Rapaport Magazine


By Anastasia Serdyukova
No Diamond Sanctions So Far

The trade sanctions imposed by the U.S. and European countries on Russia over the crisis in Ukraine have not affected the diamond industry specifically, and neither have Russia’s retaliatory sanctions. However, market participants offered varied opinions on the potential impact of continuing or expanded sanctions, noting they can be both positive and negative.
   Although diamond industry observers and participants won’t comment on the record, for the most part, in private conversation, they said they don’t expect sanctions to have any direct or indirect effect on the sales of Russian rough to foreign consumers. Even in the scenario — which most consider highly unlikely — where rough exports to Europe are stopped, India, China and other countries are expected to jump in and fill the gap.
   Manufacturers also agreed it is unlikely that clients in Europe or the U.S. would stop buying Russian polished diamonds “as a protest.” “In theory, there may be image damages, but it is unlikely, and we definitely haven’t felt them,” said Nikolay Afanasiev, the head of sales for Kristall Smolensk, the country’s largest manufacturer. “Polished diamonds don’t have the country-of-origin control system similar to that of the Kimberley Process for rough,” said Valery Morozov, the head of Ruis Diamonds, “and pushing this issue is not in the interest of the market participants, including dealers from the European Union (EU) and the U.S.”

Money Issues
   While there are no obvious repercussions from political fallout, the diamond market may be hit financially on another front because the cost of money is increasing. “The diamond industry is very money consuming, and if diamonds become much more expensive, it would be bad,” said Afanasiev. “Our company is not worried about that because we finance our production from our own working capital.”
   But other companies are. Some said that they have had difficulties processing payments, especially in dollars. This is true not only for manufacturers, but for all industries in Russia. “Correspondent banks in the U.S., which process payments in dollars, are starting to delay transfers by studying every payment ‘under a magnifying glass,’” said Morozov.
   Jewelry makers and manufacturers who deal inside the country are also affected because bank credit is becoming more expensive. Most of the jewelry businesses work on the basis of half their working capital loaned from banks, according to Flun Gumerov, the head of Almaz Holding. “The sanctions are also affecting the ruble-dollar exchange rate, which makes gold more expensive,” he said. The Russian ruble lost around 6 percent of its value in July and August.

Domestic Boosters
   Gumerov pointed out that sanctions can have a positive effect if they push local producers to look for new ways of production and marketing. “There is a certain ‘patriotic’ boost to the sale of Russian jewelry inside the country,” said Alex Popov, the head of the Moscow Diamond Bourse. Since the sanctions were introduced, there has been a trend among Russian consumers to buy products produced in the country, according to reports on various retail sectors, although the actual financial impact has not yet been assessed.
   “Jewelers would win only if there are fewer imports into the country,” said Fyodor Poludenny of Moscow-based Estet. He said that since the beginning of the crisis in Ukraine, there has been more interest in expensive jewelry and more sales in that category. Other jewelers also have observed that their rich clients are looking at gold and jewelry as an investment in light of increased concerns about keeping all their money in foreign banks, which was their previous practice.
   At the same time, the purchasing capacity of the average Russian is decreasing, which reflects negatively on jewelry demand. If the political standoff continues, “people will stop buying expensive items in general, and this would hurt jewelers,” said Popov.

Into Africa
   Russia’s largest diamond manufacturer ALROSA is developing projects in three African countries: Angola, Botswana and Zimbabwe. At the moment, the company has a share at Angola’s Catoca, with annual output of 6 million carats and deposits estimated at 60 million carats. ALROSA also is working with Angola’s ENDIAMA on the creation of a joint venture. Angola’s diamond deposits are over 1 billion carats, according to ALROSA estimates.
   The miner also has created a 50/50 joint venture, Sunland Minerals, with the British Botswana Diamonds. In searching for promising deposits in the country, the companies are investigating four areas.
   In Zimbabwe, ALROSA is interested in two large alveolar deposits. The company has signed a technical agreement with local DTZ-OZGEO and is discussing a joint venture with this company and the state-owned Zimbabwe Mining Development Corporation (ZMDC).
   The Russian company is contributing its exploration techniques that proved to be very efficient in Yakutia. “They have been created by the company and are different from those used by De Beers and other companies,” ALROSA said. The company notes that while Botswana and Zimbabwe have been studied by De Beers, Angola’s deposits have not been as thoroughly explored.

Article from the Rapaport Magazine - September 2014. To subscribe click here.

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