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Ukraine Crisis Leaves Diamond Industry Vulnerable
Field Notes
Feb 28, 2022 11:07 AM
By Avi Krawitz
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RAPAPORT... Several scenarios could play out for the diamond industry as a result of Russia’s invasion of Ukraine. While it’s too early to understand the full impact of the crisis, the longer it goes on, the deeper its effect will be on the market.
Following the February 24 attack, the US government placed Alrosa on a sanctions list that bans US businesses from extending credit to the Russian mining company. As of this writing, the sanctions do not prohibit Alrosa from conducting sales.
“Alrosa was added to a list of menu-based sanctions but not added to the Specially Designated Nationals List,” the Jewelers Vigilance Committee (JVC) explained. “Effectively, this action bans US businesses and persons from entering into debt transactions longer than 14 days with Alrosa but does not impose the harsher sanctions of an asset freeze and outright prohibition of all business.”
The sanctions may affect the miner’s polished-diamond business and its attempts to build a branded jewelry line in the US. It may have lost goodwill in that market. Under the regulations, a retailer cannot take polished or jewelry on memo from the supplier. Transactions would need to be in cash, while Alrosa’s rough is generally sold on a cash basis anyway. The miner said it intended to fulfill its obligations to clients as usual, as best it can.
Potential supply constraints
Companies can buy rough from Alrosa, but they will face difficulty paying for the goods, since Russian banks have been cut off from the main international payment system, Swift. That means the company’s clients can only pay in rubles using local Russian banks, as they’re unable to make international transfers. Some have such facilities in place. India is reportedly considering a rupee-ruble trade arrangement that would help facilitate transactions between Alrosa and its many India-based clients. However, that also might place India under scrutiny by US lawmakers.
Broader sanctions that might affect Russian-origin goods and Alrosa’s rough business would have a deeper impact on the market. Considering the volatile state of the diamond market, concerns are understandable. Cutting off Russian supply would create further shortages, which would support a sharp rise in diamond prices that may not be sustainable. The delay in payment may have a similar effect, as it is creating a two- to three-week interruption in Russian supply, according to India’s Gem & Jewellery Export Promotion Council (GJEPC).
With output of 32.4 million carats in 2021, accounting for an estimated 29% of global output, Alrosa is the world’s largest producer of rough diamonds by volume. The company sold 45.5 million carats last year, as it used inventory built up during 2020 to satisfy demand. Revenue of approximately $4 billion in 2021 placed Alrosa second only to De Beers in the value it generates.
Approximately 70% of Alrosa’s sales are made at monthly events (typically in Moscow) to Alrosa Alliance members — a group of approximately 50 cutting and polishing companies that have long-term contracts with the miner. It also conducts sales through auctions, tenders and spot sales to customers. Rapaport understands the company completed its Alliance sale last week but canceled its New York auction of special stones above 10.8 carats that was scheduled to run from February 21 to March 11. Alrosa declined to comment on these events. The next Alrosa Alliance sale is planned for March 21.
Fueling uncertainty
But what about demand? The war in Ukraine is another element shaking global markets in 2022. High US inflation, the promise of interest rate hikes and the lingering coronavirus pandemic are already fueling uncertainty and weighing on consumer sentiment.
The diamond and jewelry trade has seen unprecedented growth in the past year, driven by the US consumer. But given the prevailing conditions, there is rising concern the momentum will slow.
For now, liquidity has improved, and diamond prices have climbed. In fact, they’ve gained significantly in the last two month as rough costs have outpaced the increase in retail demand. Structural changes in the rough market have brought about shortages and unsustainable prices on secondary rough platforms. Higher rough prices have fueled expectations that polished valuations will rise further, or as some anticipate, that a correction may be looming if the increases do not reflect retail demand. At the very least, uncertainty raises interest in investment-grade diamonds.
Moral dilemma
Finally, there is an ethical component the industry must consider. Alrosa is 33% owned by the Russian government. Arguably, any sales it makes go into government coffers, which are funding the incursion.
Can Alrosa make the same claim about responsible sourcing today as it always has? Just last week, the company’s board approved its sustainability program through 2025. Over the years, Russian diamonds have gained some brand value from the contribution Alrosa made toward environmental and social causes and its involvement in industry issues. Its proximity to the current conflict could derail those efforts.
As it stands, it is left to each company across the supply chain to make its own judgment call. Rapaport follows the US government directive, which allows for Alrosa sales to continue and Russian goods to be traded.
However, the crisis may yet influence efforts by jewelry brands to ensure sustainably and ethically sourced product. Brilliant Earth announced on Twitter it had removed Russian-sourced diamonds from its platform. If bigger brands such as Tiffany & Co. and Signet Jewelers, both Alrosa Alliance customers, follow suit, the issue could have a wider impact on demand — not just for Russian product, but natural diamonds in general.
The industry needs to raise its own ethical standards to counter that argument and intensify its message about the good it is doing to uplift communities and in conservation. It needs to raise its marketing to ensure millennial and Gen-Z consumers continue to engage with natural diamonds as a product with lasting emotional, ethical and economic value. While the war between Russia and Ukraine on its own should not have a major impact on diamond sales, the uncertainty it adds to an already fragile market environment might.
Rapaport will discuss these issues and the state of the diamond market in a webinar presentation on March 7, 2022 at 12pm EST. Register here.
See Rapaport’s resource page for more information about the sanctions.
Image: A diamond sorter inspects Alrosa rough. (Alrosa)
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Tags:
Alrosa, Avi Krawitz, Brilliant Earth, diamonds, Jewelers Vigilance Committee, Jewelry, JVC, Russia, Signet Jewelers, Tiffany & CO., Ukraine
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