Rapaport Magazine

A Wake-Up Call from Russia

By Avi Krawitz

Just as Covid-19 catalyzed the move to digital, the war in Ukraine may be the push the industry needs to step up its responsible sourcing. 

If in every crisis lies an opportunity, as Albert Einstein famously said, Russia’s war in Ukraine is providing the diamond industry with the chance to embrace source verification programs.

The ability to track a diamond and assure consumers of its ethical origins may prove to be as much of a lifeline in the current crisis as digital was during the Covid-19 lockdowns. In fact, there are some parallels in the trade’s relationship with the two trends.

Just as there was widespread skepticism that consumers would confidently buy diamond jewelry online, there are those unconvinced that source verification is possible to implement effectively, or that it is even necessary. In addition, both digital and traceability channels were in development long before the respective crises that boosted their relevance, and this has provided a solid foundation now that the trade has need of them.

Prior to the pandemic, most wholesalers and retailers created online platforms as a branding exercise and to push traffic to their physical locations. The lockdowns made e-commerce central to their selling operations and fast-tracked the adoption of digital tools at the retail-consumer level.

Similarly, the industry has already built a framework for source verification systems, both via private initiatives and through industry bodies. However, adoption of these programs has been slow, as they require a significant shift in mind-set and a change in the way the trade buys and markets its diamonds.

Laying the groundwork

The industry’s drive to know its diamonds’ origins and to separate “kosher” goods from less desirable ones is hardly new. It dates back to the early-2000s establishment of the Kimberley Process (KP) Certification Scheme, which aimed to verify whether diamond production was from conflict-free areas. The problem with the KP — a government-led program — was that the tracking stopped with the rough. It also maintained a narrow definition of “conflict diamonds”: those that fund rebel movements involved in wars against legitimate governments. That meant the KP continued to allow diamonds tainted by human rights abuses or torture, including those from government-run operations.

To some extent, the Responsible Jewellery Council (RJC) filled the void. Recognizing the shortcomings of the KP, the industry initiative created an auditing system to set standards for ethical sourcing via its Chain of Custody program (which does not include diamonds) and Code of Practices certification (which does). It covered a broad range of issues that fell under the ethical-sourcing umbrella, including human rights, labor rights, and — more recently — issues such as environmental protection and gender equality in the workplace.

In the early years, the purported drawback of the RJC was that it audited companies rather than diamonds. But it seemed to be the best available solution, as there was an apparent mental block within the trade about tracking individual stones.

That problem came to the fore between 2007 and 2011, when the KP failed to ban Zimbabwe after the government seized ownership of the Marange fields and killed an estimated 200 people in the process, according to Human Rights Watch. While the KP had a mechanism to deal with rebel forces, it was not equipped to tackle any ethical challenges beyond that scope — particularly abuses carried out by a member government.

Industry parties were left to follow the legal requirements of their respective jurisdictions. The US placed the owners of the Marange operations — notably the state-run Zimbabwe Consolidated Diamond Company (ZCDC) — on the Office of Foreign Assets Control (OFAC) sanctions list. This made Zimbabwe diamonds illegal to trade in the US, but they were still permissible in other regions, including China, India, Israel and the European Union. The trade therefore had to separate Marange goods from others in its production and distribution channels. But cutters were skeptical at the time, arguing that it was nearly impossible to do so given the dynamic, hybrid nature of their operations and the diamond market in general.

In a position to act

A lot has changed in the decade since then. Technology has advanced exponentially, and there are now mechanisms that can track diamonds both within the factory production line and throughout the market. The consumer and business landscape has changed, too. There is greater awareness of environmental, social and governance (ESG) issues, and corporate social responsibility (CSR) standards have risen. Consumers, businesses and regulators simply expect more from each other.

The diamond and jewelry industry is in a position to respond more effectively to the Russia crisis than it did to previous ones. Not only is it better equipped now, there is more at stake. Whereas Marange had a relatively small output that was mostly lower-quality rough, Russia accounts for an estimated 28% of global production. This affects a greater number of consumers, who are likely to push back if they discover their diamonds are funding the war in Ukraine. Since the US has placed Alrosa on the OFAC list, and other countries such as the UK are targeting Russian diamonds with sanctions of their own, the industry has no choice but to bifurcate its diamond supply.

It has the tools to do so: De Beers, the Gemological Institute of America (GIA), blockchain firm Everledger and equipment manufacturer Sarine Technologies are among the major players that have developed traceability programs. Despite the recent turmoil at the RJC over its delayed response to Russia’s actions, the trade body has the structure to facilitate an ethical supply chain. It is busy creating a community of like-minded, principled businesses throughout the pipeline.

Suppliers would do well to become part of that community. But creating an ethical supply chain also depends on the buyers, whether of rough, polished, or finished jewelry. Businesses must know their suppliers and their suppliers’ suppliers, and verify the sources of their goods. Only by buying responsibly can the trade sell ethically and turn the current crisis into an opportunity.

Image: Shutterstock

Article from the Rapaport Magazine - May 2022. To subscribe click here.

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