RUSSIA: Diamond Industry Trains For A Second Challenge To De Beers

By IPS Correspondents Reprint | | Print |

Andrei Ivanov

MOSCOW, Mar 22 1996 (IPS) - A Russian challenge to the near total global monopoly on diamond exports held by the giant South African multi-national De Beers has been seen off for a few years, but the Russians have cleared the way for another bid in years to come.

This is the main result of the memorandum signed in February between Russia and De Beers, to be formalised in a detailed contract between De Beers and the Siberian-based diamond company Almazy Rossii Sakha (ARS) by the end of March.

Under the new agreement Russia plans to sell to De Beers’ Central Selling Organisation (CSO) raw diamonds worth at least 550 million dollars a year, the equivalent of 26 percent of Russia’s annual rough diamond production.

But ARS gets a foot in the door of the global market by winning agreement from De Beers to sell a so far unspecified amount of rough diamonds for export directly. Under the old five-year agreement Russia was obliged to sell 95 percent of its exported rough diamonds through De Beers.

The proportion is thought to be similar under the new arrangement, but the key difference is that ARS will also start shipping more uncut diamonds to Russia’s own diamond-cutting industry, which is developing rapidly.

Also, this year, ARS is prepared to sell some 900 million dollars worth of raw diamonds on the domestic market, said ARS President Vyacheslav Shtyrov, who added that the results of the three-month long talks with De Beers, are “more or less satisfactory”.

Overall Russia plans to boost diamond production in 1996 to between 1.5 and two billion dollars from 1995’s estimated 1.2 billion dollars.

The opening up of the uncut diamond export market to Russia and the opportunity to develop its diamond cutting industry lays the ground for a future bid to challenge the De Beers monopoly. Russia accepts that presently its domestic industry and international market presence was nowhere near strong enough to warrant a challenge now.

“We plan to borrow a lot from De Beers’ development strategy,” says Shtyrov. “This implies a massive concentration of production potential and capital resources of the diamond-producing sector of Russia. In other words, a giant will be born.”

Perhaps most importantly, there is little doubt now that ARS is winning the power struggle with the State Committee for Precious Metals and Stones (Roskomdragmet) which in the past has represented the interests of Russia’s diamond industry internationally.

However there is still some uncertainty about the ability of ARS to maintain the competitive pricing levels they now enjoy under De Beers, but which may take a tumble in a no-holds barred market battle with the veteran South African trader.

ARS will have some leverage over De Beers’s diamond prices through the independent sale of its quota of Russian diamonds on the free market, but Russia’s diamond cutters are particularly concerned about their increasing dependence on ARS in this respect.

Ararat Yevoyan, executive director of the Association of Russian Diamond Producers says that Russian diamond producers will be at the mercy of ARS’s pricing policy.

Previously, control over price setting on the five percent of Russia’s uncut diamonds sold on the free market was in the hands of the state foreign trade company, Almazyuvelireksport.

Many fear simply that they may be swopping the efficient dictatorship of De Beers for the inefficient rule of ARS>

Aleksandr Kushtynov, First Deputy Director-General of the Kristall diamond cutting plant in Smolensk, notes that the final arrangement is expected to ban Russian diamond producers from independently sending diamonds to be cut and polished abroad and subsequently sold on foreign markets.

Under the new memorandum, this is regarded as export and can therefore only be carried out through De Beers. Retailers who have Russian diamonds cut abroad could be forced out of the market.

However, Shtyrov insists that the interests of Russia’s producers will be protected. In addition, the industry will develop facilities to cut types of diamonds not previously processed in Russia, he says.

The government of the Siberian republic of Yakutia has already approved a two-year programme of accelerated development for the production of jewellery using domestic raw materials.

The programmed is intended to boost the sale of high-quality Yakut jewellery made of gold, silver, gems, and semi-precious stones, and provides for establishing a network of the company’s shops in Yakutsk, Moscow, St Petersburg, Sevastopol, Volgograd, and Vladivostok.

About 10 jewellery-manufacturing enterprises operate in the Republic at present, including the jewellery plants of the Gold of Yakutia and Aldan Gold joint stock companies, and of the Goldspark joint venture — the largest such plant in eastern Russia.

Their number is expected to double in 1996-1997, while the value of their total output of products will exceed 1,000 billion roubles (222 million dollars).

Within the framework of this programme ARS has already received the state-owned block of shares of the Tuimaada Diamond company for producing cut diamonds in Yakutia which vested interests in the 10 local diamond-cutting factories.

Next on the list of acquisitions are Kristall’s factories in Smolensk, Barnaul and Moscow. Shtyrov wants to unite these factories in a single financial and industry group with the joint- stock commercial bank based in Mirny, Russia’s diamond production capital, as the group’s major lender.

In 1997 the company plans to start a joint operation for a small diamond-extracting plant in Angola, with an annual output of one million carats. Shtyrov says the deposit is very promising. Work is under way to start another project in Namibia.

The government is expected in the near future to set up a Russian diamond and gems exchange to trade these commodities on the secondary market, Shtyrov adds.

The World Federation of Diamond Bourses has agreed to provide favourable conditions for establishing a Russian exchange. Recently four ARS affiliates concerned with selling cut and industrial diamonds merged into a single marketing entity, similar to De Beers’ CSO.

Shtyrov believes that very soon Russia’s domestic marketing of raw diamonds will be conducted on fundamentally new principles that in challenging De Beers, may herald a step into the direct export and marketing of cut diamonds abroad.

How the South African multinational will react to that is anyone’s guess, he says. “If we succeed in creating a ramified marketing network of our own in the upcoming three years,” adds Shtyrov, “it will be hard to predict how our relations with De Beers will change.”