GOLDEN RULE

Azerbaijan achieved significant progress in gold and silver production in recent years. Several deposits have been developed with the creation of corresponding infrastructure for the extraction and processing of ore, as well as the export of ingots. For a number of reasons, however, rich jewellery traditions of Azerbaijan have been lost, and mass import of mostly low-quality products nullified local production. Today, the government has outlined a set of measures to revive the local jewellery industry, as well as to eradicate the negative phenomena impeding this process.

Old problems of jewellery

Despite market changes in the past decades that created numerous opportunities for investing, the Azerbaijani population is still interested in buying gold and silver products due to historical traditions, including weddings.

Experts believe that given the ongoing trade confrontation between the USA, China and Europe, sanctions and protective tariffs in a number of countries, the growing epidemic of coronavirus, as well as the high volatility of energy prices, interest in gold products as a means of hedging risks in the coming years will only increase.

However, despite the projected demand, the needs of the Azerbaijani retail jewellery market today are met mainly by imports. This is due to the lack of quality supply from local manufacturers and the existing problems in customs control, which contributes to the smuggling and import of counterfeit precious goods. This also includes the insufficient control facilities at shopping facilities, as well as the lack of legislative and administrative mechanisms to ensure reliable protection of consumer rights.

In order to overcome the negative factors in the gold market and in the jewellery sector of Azerbaijan, representatives of a number of ministries and departments indicated the need to take measures to curb trade in contraband products, as well as create fair conditions for competition in the market and state support for local producers.

“Unfortunately, the legal supply of gold products refers only to trade in brand products with a very small market share. It is important to create fair conditions for competition and completely transparent schemes for suppliers and manufacturers, getting rid of the existing shadow schemes of illegal deliveries of raw materials and products,” Minister of Economy, Mikayil Jabbarov, said during his meeting with entrepreneurs involved in mining, production and processing gold. According to Jabbarov, it is necessary to develop the entire production chain of the gold and jewellery market and to ensure the export of final products as soon as local demand is met. Over time Azerbaijan could turn into one of the regional hubs of the jewellery market.

However, this requires eliminating the absolute dominance of low-grade imported products in the market, which discourage any initiatives of local jewelers. Today, the share of imports is over 80% of the total volume of jewellery sold in the country, with the share of branded products being less than 1/20 of the total volume of imported products. The bulk of the jewellery comes from lesser-known manufacturers mainly from the UAE, Turkey and Russia, partly from Iran, India and Thailand. Moreover, according to some experts, about a quarter of jewellery sold on the market is smuggled.

Azerbaijan’s customs department also recognises the necessity to take comprehensive measures to overcome negative factors in jewellery imports. “Statistical indicators show that the current situation in the jewellery sector is not good. High taxes and customs duty rates make some companies prefer smuggling schemes. In general, increasing import duties does not help regulate the jewellery market and, on the contrary, complicates the fight against the shadow economy,” Safar Mehdiyev, Chairman of the State Customs Committee (SCC) of Azerbaijan, believes. According to Mehdiyev, in order to ensure transparency and effective regulation of the jewellery industry, a direct dialogue between the state and business, creation of favourable conditions for entrepreneurs and joint fight against illicit trafficking and import of counterfeit products are necessary, which will undoubtedly lead to the dynamic development of the sector.

“We know how serious the problems in the jewellery sector in Azerbaijan are and what are the white spots in the legislation in this regard. If we join our forces to approach the problem, then further legal and productive development of jewellery business in Azerbaijan will become possible. Otherwise, if the state and private sector do not take joint measures, the development of the jewellery market is impossible regardless of reducing or increasing the fiscal burden in the industry,” Mehdiyev emphasized, noting also the need to review current legislation in order to protect domestic production.

Quality control

Today, local production in Azerbaijan is mainly represented by small workshops and individually working jewellers. As a rule, this market is dominated by small-scale production firms, as very few workshops can afford expensive processing machines due to the long payback period of such equipment with small volumes of production, and the cost of products increasing accordingly. It is  impossible to establish mass production using manual tools, as well as to comply with the quality standards set for the entire series of products. As a result, local handicraft production in most cases loses the market share to imported jewellery mostly produced industrially.

However, there are exceptions. There are several workshops in Azerbaijan equipped with modern equipment that ensure the highest level of quality and even export their products. Serial production of gold and silver products is established at the Miraj Gold LLC jewellery plant commissioned in 2018 in the Nakhchivan Autonomous Republic and producing state orders for the production of medals, orders and other honorary titles. The leading gold mining company of the country, AzerGold,  sells high-quality 999.9 gold and silver ingots and investment coins (5, 10 and 20 grams) at 12 different points in Baku. These are the main participants in the gold market of Azerbaijan.

What can be done to revive the jewellery traditions of Azerbaijan and gradually reorient market demand from import to the products of local jewellers?

“In the jewellery industry, it is necessary to create transparent assessment and regulation mechanisms, since the lack of control over the quality of precious metals and stones leads to various problems. There is a low level of trust between participants and consumers of the jewellery market. That is why it is necessary to establish mechanisms that will regulate the industry. In particular, it is necessary to strengthen control measures by creating appraisal and regulatory institutions in this sector,” Orkhan Mammadov, Chairman of Board of the Agency for the Development of Small and Medium-Sized Enterprises said.

Lack of an effective quality control mechanism in the jewellery industry can lead to economic losses. In particular, inadequate assay supervision mechanisms have a negative effect on the retail segment, leading to a violation of consumer rights. So, pursuant with paragraph 10.3 of the Law on Precious Metals and Precious Stones, jewellery produced and sold by business entities is subject to a state supervision. Thus, all imported and manufactured jewellery and other products from precious metals and precious stones should be submitted for analysis, examination, testing and branding in the relevant state agency. However, authorities have identified thousands of products with assay brands of unknown origin, as well as without state assay brands in shopping centres and jewellery stores in recent years. It was identified that jewellery was sold that did not meet the gold and silver samples indicated on them, with a low weight of precious metal, with precious stones of inferior quality, etc.

By the end of 2018, the State Assay Chamber under the Ministry of Finance has been the only athority that supervised the jewellery products sold in the country. However, after the abolition of this institution, there is no single control mechanism in this area and the risks of violation of suppliers and buyers' rights have noticeably increased.

Targets and goals

In order to solve these and other problems, the Ministry of Economy initiated and decided to create a working group, which will identify concrete steps to develop the industry and ensure the competitiveness in this sector. The tasks of the working group also include the development of incentive mechanisms for manufacturers and preferential financing of the jewellery industry. It is expected that the group will include representatives of the Customs Committee, Ministry of Economy, Agency for the Development of Small and Medium Enterprises, AzerGold CJSC, as well as the Association of Jewellers of Azerbaijan to be created in the coming month. In particular, the Agency for the Development of Small and Medium Enterprises has already held a meeting with various  participants in the jewellery market, and also contacted the Ministry of Justice to register an association that is going to play the role of a bridge between the state and business.

“Our next task is to reduce duties to take entrepreneurs back to the market,” Orkhan Mammadov, head of the SME Development Agency said.

Almost all experts recognise the need to reduce the fiscal burden in the jewellery sector. For example, in China, India, Italy and Turkey, gold products are exempt from excise tax, and margins on the cost of gold, precious stones and finished goods (VAT and other duties) are approximately 0-24%. However, when they are imported into Azerbaijan, fiscal margins increase to 46%, which deprives entrepreneurs of incentives for transparent activity. This point is especially relevant in relation to the supply of raw materials, since in most countries of the world import for domestic production is subject to minimum duties.

We hope that the reforms initiated by the Ministry of Economy will help to overcome problems with counterfeit products, increase transparency and competitiveness in the market, as well as revive the jewellery industry in Azerbaijan.