Russia is one of the main players in the global circulation of precious stones, mainly diamonds. The country has the world’s largest diamond reserves exceeding 700 mio carats.
Selling diamonds on foreign markets is among the top ten sources of non-energy export revenue for Russia’s federal budget today; therefore, global sanctions predictably targeted our jewelry market. On March 11, US President Joe Biden signed Executive Order on Prohibiting Certain Imports, Exports, and New Investment. In particular, this act prohibited the importation of non-industrial diamonds from Russia into the United States.
However, it later became clear that unless other EU countries, as well as India, joined the sanctions, that ban was not critical for the Russian diamond mining industry. For example, Russia’s Alrosa, the largest diamond miner in the world, has so far continued selling uncut diamonds in other countries, including India, unimpeded. Those diamonds can be cut and subsequently exported from a different ‘country of origin.’
In general, external sanctions have certainly affected the precious metals market, but it is important to remember that it is a two-way street. On the one hand, the sanctions have limited Russia’s diamond exports, but on the other hand, the import of precious stones has also decreased. This situation also stimulates domestic demand for precious stones.
Domestic demand is also supported by government measures to support companies or individual entrepreneurs selling gems, as well as buyers who use them to make jewelry or as an investment.
In particular, Federal Law No. 323-FZ of July 14, 2022 amended the Russian Tax Code introducing a zero VAT on the purchase of rough and polished diamonds. The initiative made a dramatic difference from the 20% VAT levied on such purchases before. The move effectively abolished the VAT. It is expected to stimulate the demand for diamonds as investment and boost diamond sales within the country.
Furthermore, the Russian Ministry of Finance has drafted amendments to the Rules for Retail Purchase and Sale of Goods approved by the Russian Government Resolution No. 2463 on December 31, 2020.
The changes will concern retail sales of cut gemstones by individual entrepreneurs and legal entities. The new procedure will include a mandatory gemological examination by a state certification body to confirm the authenticity of a cut gemstone, and this requirement should make all the difference.
The new rules will effectively change the sellers’ obligations. To sell a gemstone to an individual, they will need to provide a state gemological examination certificate, as opposed to the rules that are in effect today, which allow individual retail sellers and legal entities to obtain authenticity certificates from commercial gemology centers.
According to the policymakers, a mandatory certificate from the Federal Assay Chamber authenticating the gem should increase buyer confidence in retail. However, it is difficult to say how effective this measure will be, because a procedure that involves obtaining an additional state-issued paper may, on the contrary, lead to the emergence of a shadow market, where gems could be sold easier and faster.
According to the Federal Draft Regulatory Legal Acts website, the new amendments have passed anti-corruption examination – consultations with the gemstone market participants who sent their feedback on the initiative. This means the final version of the document may have changed – hopefully, for the better.
Other changes concern the procedure for pressing administrative charges for unlawful circulation of precious stones. At present, transactions with gemstones without special registration are punishable under Article 15.43 of the Russian Code of Administrative Offenses, with individual sellers facing fines from RUR 30K to 50K ($330-$550), and legal entities, from RUR 60K to 80K ($660-$880).
However, although administrative penalties are stipulated by law, the procedure for holding precious stone traffickers accountable is complicated. It is no secret that many unscrupulous dealers sell gemstones without appropriate certificates or mandatory registration. One of the reasons is the short statute of limitations on such cases – 60 days under Article 4.5 of the Administrative Code, which is clearly not enough time for law enforcement to prosecute them.
The 60-day statute of limitations expires before the Federal Assay Chamber can verify the reports from citizens, organizations or law enforcement agencies, which is its only source of information amid the moratorium on inspections. Report verification takes much longer than the statute of limitations on illegal gemstone sale cases.
To change this situation, on May 18, 2023, the State Duma adopted in the first reading a bill increasing the statute of limitations from 60 days to two years. According to the sponsors of the new legislation, a longer statute of limitations will encourage the gemstone market players to comply with the law, and reduce the share of illegal products in that market. Together with other incentives, this change will have a positive impact on the gemstone market, as it will increase trust and the transparency of gemstone transactions for major investors and other buyers.
By Anna Tsuranova, lawyer, Asterisk law firm