MOSCOW. (RIA Novosti economic commentator Nina Kulikova.) -- Russians traditionally love jewelry, especially gold, the symbol of wealth and prosperity.
And the Russian jewelry market is booming. Wealthy Russians can increasingly often be seen at European auctions and leaving as the surprise purchasers of exclusive pieces. Western jewelers are opening boutiques in Moscow one after another and are prospering. However, mass Russian consumers are oriented to the cheaper end of the market, meaning that the Russian jewelry market today has significant potential for development.
Legal and illegal markets.
According to the Russian Guild of Jewelers, in recent years the sector has witnessed 30% production growth annually. Today, it is the most successfully developing industry outside the raw materials sector. Some believe that this is due to the increase in real incomes of the population. Yet many experts agree that growth rates in recent years have been down more to the industry emerging from the "shadow economy" into the legal sphere.
The jewelry industry has always had an illegal side, including both smuggling and illegal domestic production. According to different estimates, the current turnover of illegal jewelry in Russia today accounts for 40-50% of the total turnover. In compliance with the Russian law, the Central Assay Office must certify all jewelry, both foreign and domestic, before entering the market. However, illegal producers have no problems printing a label and faking a seal or even an assay mark, and as a result can turn profits of 200-400%. This situation affects the position of both domestic producers and consumers, who are not insured against buying low-quality items.
Since the state abolished licensing in 2001 and excise taxes on gold and diamond production and sales in 2003 (in 2000 the tax rate was 43%), it has become more profitable to produce jewelry legally. The abolition of sales tax in 2004 also contributed to increased output. The Guild's director general, Valery Radashevich, says that growth is driven not by high purchasing capacity, but by production becoming legalized and the gray market shrinking.
Market problems.
Although the government has done a lot to create the necessary legal basis for the industry's development, the judicial framework is still underdeveloped. The main shortcomings are the VAT calculation formula and restrictive export duties. According to Valery Rudakov, committee chairman at the Russian Chamber of Commerce and Industry, jewelers worldwide can buy precious metals for production without VAT and with payment delayed until finished products are sent to the shops. In Russia it is the other way round: VAT is 20% and payment should be made in advance, which makes products less competitive.
Moreover, this year an amendment to the Russian Tax Code comes into effect that will raise state duties for assaying jewelry by two to five times. This may result in higher prices for Russian jewelry.
What Russians buy
In 2004, Russians spent almost $2 billion on jewelry in Russian jewelry shops. According to research firm Komkon, spending on jewelry has increased by 5% in the last three years. Demand for jewelry is growing, as for other expensive durables, especially in Moscow. The main reason is that deposit interest rates in banks are almost zero relative to inflation, while the rates of foreign currencies are very unstable. Jewelry, however, remains a safe means of saving.
Russian consumers of jewelry fall into two categories. Most buy mass-produced goods. These are people with a medium income and traditional preferences, and they usually trust Russian-manufactured jewelry. Mass consumers in Russia are offered mainly light-weight casting - earrings, rings, pendants, and chains with an average weight of two and a half to five grams and suitable for a client with low purchasing capacity. The other group comprises people whose incomes are large enough to appreciate not only the metal the jewelry is made of, but also its brand and exclusiveness. This group usually prefers foreign-made jewelry.
Imports
The market for foreign jewelry in Russia is polarized. On the one hand, a huge amount of low-quality, cheap Turkish, Chinese and Indian goods is flowing in. On the other hand, in Moscow stores you can see high-quality earrings, rings and necklaces made in Italy, the global leader in jewelry production.
The dynamic development of the Russian market has made it attractive for foreign companies such as Carrier, Tiffany&Co, Bibigi and others. Last year, foreign players continued to expand into the Russian market: Gilbert Albert opened a gallery, de Grisogno a boutique, and the Privilegiya jewelry house a boutique that offers products from four European jewelry houses (Germany's Wellendorff and Gellner and Italy's Marco Bicego and Favero).
The heads of these houses, Hans Peter Wellendorf and Mateo Favero, say that the Moscow market is now extremely attractive to all producers of luxury goods. It already has a class of consumers for such goods, and Russians are just as demanding and solvent as affluent buyers in Europe. Vyacheslav Tkachenko of Kosmos Zoloto, Bibigi's distributor in Russia, says that the demand for luxury goods is growing every year.
Russian producers
The leading Russian producers of jewelry are Moscow-based Adamas factory, with a 20% share of the market, and the Krasnoyarsk non-ferrous metals plant, with about 10%. The domestic industry is trying to keep up with the West. Radashevich of the Guild says that jewelry technologies in Russia are fully in line with international standards, as all large firms have foreign equipment. "Jewelry production in this country has deep roots, and there is no lack of real masters. The quality of our jewelry is very high," he adds.
Experts say that Russian producers are quite able to make exclusive, high-quality pieces. Yet a crucial advantage in competition for buyers, apart from the quality, is a well-known brand name, which, however, Russian producers do not have. The Soviet and later Russian jewelry industry did not address branding at all, and it is only now that Russian producers and shop owners are beginning to make the first steps in this direction.
An important trend in the sector's development is its ongoing restructuring, and the continuing formation of wholesale and retail chains. Major producers are setting up their own chains, especially Adamas and Almaz Holding. The latter owns a network of over 80 stores in all regions of Russia. Secondly, Russia is creating vertically integrated systems of production and sales. For example, the diamond producer Alrosa intends to create a company for the luxury jewelry market. It is expected to create a jewelry brand based on a retail network set up especially for this purpose. The first store is to open in Moscow later this year.
Overall, the Russian Guild of Promoting Jewelry Trade says that jewelry production in Russia may grow by 20-30% annually, provided a number of administrative obstacles are lifted to allow the market to develop effectively.
