Image: AlrosaTo stem the tide of funds fueling Russia’s war on Ukraine, the US has placed sanctions on Alrosa, which is partially owned by the Russian Federation. These measures state that American firms must immediately cease all transactions with or benefiting the Russian miner. But what does that mean in practice for retailers struggling to make sense of the latest regulations?
The government’s moves
Alrosa is the world’s largest diamond mining company, according to the US Department of the Treasury, and is responsible for 90% of Russia’s diamond mining capacity. On April 7, the US Treasury’s Office of Foreign Assets Control (OFAC) placed the miner on the Specially Designated Nationals (SDN) list. This means US firms cannot directly or indirectly purchase rough or polished diamonds from Alrosa or any company in which it holds a 50% stake or higher.
An earlier executive order, which the White House released on March 11, contains a loophole of sorts: that Russian diamonds cut and polished in other countries are legal to import. However, while that loophole is still valid as of this writing, American jewelry merchants should scrutinize the fine print carefully before relying on it.
“[The March 11 order was] intended to give the industry time to figure out how to handle its inventory and sourcing,” says Brad Brooks-Rubin, senior advisor at The Sentry, an organization that investigates predatory networks and kleptocracies. “Now every retailer should be asking suppliers, ‘Am I sourcing Alrosa diamonds?’ [Because] you could face penalties or blocked goods if you don’t stop.”
Risky business
Any diamonds or diamond jewelry of Russian origin that US companies already own are still legal to sell, according to the Jewelers Vigilance Committee
(JVC), which has issued member alerts outlining key facts US jewelers should know (see box). The problem lies with new inventory or business (such as marketing agreements) since April 7 that may directly or indirectly benefit Alrosa.
Companies that had transactions in progress with the Russian miner, such as memo agreements or related contracts, must complete these by May 7 — though the JVC recommends seeking counsel to ensure proper policy observance.
Russian diamonds that have been substantially transformed — i.e., cut — in other countries are still legal to import as per the executive order. So are parcels of mixed-origin melee. However, even these categories are fraught with risk. Alrosa contract clients — which include many of the companies doing the overseas cutting or putting together the parcels — could end up on OFAC’s “SDN list for secondary sanctions for contributing to a blocked entity,” according to an April 15 JVC alert. Should that occur, any US firm that does business with them would be subject to penalties.
“The least risky choice for businesses to make is to tell your suppliers that you no longer want to sell Russian diamonds,” explains Sara Yood, the JVC’s deputy general counsel.
Brooks-Rubin agrees. “If 20% of your Indian suppliers’ diamonds come from Russia, and that is 90% of what you sell, then you may be at risk. You can mitigate penalties through due diligence. Ask suppliers questions and seek advice from lawyers with experience on sanctions issues.”
Legal aids
Jewelers can find sanctions experts at many large law firms. The JVC even has a tool to help its members locate law firms with the relevant expertise. The staffers answering the phones at the OFAC hotline are also helpful.
“This is not a ‘gotcha’ situation — they want to help,” notes Yood.
Meanwhile, retailers should prepare talking points for their employees to address the topic of diamond origin. It’s also a good idea to ask suppliers for written documentation that shows they’re not selling Russian rocks. If suppliers are unable or unwilling to do so, it may be safer to discontinue doing business with them.
Article from the Rapaport Magazine - May 2022. To subscribe click here.