Future of Russia’s Diamond Exports Shines Brightly

There are changes in one of the most secret, strategic branches of Russian industry: the diamond and precious metals industry. Beginning this year, the quotas for precious jewels and metals, raw diamonds, platinum and palladium export have been abolished by presidential edict.

The ministry of finance believes that any changes in the export structure should not be expected, since in past years diamond exporters have used export quotas of 65 percent to 70 percent. Thus, the anxieties that an increased flow of Russian diamond resources will horribly diminish world prices and melt down the market are not justified.

Up to now quotas presupposed a long period of agreement in diverse Russian departments, which got on the markets’ nerves, especially in relation to platinoids. Russia has one of the biggest mining and smelting companies in the world, Norilsk Nickel, which provides about 65 percent of the world’s palladium. And delays in defining quotas, which irked the West, were part of a speculative game directed to raise prices on the world markets.

Actually, although there is no more need to obtain a license for quotas, it does not mean there are no more obstacles standing in the way of a flow of precious metals and diamonds overseas. Firstly, according to Valeriy Rudakov, the chairman of the Chamber of Commerce and Industry of Russia’s Federation Council, bureaucratic procedures involved in obtaining export licenses have not disappeared. In addition, between the exporters and Western purchasers a state agent still takes 1 percent off the top of a transaction. All this, in the opinion of market participants, ties their hands, and is a violation of their freedom of enterprise.

A common opinion for analysts of and participants in the market is the following: The abolition of export quotas on precious metals and diamonds will be notable only when it is paired with a total liberalization of this market. And according to Alexander Nichiporuk’s prognosis, an ex-president of ALROSA, the biggest producer of diamonds in the world after De Beers, which makes up 25 percent of world diamond market, this liberalization is expected when Russia enters the World Trade Organization. Only then, it is believed, both the licensing of precious jewels and even export duties will be abolished.

The absence of a Russian exchange for precious metals also limits the development of a free market. These metals’ prices are currently defined at the London Metal Exchange. In the opinion of many Russian businesspeople, this is not natural for the country that is the world leader, by production volume, in supplying gold, platinum, and palladium. When asked what prevents the creation of such an exchange, a representative of Norilsk Nickel said that, to begin with, a political decision should be made. If Russia aims to be a full member of the G-8, and to obtain full convertibility of the ruble, the creation of such an exchange is unavoidable. And, in general, the state must aim to sell oil, gas, and precious metals for rubles on Russian territory.

Besides this, "it is an ideal that Russia shall facet all the diamonds that it extracts and shall sell the brilliants as jewelry," says Ararat Evoyan, vice president of the Russian Association of Diamond Manufacturers. But for now this idea is just a fantasy. According to different appraisals, if the worth of a total volume of raw diamonds fluctuates near $5 billion to $6 billion, a total volume of brilliant jewelry sales nowadays exceeds $50 billion. To sell complete product is, certainly, much more profitable from all points of view.

But the fate of a national diamond complex, as always, will be dependent on government decisions—and even more so than when quotas regulated it. According to analysts’ evidence, one of the biggest transactions of the century is being readied on the Russian diamond-platinum market. This would be the merger of two industrial giants, ALROSA and Norilsk Nickel, and the transfer of a new company into the state’s property. A chain of recent events leads experts to this opinion.

First, in the beginning of February a new president was appointed to ALROSA. Second, Alexander Nichiporuk’s resignation seemed to be almost synchronized with Mikhail Prokhorov’s—a chief manager of Norilsk Nickel who has been, by all accounts, an opponent to selling the business to state structures. Experts argue that, since Vladimir Potanin will be the only owner of the enterprise, a merger with ALROSA is on the horizon.

And since the state’s share in this strategic business will increase, state regulation in the area of diamonds and precious metals will weaken even more.

By Tatjana Zikova