Vladimir Sanko
Staff Writer, Nezavisimaya Gazeta (Independent Newspaper)

Russian diamonds abroad are either smuggled or no longer Russian. ALROSA, Russia’s largest diamond-mining company, is permitted to get to world market only through marketing networks of De Beers. Under the agreement between the two companies, which account for about 70 % of the world’s diamond market, ALROSA can sell via De Beers precious stones for $4B within five years. The company should thus be marketing the rest of mined diamonds internally.

    In mid-October, leaders of associations of jewelers and diamond producers announced the creation of a special committee at the Russian Chamber of Commerce and Industry, which will promote drafting of laws on developing the market of precious stones and metals. In light of Russia’s expected accession to the WTO liberalization of this market is a major problem. The European Union is examining the agreement between ALROSA and De Beers to ascertain if there is any evidence of monopolistic activity on their part.
Government officials welcome the reduction of obligatory sales of uncut diamonds to De Beers and simultaneous growth of selling stones to Russian cutting enterprises. On the face of it the argumentation seems quite convincing: new jobs are to be created, tax collection and added value will increase. However, in specific Russian conditions such expectations do not always come true. The principal problem is that the major portion of Russian cutting enterprises belongs to five or six businessmen from Israel and Belgium. One may assume that when Vyacheslav Shtyrov, the former president of ALROSA JSC and now the head of the republic of Yakutia, said it, he also meant Levy Livaev, the diamond king, who allegedly participated in lobbying for restrictions on free sales of Russian diamonds in world markets.
Since these businessmen are from countries, which have a tax paradise and unlimited turnover of uncut diamonds and brilliants, then, what made them come to Russia with its overtaxes and tough legal regulations of foreign currency dealings? There might be only one answer: the price for diamonds in Russia’s domestic market is much lower than anywhere in the world. Vice president of ALROSA Alexander Dudenkov said in one of his interviews: «Diamond prices in the domestic market are lower than those in world market. As soon as the decree on this is signed, companies will increase consumption of rough diamonds and start exporting them. Diamond trading is the most profitable business in this chain».
At present, most rough diamonds are bought in the domestic market by joint enterprises for foreign currency (the so-called inland tolling). It is a mystery as to who has limited the number of these enterprises. But it lets them pick and choose. «Domestically we offer rough diamonds for $900M but they make purchases for $700M to $750M», Alexander Dudenkov complains.
ALROSA’s compliance with the government’s order to sell diamonds inside the country results in considerable financial losses. As Dudenkov acknowledges, the company is losing from 15 % to 20 % of its revenue just because it has to sell large gemstones to Russian firms only.
In the words of vice premier Alexander Kudrin, the president’s decree on liberalizing the diamond market, which has been expected for about two years already, should have been issued this September. But the commission that he chairs decided to put it off till November since more time was needed for specifying its concept.
On the whole, the main provisions of the draft decree on market liberalization are more or less known: cutting enterprises will be given the right for freely selling on the world market 15 % of uncut diamonds bought inside the country as well as the right to export brilliants without licenses or quotas. ALROSA, the diamond monopolist, will receive a five-year export quota.
It is quite obvious that such a scheme of liberalizing the diamond market should provide cutters with more freedom. Relations of ALROSA with De Beers will be more stable. The decree will not cancel their trade agreement.
It is noteworthy that by permitting enterprises to freely sell 15 % of diamonds purchased in the domestic market the state would in fact legalize the existing contraband export of diamonds. By the estimate of Vyacheslav Shtyrov, the contraband is currently estimated at $150M to $200M and it accounts for 20 % to 25 % of rough diamonds being sold in the domestic market. But the absence of any particularly notorious criminal cases is of no surprise. Diamonds are rather specific goods and their identification is impossible due to the abundance of precious stones. Value assessments are only done expertly, i.e. by eye, with the officially set average norm of differences in opinions equaling 10 %. With an enormous mass of stones it is impossible in principle to determine what kind of a diamond this or that brilliant is made of.
The genuine liberalization of the diamond market is feasible only if ALROSA is free of obligations with respect to diamond sales and prices imposed by officials. Former deputy minister of finance Valery Rudakov, who has been dealing with diamonds for about 40 years, believes that ALROSA should raise its rates and sell diamonds in the domestic market for prices higher than those for diamonds being sold to De Beers. For free market prices, that is.
The other basic point of liberalizing the diamond market should be the withdrawal of ALROSA JSC from the cutting business. Lately, ALROSA started to actively develop its cutting subsidiaries whereas De Beers in the course of more than a century of its activity has firmly refrained from doing this. The South Africans think that a seller does not have the right to compete with the client. True, subsidiaries will always have a competitive advantage with respect to purchasing rough diamonds. It is no less important that such a scheme will clear the way for large machinations with diamonds within the system itself: as soon as a cutter lays his hands on the diamond, it becomes practically impossible to determine its original cost. Due to the fact that a diamond may lose from 10 % to 40 % of its mass during cutting, chances for the revision of grades are rather large.
It is obvious that the liberalization of the diamond market should be started with restructuring the whole marketing system by ALROSA. Only then there will be no need for any control over the diamond turnover in the secondary market. All the more so since the experience proves that such a control is absolutely ineffective.