Russia Market Report

RAPAPORT... The diamond market may be facing difficulties, but ALROSA President Sergey Vybornov sees good opportunities for the Russian company’s growth. “All the ongoing changes do not suggest any fatal projection for ALROSA; moreover, they give us a unique chance. Maybe we are not ready for that completely, but we have no other way out,” Vynornov was quoted as saying in a transcript of his speech published on the company’s website.

Currently, ALROSA is working out the basis for cooperation with its clients. In 2009, the Russian diamond monopoly and De Beers will cease cooperation on the previous terms under which they did business, due to a ruling of the European Commission (EC). “The world’s largest diamond manufacturers and jewelry brands are ready to take up De Beers place in trade cooperation with the company,” said Vybornov.

In March, the company reportedly reduced the number of its clients. ALROSA wouldn’t comment on whether there would be any changes to the client list in April. “We are working out long-term agreements with a pool of clients who are capable of taking responsibility for the market,” said ALROSA spokesperson Andrey Polyakov.

The company sees stable contracts as security against the current turbulence of the market and hopes to benefit from them in the long term. The falling dollar against the Russian ruble has already consumed $2 billion of ALROSA’s sales during the past five years. Yet, Polyakov said the current slowdown of the American market is offset by the growth of demand in Asia, China in particular, and in Russia itself.

World resources is another key ingredient in the company’s stability. “Control over resources means control over the market,” Vybornov said in his statement. “We must use any chance to increase our own resource base in Africa.” He noted that China also is bolstering its presence in the African continent.

Earlier, ALROSA indicated it is planning to expand its operations in Africa, including diamond, oil and gas exploration and energy and construction projects. Vybornov already has discussed cooperation with the officials of Angola, Namibia, Congo and Zimbabwe.

However, 85 percent of ALROSA’s exploration resources — the company plans to spend $122 million on exploration in 2008 — will stay within its own backyard in Yakutia. The diamond output has increased 1.6 percent year-on-year to $2.37 billion in 2007.

De Beers and Lukoil Settle Dispute
Russia’s oil company Lukoil and De Beers have settled their 15-year-old dispute over the Verkhotina diamond field, a number of news agencies reported. The settlement is expected to boost operations at the field’s Grib diamond pipe, one of the largest undeveloped diamond fields in the world, with an estimated $5 billion of deposits. De Beers, its subsidiary Archangel Diamond Corporation (ADC) and Lukoil have signed an agreement on the terms of their development of Verkhotina. Under the terms of the agreement, ADC will acquire not more than 49.99 percent in Arkhangelskoe Geologodobychnoe Predpriyatie, a Lukoil subsidiary that holds the license for developing Verkhotina. The federal antimonopoly service has yet to approve the deal.

In 1993, De Beers and Lukoil first agreed to jointly evaluate the deposit for the presence of diamonds and then to develop it. Then ADC filed multibillion-dollar charges, claiming that it was blocked from exercising its operating, investment, and stakeholding rights in the Grib mine.

All Eyes on the New Government
On May 7, Dmitry Medvedev will be inaugurated as Russia’s new president and, within the following few weeks, the country will learn the names of its new prime minister and cabinet members.

“There are many issues we would like to discuss, including the lifting of the value-added tax (VAT) that companies have to pay starting this year, ” said Ararat Evoyan, vice president of the Russian Diamond Manufacturers Association. “But we will be able to do this only when a new government is formed.”

Russian Jewelers Go West
Most of Russia’s six jewelry makers and two watch manufacturers participating at BaselWorld 2008 were not first-timers at the show. They see the event as one of the best ways to reach the international market.

“When you participate for the first year, you get little attention,” said Aleksandr Makarov, the director of Maktime Watch Manufactory. “When you come the second and third times, people start talking to you and, when you come for the fourth year running, they treat you as a reliable partner.”

“People were attracted by big stones and pearls,” said Ekaterina Katliar of Jewellery Theatre. Yekaterinburg-based Rifesta reported that its most successful jewelry at the show was its “Diamond Collection,” which featured diamonds larger than 2 carats.

The Marketplace
• The Russian jewelry industry used 30.85 percent more gold and 43.23 percent more silver in 2007 than in the previous year, according to Russia’s Assay Chamber. Gold consumption was 71.15 tons and silver consumption was 147.575 tons.
• The Assay chamber registered 163.03 kilos of platinum items and 31.44 kilos of palladium pieces.

Article from the Rapaport Magazine - May 2008. To subscribe click here.