Russians shrug off diamond trade scare
By John Helmer
MOSCOW - The Russian diamond industry believes that it has nothing to lose if the European Commission forces a change in the diamond trade agreement between De Beers and Alrosa, Russia's monopoly diamond miner; and nothing to lose either if the trade continues on the current, willing-buyer, willing-seller basis. Asian diamond manufacturers, too, say that they will also benefit, whatever the outcome of the trade spat between Moscow and Brussels.
The Russian agreement was signed with Nicky Oppenheimer of De Beers after more than a year of negotiations in December 2001. It provides for the sale by Alrosa of up to US$4 billion in rough diamonds to De Beers' Diamond Trading Company over a five-year period, with the proviso that $500 million of each year's deliveries should be run-of-mine, and with the allowance for lesser deliveries in the last two years of the agreement.
Since then, President Vladimir Putin has signed into effect a decree allowing greater flexibility for Russian diamond exports outside the De Beers marketing channel.
Asian diamond-cutting factories, particularly in Mumbai, Bangkok and Shanghai, have been waiting for years for the opportunity to buy directly from Moscow. However, several factors have deterred them - corruption in the Sakha republic, bureaucratic obstacles in Moscow, as well as the fear of losing their access to supplies from De Beers.
The European Commission announced in a statement on January 16 that the terms of the agreement are restrictive of competition on the rough diamonds market "by eliminating competition from Alrosa. The commission also takes the view that by entering into the agreement, De Beers has abused its dominant position in the rough diamonds market."
This was hardly news in the Russian diamond market, where diamond cutters have complained for more than a decade that the special trade arrangements between De Beers and Alrosa curtailed their access to rough at market prices, and allowed Alrosa to act as a price and supply monopolist. It was the local diamond manufacturing industry that has lobbied for the permission to sell rough abroad which is unprofitable for cutting in Russia.
Leading this effort has been Ruis Diamonds, the Russian manufacturing company owned by Israeli diamantaire Lev Leviev. In September, Valery Morozov, who heads Ruis in Moscow, told Asia Times Online that he favors cutting the volume of diamonds to be sold to De Beers by 25 percent. He was unavailable for comment on the EC move. In September also, a senior Alrosa official who was appointed to the company by the government, German Kuznetsov, also came out in favor of modifying the terms of the diamond trade pact by cutting the share of De Beers by 25 percent.
Alrosa directors were at a scheduled board meeting through most of Friday, and declined to respond directly. The company issued a pro forma statement, following De Beers's lead in welcoming a fresh round of negotiations with the European Commission in Brussels.
If the EC vetoes the trade agreement, Alrosa will benefit from the increased flexibility that it will have to market its diamonds, Ararat Evoyan, president of the Russian Diamond Manufacturers, told Asia Times Online. He said that there would be no benefit to BHP Billiton, which has been trying for two years to get Alrosa to trade its diamonds through BHP's Antwerp sales network. "The company is not interested in intermediaries," Evoyan said, "since it can easily sell diamonds by itself."
According to Evoyan, "It is De Beers that is more interested in the trade agreement and its approval by the EC [than Alrosa], because without the approval of the trade agreement, Alrosa is already selling its diamonds to De Beers at higher prices, and the EC doesn't interfere with this. De Beers is more interested in a trade agreement with Alrosa, because it will be able to get diamonds cheaper than the market price, and at the same time add Russian diamonds into the mix that it offers for sale."
There have been periods in the past decade when Alrosa continued selling up to $1 billion in rough annually to De Beers without a formal trade agreement.
The advantage of an approved agreement, Evoyan conceded, is that it helps secure Alrosa's financing arrangements with international lenders, who regard the Russian company as a security risk. "Alrosa does need money for its projects," he conceded, "but there are different ways of attracting finance, some of which Alrosa still haven't used."
Evoyan speculated that De Beers and Alrosa will be able to persuade the EC to accept a compromise version of the agreement without a major overhaul, let alone abandonment of the current trading terms. According to Evoyan, "The [current] trade agreement limits the development of Russian polishing industry, but preserving coordination between Alrosa and De Beers on the market is preferable." |
