Putin Mandates New Look at Russian Trade (Russian Market)

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Perhaps motivated by the repositioning of De Beers, President Vladimir Putin announced in August that he would undertake a review of the diamond sector.

His first move was to order Prime Minister Mikhail Kasianov to draft a decree creating a State Commission on Diamonds. The commission would have two purposes. The first is to organize an International Conference on Conflict Diamonds for the fall, in accordance with a verbal agreement between Putin and British Prime Minister Tony Blair made during the G8 summit in Okinawa, Japan. An October date for the conference is likely.

The second purpose of the Commission would be to formulate Russia’s response to De Beers’ new business strategy. It will collect the relevant information and then present some ideas on the shape of Russia’s future relationship with the rough diamond giant. Toward that purpose, the vice president of ALROSA, Sergei Oulin, met in London in August with the managing director of De Beers, Gary Ralfe, and obtained his agreement to organize a special presentation on the new strategy in Moscow.

According to the Prime-TASS news agency, De Beers’ Moscow office director Ray Clark will follow through on the plan, with a presentation likely to be scheduled early this month.

Officials Weigh In

For now, various Russian governmental bodies are forming their ideas and weighing the options for the diamond sector. Minister of Finances Alexei Kudrin and Gokhran Director Valiry Rudakov discussed the industry’s future on August 10 at the Ministry Board. Rudakov, a leading figure in the diamond industry, suggested a list of members for the new Diamond Commission, and proposed an outline of the new body’s powers. Head of the Security Council of the Russian Federation, Sergei Ivanov, explained his views to President Putin at the meeting of the Council. He sees the diamond industry as one of Russia’s core strategic interests. Yakutian president Mikhail Nikolayev sent a detailed letter to President Putin, defining diamonds as the base of the Yakutian economy.

The diamond problem was the focus of the Yakutian government’s August meeting. With no plans to expand its production in 2001, ALROSA’s president, Vyacheslav Shtyrov, was to hold a meeting of the board to discuss a revised strategy that will take the company through to 2005. There were varied predictions for the world diamond market’s future, with the ultimate conclusion being that the industry must be ready for anything.

The Russian Association of Diamond Manufacturers is also engaged in the reassessment process. At present, Russia is keeping its trade agreement with De Beers to the letter. According to ALROSA’s public relations officer, Alexei Chertkov, July and August lots of rough were shipped to the DTC in correct qualities and terms. The September lot is now being prepared. In general, ALROSA prefers to sell at least the minimal quota of $550 million to De Beers this year. But nobody knows what to expect in the fourth quarter.

Veto for VAT Relief

Putin’s second decision, after the creation of the Diamond Commission, was an August 11 veto of a law rejecting a Value Added Tax (VAT) on rough diamonds for the processing industry. It has taken about three years for the law to move through Russian Parliament, propelled by the lobbying of the Russian Association of Diamond Manufacturers. Former President Yeltsin supported the law through Decree 740, issued in July 1997. But now President Putin has rejected the idea of his former boss.

In reality, the veto will not damage the Russian cutting industry because about 99 percent of its polished output is exported, and all cutting factories can easily recoup the VAT though tax rebates. The more important factor is Putin’s demonstration of independence regarding diamond politics. De Beers has actually helped him by issuing its new strategy, because it frees the current Presidency from prior restraints and creates a blank slate.

On the Offensive

Russian diamantaires are girding for what is expected to be some tough negotiations with De Beers. The first issue of contention is the slogan, “A Diamond is Forever.” This summer, De Beers presented its new hallmark, the Forevermark, which is linked to the venerable slogan. But in reality, the slogan has been part of diamond advertising since the 1950s, and has been as a key element of the single-channel system.

All De Beers’ partners in the single-channel system, including the USSR (now Russia), Argyle Diamonds (during 1982-1996), Botswana and Namibia, were selling their rough to the Central Selling Organization (CSO) at a 10 percent discount. This money helped cover De Beers’ administrative costs, inventory maintenance and advertising.

Russian analysts figure that during the industry’s 40 years of trade with De Beers, De Beers has received about $50 billion worth of rough from Moscow, with a total discount of about $5 billion. Perhaps about $2 billion in Russian money was used to promote the slogan “A Diamond is Forever.” Thus, De Beers has misappropriated a joint intellectual property. At the moment, Gokhran lawyers are studying the situation and may file a claim of up to $10 billion. The claim is real, especially in light of De Beers’ recent discussions regarding a $2.5 billion long-term credit to ALROSA for development of diamond mines.

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