export share shrank by 21%, as two key importers, UAE and Belarus, had cut their jewellery supply.  In the first half of 2016, as the consumer markets reflected on the crisis, production plummeted, while the share of exported goods’ value rose up to over 90% of the overall production volume. In practice, as we compare the data provided by the Federal State Statistics Service (Rosstat) and the Federal Customs Service of the Russian Federation, we may conclude that the Russian manufacturers’ attempt to escape an internal crisis in 2016 resulted in them almost completely refocusing their sales policy on foreign trade.

 

As they have veered towards this new course quite abruptly, the following risk factors have to be taken into account:

  • 88% of the exported products’ weight and 47% of their overall value are shared among the former Soviet republics: Belarus, Kazakhstan, and Moldova. Russian jewellery is welcomed in these countries’ markets: on the one hand, local jewellery production is not as well-developed as in Russia; and on the other hand, the population’s consumer preferences are largely similar to those of Russians, as for quite a long time, the countries’ communities shared a single consumption culture. There is a certain risk, though: as these nations’ economies become integrated with Russia’s economy, the local economic situation begins to deteriorate. As a result, exploring these markets is not an efficient counter-crisis measure.
  • As the share of export-oriented production remains at such a high level, Russian retail, which currently mostly works with the stock left over from the previous periods, may suffer from the impact of external intervention, coming from foreign suppliers that flood the mass market with cheap products; and as demand later recovers, Russian jewellery manufacturers will have to fight to regain their share in the domestic market.

 

INTERNATIONAL AGREEMENTS THAT MAY IMPACT THE FOREIGN TRADE IN RAW MATERIALS AND JEWELLERY ITEMS

  • Now that the Customs Code of the Customs Union has come into force, and it is no longer necessary to declare goods passing across the borders between Russia and the Republics of Belarus and Kazakhstan, export of Russian-made jewellery containing locally sourced precious metals and precious gems is not subject to customs declaration. That is to say, customs officials no longer demand any special documents when such goods are exported from Russia to Belarus or Kazakhstan.
  • On September 1, 2016, as part of Russia’s joining the WTO, the country cancelled the customs duty for natural diamonds that used to be 6.5%; consequently, Russian diamond makers have to pay more for raw materials.
  • In mid-2016, Armenia initiated a discussion within the Eurasian Economic Commission, proposing that the jewellery fineness marks be mutually recognized by the EAEU nations. It is a known fact the Commission intends to stimulate the unhindered export of Armenian jewellery within the EAEU, as well as provide assistance with the cancellation of such procedures as repeat certification and additional jewellery marking. As of February 1, 2017, the Russian Jewelers Guild officially denounces the initiative to mutually recognize national fineness marks. The Guild members argue that the procedure of measuring jewellery fineness and marking jewellery with the Russian national hallmark allows to protect Russian consumers’, regardless of who makes jewellery that finds its way to the Russian market, or where this jewellery comes from. In addition, the necessary marking requirement for all jewellery items in the Russian market, regardless of their origin, even slightly aligns the time and money resources of Russian and foreign manufacturers.
  • Another technical aspect within the framework of EAEU innovations that is actively discussed by Russian jewellery-making community concerns the demand for information markings on jewellery. The Russian Jewelers Guild has decided to support the pilot project related to marking jewellery with QR codes. However, market experts believe that this approach, along with the recognition of national marking, may end up in saturation of the Russian market with low-quality counterfeits.