A la recherche du temps perdu

About the fineness of Russian jewelry, there used to be no doubt.

"There are sectors of production, which, we Russians, have no equal anywhere in Europe," a St. Petersburg exhibition catalog confidently declared in 1886. "These specialties are the ones created by us personally, which grew and developed on Russian soil, and bear the imprint of this country, which foreigners cannot possibly imitate."

For Western connoisseurs of Old Russia, it is clear these are the master works of the Faberge and Khlebnikov firms. Speaking in 1910 of the clients for these jewels, Carl Faberge noted that "a class of nouveaux riches has emerged in Russia, and we cannot afford not to use this situation."

Remembering Faberge in 1999, the year after the catastrophic Russian bank crash of August 1998, Galina Ananina, then president of the Jewelry Guild of Russia, told me: "The effect of last year's financial crash was that the class of nouveaux riches has now ceased to exist. A new class of oligarchs has appeared, but there are a very small number of them, and you cannot depend the entire Russian jewelry industry on them."

The Jewelry Guild of Russia represents the largest jewelers in the country. In 1999, the Guild produced a report on the state of an industry that was undergoing an unprecedented assault from contraband imports; and the worst contraction, Russian jewelers have ever seen.

According to the report, the volume of jewelry produced in Russia had decreased almost fourfold from 1990, when domestic jewelers made 35.4 million pieces; to 1998, when just 7.2 million pieces were produced. In the last quarter of that year, following the default of the government on its short-term bonds and the collapse of many Russian commercial banks, billions of rubles and dollars in individual savings deposits were lost. Unsurprisingly, jewelry output dropped like a stone — 46% compared with the first quarter of the year.

In 1999, according to the Guild report, production fell 35%. Domestic sales of jewelry, which had peaked in 1997 at $830 million, were down to less than $320 million in 1999.

Ananina was convinced at the time that economic uncertainty had upset another important element in Russian demand for jewelry — the belief in gold as a store of value. "The dominance of the dollar is almost as important to us as the devaluation. There was a lot of faith in gold before. But in the current situation, the dollar has replaced everything. There is almost no belief in the value of jewelry anymore. Everyone invests in dollars."

In 1996, when the future had seemed brighter, the Russian Market Research Co. asked a nationwide sample of Russians if they had money to invest, what they would do with it. Just 0.4 percent mentioned buying antiques or jewelry. When the researchers probed further, they estimated that about 250,000 Russians were potential buyers of jewelry.

Three years later, the Jewelry Guild estimated potential demand at more than $1 billion per annum. But that did not necessarily translate into demand for the domestic jewelers. The trouble for them, explained Ananina, was that most of the domestic demand for jewelry was being met by illegal imports.

"We do not pay much attention to legal imports," she told me, "because of the extreme situation we are in. We never considered the famous international brands to be a threat to the domestic industry. In fact, we regard the competition as a stimulus to our own designers." Cartier, Bulgari, and Tiffany are the most well-known of the international jewelry names to Russians. But the volume of their jewels actually sold in Moscow was "minuscule," said Ananina. She pointed out that wealthy Russians, who can afford to buy these pieces, preferred to do so where taxes are lower, in Western Europe or the United States.

In conjunction with the 1999 Guild report, I surveyed retailers and distributors in Moscow to gauge their view of the future for the Russian jewelry market. Center Yuvelir ("Jewelry Center"), a chain of 20 retail jewelry stores in Moscow that holds an estimated 40 percent to 50 percent of the retail market in the Russian capital, said it did not stock any of the famous brands.

At the time, just two Moscow distributors, Mercury and Hermitage, handled these imports, but none of their marketing executives would agree to discuss recent sales results. Hermitage has since gone out of business. Mercury, one of the largest promoters and advertisers of high-end luxury jewelry and watches in Russia, is facing prosecution for customs offenses, and will not respond to questions about its business. Other distributors representing well-known import brands include Maska, and newcomer, Jamilco. All have rebuffed questions regarding their business strategy and market trends.

The year 1999 was a difficult time too for small dealers and retailers. Marina Karatayeva, director of K-Boutique, which had several up-market shops in leading Moscow hotels, said she had decided to leave the luxury imports to Mercury and Hermitage, and to abandon lower-priced import jewelry from Italy as well.

"We dealt with Italian jewelry previously, but now we have decided to concentrate on exclusive works by Russian jewelers only. The Russian jewelry we sell now includes Vasili Konovalenko, Fyodorov's Works, and Mastera Rossii ("Russian Masters"). They are quite interesting for our clients and can even be called brand-names of their own. This niche of the market is quite special, and definitely not large. Our boutiques have the same clients as those buying Cartier. As far as I know, at least Cartier is trying to keep the prices for its jewelry more or less the same as abroad." Four years later, she was no longer trading, at least under the original name.

The rhinestone recovery

A fresh report by the Guild, prepared in conjunction with a jewelry fair in Moscow in December 2003, demonstrates that along with the recovery of the Russian economy, the jewelry sector has picked up.

Between 2001 and 2002 domestic jewelry sales grew by 22.2 percent, and totaled the equivalent of $750 million in 2002. The first six-month figure for 2003 shows continuing growth, but it is a bit misleading. As the new president of the Guild, Alexander Rybakov, explains, most of the year's jewelry sales are concentrated in the last quarter of the year, especially December.

He is forecasting that the full-year sales aggregate for 2003 will be between 28 billion and 30 billion rubles; this is equivalent to $1 billion. At over 30 percent, this year's growth rate is even more rapid, according to Ribakov, than last year's. Aggregate sales have now pushed through the record set in 1997, before the bust.

Guild data suggest that the current Russian jewelry market is worth $1.7 billion - 60 percent domestic jewelry, 40 percent imports. There is a predictably high degree of concentration of jewelry sales in the wealthiest regions of the country, starting with Moscow. According to Ribakov, roughly 60 percent of domestic jewelry is produced in Moscow; about 70% of jewelry sold is bought near or in Moscow.

Currently, more than 15,000 Russian jewelry companies are officially registered and licensed to operate. An estimated 2,000 are active producers, and almost all of them, according to Guild data, combine precious metals with gemstones. The largest manufacturers are the Moscow Experimental Jewelry Works, Krasnoselsky Yuvelirprom, Kostroma Jewelry Works, Yuvelir, Russkiye Samotsvety, and Yuveliry Urala.

They are located in the traditional jewelry making regions of Russia, but their share of the total domestic production is steadily declining, giving way to the growth of smaller design studios. Moscow, St. Petersburg, Kostroma, and Yekaterinburg are the dominant centers for jewelers. In 1999, little more than 30 percent of production capacity was at work. Today, the figure is considerably better.

In the interval, the federal government has cut income taxes for consumers, but corporate taxes remain so heavy, the Jewelry Guild complains, that they are crushing the jewelers. "Out of each million rubles worth of jewelry produced," the Guild report of 1999, claimed, "the producers pay 500,000 rubles to 550,000 rubles in taxes and excises.

After payments for precious metals and stones, the producer gets about 100,000 rubles to — or around 10 percent to 15 percent. By selling precious metals to jewelry producers, the state in the long run receivesalmost three times more than it would for selling gold ingots on the world market. In other countries, the added value of jewelry compared to the cost of precious metals and stones in jewelry is 30 percent. But in Russia the price of the jewelry is 250 percent to 300 percent compared to the cost of metal and stones."

Rybakov confirms that the fiscal position has not changed for the better. It is one of the reasons, Ananina stated, price-sensitive Russians want to buy contraband imports, and that wealthy Russians go abroad for luxury brands.

This price sensitivity in Russian consumer demand for jewelry should not be confused with the publicity attracted by displays of Russian wealth at home and abroad.

To Italian jewelry producers seeking growth markets for their products, the tale of Russia's recovery, and the notoriety attracted by the so-called Russian oligarchs — the billionaire owners of most of the country's oil and mineral assets - looks alluring. A 30 percent annual growth rate in a market already approaching $2 billion is relatively promising, compared to the much larger, but more sluggish European, North American, or Middle Eastern markets.

However, those high-end jewelry sales still constitute the minuscule proportion of the Russian market that it was during the boom of the mid-1990s. The recent takeoff in the Russian jewelry market is thus more rhinestone recovery than diamond-studded.

According to Rybakov and other sector analysts, between 5 percent and 10 percent of the total market comprises official, customs declared imports from foreign jewelry producers. Data from the State Customs Committee indicate that in the nine months to September 2003, these jewelry imports totaled just over $40 million. The year-end figure is projected to be about $80 million; that is 4.7 percent of market consumption. At the same time, roughly 35 percent of the market, worth as much as $600 million, is occupied by contraband or smuggled imports of jewelry. Smuggling serves to keep the unit price down, and jewelry affordable.

Domestic producers aim to drive imports out

Much of the imported jewelry that Russians see in their shops is produced in Turkey. The 1999 Guild report does not hazard a guess about the value of Turkish-made pieces that are smuggled into the country, but a parliamentary hearing that year stated the figure ran into several hundred million dollars. "The Turks are even producing their pieces with false Russian hallmarks and stamps to make them appear domestically produced," Ananina said. The contraband trade takes many forms, including concealment by shuttle traders, low valuation, misclassification, and so on.

Today, officials at the State Customs Committee refuse to provide country-by-country data on jewelry imports. Officials of the commercial section of the Turkish Embassy in Moscow claim there are no Turkish data on exports of jewelry to Russia, and refer to the Russian import statistics. From the point of view of domestic jewelers, this is a multi-million dollar conspiracy to damage their business.

The State Customs Committee (GTK) has been gradually eliminating corrupt practices that were rife in the past decade. Domestic producer pressure is one factor. The government's need to maximize revenue collections is another. The outcome in other higher-value sectors, such as food, has been to stimulate import replacement by Russian producers. This is also what the Jewelry Guild believes will happen, if and when enforcement improves regarding Turkish imports, principally.