Rapaport Magazine

Russia Market Report

ALROSA Rescinds VAT Exemption

By Anastasia Serdyukova
RAPAPORT...Russian diamond manufacturers say they will suffer considerable losses and some may be put out of business if ALROSA, their main supplier and the country’s largest diamond miner, follows through on its plan to impose an 18 percent value-added tax (VAT), beginning January 1. Currently, ALROSA waives the VAT for domestic manufacturers and writes off the approximately $100 million annually as a cost of doing business.

Manufacturers said the newly imposed tax would be devastating to an industry that already has low profit margins. They have asked ALROSA for a one-year delay to give them time to try to get the tax code changed by the government. Ararat Evoyan, head of the Russian Diamond Manufacturers Association, said the manufacturers would get the tax back when they sell their product abroad, but it usually takes half a year to receive the refund. “This will be a harsh blow for Russian manufacturers,” he said, estimating the new tax would increase manufacturers’ costs by as much as 5 percent of turnover.

ALROSA, which sells about 40 percent of its product inside Russia, said it needs the revenues from the tax to spend on underground development and to cushion its losses from the falling exchange rate.

Kristall to Expand Sales Inside the Country
Kristall Smolensk, Russia’s largest diamond manufacturer, plans to increase its domestic sales as part of its 2008 strategy. Maxim Shkadov, Kristall’s director, said the company’s sales inside the country are expected to double to $10 million in 2007. The company’s overall revenue for the first nine months of 2007 is $320 million. Although domestic sales represent a minute share of that total, domestic sales is also the fastest-growing segment. Shkadov expects the sector to grow by as much as 20 percent in 2008.

The company plans to increase sales by making Kristall Smolensk a recognizable brand in Russia. “Our company is more known abroad than inside the country,” said Shkadov.

A year ago, the company started selling diamonds through the internet. Shkadov said the service allows customers to find a specific stone and compile a set of stones without leaving their hometowns anywhere in the country. This is the first project of its kind in Russia, where buying online is far less common than in the West. So far, the company has sold $500,000 through the internet. Nikolai Afanasiev, the company’s deputy director, expects online sales to rise by 20 percent next year.

Concern About the U.S. Market

“This year, Russian diamond manufacturers will end up in the black; in 2006, we suffered losses,” said Evoyan. He said the market has stabilized and he expects 3 to 5 percent growth for 2007, with overall cut diamond sales totaling $1.2 billion.

Yet, this growth is strained by a number of factors. “The crisis of overproduction is obvious,” said Shkadov. “Today, governments’ politics play a crucial role at the market.” He said the increase in rough prices had been stimulated by aggressive Indian companies, who are supported by cheap credits backed by their own government.

Shkadov said the fall in overall diamond production is a worrisome factor. He said that diamond deposits were getting scarce and new sources from underground production haven’t kicked in yet.

Russian manufacturers also are concerned by the meltdown of the American market. Shkadov emphasized the negative impact of the mortgage crisis in the U.S. The falling dollar also contributes to the worrisome picture because Russian manufacturers sell their product in dollars, but incur many expenses in the strengthening ruble.

Jewelers’ Holiday Expectations
The country’s jewelers unanimously expect high sales in the holiday season. While some companies are counting on their best, exclusive pieces worth several thousand dollars, others are betting on tiny stones in rings and charms priced at around $500.
This positioning extends far beyond the holiday season. “The Russian market is being shaped at the moment and companies are looking for their place in it,” said Valery Radashevich, director general of the Russian Jewelers Guild.

Some companies are looking for a specific niche. Moscow-based Estet launched a premium jewelry line two and a half years ago. “We want to create a recognizable brand and offer good-quality stones,” said Dmitry Gavrilenko, the company’s head of sales.

The Marketplace
• ALROSA sold $18.5 million worth of diamonds at the international auction in Antwerp.
• The company put on sale 20 lots that consisted of 45 stones weighing more than 1,800 carats total. The median price for a carat sold was over $10,000.
• ALROSA and Russia’s Diamond Chamber sold $31 million worth of diamonds at their 25th auction.
• The company presented 96 lots with 643 stones weighing over 11,000 carats. The biggest stone at the auction was 140.77 carats.

Article from the Rapaport Magazine - December 2007. To subscribe click here.

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