From minesite.com/features.htm
RUSSIANS DIG IN FOR LONG NEGOTIATIONS WITH DE BEERS
Never was the division between the De Beers fan club and the doubters clearer than when the South African diamond giant announced recently that it was ready to provide loans to Russia’s diamond industry as part of a new marketing arrangement. De Beers presently has a marketing agreement in place which runs until the end of 2001 with Alrosa, Russia’s biggest producer, whereby Alrosa must sell at least US$550 million worth of uncut diamonds to De Beers.
The Russians have been complaining for some time about the De Beers terms of trade and threatened to end the 40 year agreement unless they are improved. This all goes back into the 60s when the cold war was at its height with the Berlin Crisis and Gordon Waddell, Harry Oppenheimer’s son in law, was seen at the Bolshoi Ballet in Moscow. Loans, or pseudo loans, were an inevitable concomitant of deals in those days. But things have moved on and although Sergei Oulin the Alrosa vice president has said he would welcome such an initiative - he would, wouldn’t he?
In his attempts to woo the Russians De Beers Managing Director Gary Ralfe promised that the company would expand the agreement and alluded to De Beers’ earlier US$1 billion loan to Glavalmolozoto, the former Soviet Union diamond organisation.That loan was arranged in 1990 and repaid over a period of five years and was covered by collateral of gems from the Gokhran which is Russia's gem and precious metal stockpile agency.
Sergei Oulin let it be known that that Alrosa "intended to raise further loans and encourage investment in a US$2.5 billion five year diamond mine and infrastructure expansion" Without any doubt this was intended to convey the size of the loans expected so it is a high stake game that is being played. If the contract is cancelled De Beers will control less than half the rough diamonds mined each year and this will seriously damage its bargaining power.
Alrosa accounts for about 98% of Russia's output which amounted to 22 million carats last year. About half its output is industrial, and the average price of its quality gems exceeds US$100 a carat. It has been disclosed that Russia's sales of diamonds to De Beers last year, including those from the Gokhran, amounted to US $830 million and a further US$590 million went to the Russian polishing industry.
It will certainly be no walkover for De Beers and it knows it. Earlier this year Valery Rudakov, the government's chief diamond policymaker who also heads the Gokhran, made it clear that De Beers was not welcome in Russia. De Beers reacted by announcing the decision to halt its Russian investment programme. Tit for tat.
A few weeks ago De Beers announced that it intended to cut its diamond stockpile; reduce the number of its sightholders; brand all its diamonds; and compete against other diamond producers to establish itself as the market's "supplier of choice". Hours later, Rudakov retaliated by declaring that Russia too wants to choose whom it will supply and the CSO – now to be known as the Diamond Trading Company - will no longer be an exclusive, and not even a preferred customer. Russia will also start branding its diamonds for competitive sale.
Well known in the diamond business for his blunt approach Rudakov then, apparently, went on to say, "After forty years in the diamond business Russia has grown out of children's shorts, and understands how to sell diamonds so as not to harm the market, or our own interests."
The terms in the De Beers contract which really grate with the Russians require them to sell run-of-mine production. Rudakov wants first choice to be given to Russian diamond manufacturers, and that the stones exported to De Beers should be the remainder, including those small Indian-type goods that are unprofitable to cut and polish in Russia.
Historically Alrosa has backed De Beers as the agreement had its uses as long as Mikhail Nikolaev, the president of the Sakha republic, was a useful political ally and source of cash for President Yeltsin. They had the clout, according to insiders, to give it protection at a time when the flow of cash from diamond dealing by Alrosa on behalf of the Sakha authorities, and by the federal authorities out of state diamond stockpiles, ran into billions of dollars.
That game is over now that President Putin is in charge and he has set his heart on Russia rebuilding its position in world industry. His advisers are well aware that the Australian giant BHP reckons that it is getting at least 30 per cent more for the diamonds it is mining at Diavik near Yellowknife in Canada by staying out of the De Beers cartel, and they want to follow suit. They have also gauged the vulnerability of De Beers as it switches from being "buyer of last resort" to "preferred supplier" and are prepared to play a long game. In their terms it is not even half time yet, and this is a point the De Beers fan club should bear in mind.
9 August 2000 |
