RUSSIA INCREASINGLY INFLUENTIAL IN THE GLOBAL DIAMOND MARKET

• Document Type: FOIA
• Collection: FOIA Collection
• Document Number (FOIA) /ESDN (CREST): 0005374629
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 8
• Document Creation Date: June 23, 2015
• Document Release Date: June 12, 2009
• Case Number: F-2008-01923
• Publication Date: August 15, 2003

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CENTRAL INTELLIGENCE AGENCY
DIRECTORATE OF INTELLIGENCE
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APPROVED FOR RELEASE^
DATE: 06-09-2009
Russia Increasin;l~y ::
Influential in the Global
Diamond Market
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14 t.~.
15 August 2003
OREA 2003-40108
 try, as par! of the goven:rnent's effort to comply with WTO rules, set
the .stage for Russla to exercise its market power in the diamond trade.
Russia mines about 20 percent of the world's rough diamond output and,
until recently, had allowed the international diamond conglomerate De
Beers to control most of its exports. Russian mining giant Alrosa and
many cutting enterprises have responded to deregulation by setting up
direct marketing arrangements with foreign customers.
? Growth in export revenues, however, will depend on whether foreign
demand continues to expand rapidly enough to absorb an ex ected
surge next year in output from new Canadian mines?~
Russia used its clout as a major diamond producer to help scuttle a
proposal to set up an international enforcement agency in the Kimber-
ley Process-an international initiative to stem [he sale of diamonds by
African rebel groups and their allies. The Russian delegation succeeded in
convincing others that acountry-based enforcement program was cheaper
and less intrusive on national sovereignty than the competing proposal.
Because Russia has the potential to be a major conduit for moving
smuggled diamonds to market, its ability to implement an enforce-
ment regime will be central to an internatiaml effort to shut down this
method of frnazcing insurgent and terrorist activities.
 President Putin's government has Taken steps in
recent months to reduce the role of foreign middle-
men in tke marketing of Russia's diamonds. Most
rough and polished Russian diamonds are exported,
earning an estimated $LA-? billion in ?002. The
Russian President set the stage last year fnr loosening
the country's Soviet-era reliance nn the marketing ser-
vices of international diamond giam De Beers when
he signcJ a decree deregulating the diamond industry,
as part of Russia's program to align its regulations
with WTO standards.
? Under the decree`s provisions, diamond mining and
cutting enterprises gained the right to sell rough
diamonds directly in foreign markets.
? The revival last year in global demand (or gem qual-
ity diamonds has encouraged Russia's producers to
bu more axkressive in marketing, accordine to prays
The Russian Government's moves ur allow its produc-
ers to circumvent. its tradilionsl diamond marketing
channels came at about the same time that the Euro-
pean Commission put a hold on Russian diamond
mining giant Alrosa's agreement with De Bccrs to
market $800 million in exports of rough diamonds
annually. The Commission raised questions shout
whether the agreement complies with EU competition
rules, The Luxembourg-registered De Beers company
already controls 60 percent of global output of rough
diamonds through its mining interests in Africa, and
its agreement with Russia would boost that to
70 percent, according to press reports. The Commis-
sion's linal ruling is due this fall, but it has indicated
to Ahosa that it would he wise to develop other mur-
keting channels, the Russian media reports.
Australia
$n.4 billion
Namibia
? Alrosa has set u sales offices in New York and
London, and earlier this
year, it signed a deal with the Lebanese conglom-
erate, Huri ron Development, for its assismncc in
selling $500 million in rough diamonds per year in
the Middle East.
? To take greater advantage ol'thc 12-16-percent
markup on cut diamonds, Alrosa reached an agree-
ment this summer with a US company to set up a
joint venture in Russia for processing rough dia-
monds,which could boost Alrosa's exports of cut
diamonds from $120 million to ti;500 million per
 ALRO5.4 also is working with independent Russian
diamond-cuing firms in the Diamond Chamber of
Russia-mt association chaired by ALROSA Vice
President Ulin that also includes Russia s largest
cutting firm, Kristall of Smolensk, and some d0 other
enterprises. The Chamber has signed an agreement
wi[h.4ntwerp's Diamond Council that gives Cham-
bcrmembers direct access to market their stones in
Belgium's major diamond trading center.
? The Russian Government's decision earlier this
year to switch from a one-year [o a five-year export
quota regime has facilitated [he cl'lorts ofALROSA
and major cutting enterprises to develop Ion *-term
marketing relations with foreign customcrs.~
Russia's big two crttiing enterprises are well posi-
tioned to puslr exports. Kristall has established out-
lets in Hong Kong, London, New York, and Tcl Aviv,
and Russia's second-largest cueing lirm, Ruiz, is part
Many of Russia's small diamond-cutting enterprises
also have close tics to overseas clients. Several for-
eign lrms use a tolling scheme-in which they land
Russian cutting lrms' purchases of rough diamonds
and take the polished diamonds as puymcm-that
accounts I'or shout hal(of the rough diamonds cut in
Russia, according to industry experts.
? In response to overseas demand, Russian diamond
cutters last year adopted world stgndards for grading
Exercising its clout in [he global diamond market,
Russia was in the forefront of a successful effort
during Kimberley Process negotiations to torpedo a
plan that would have created an international enforce-
ment agency suppress the trade in "conflict dia-
monds'smuggled out of insurgency areas ol'Africa.
Moscow publicly branded [he initiative as too costly
and intrusive on national sm~ereignty and backed u
The UN in 2000 sponsored an initiative to
block cross-border trade in diamonds smug-
gled out of insurgent areas of Africa to finance
arms purchases. These "conflict diamonds"
account for 2 to 4 percent of global trade
in rough diamonds, according to industry
experts. Diamond-producing and -consum-
ing countries, which account for 90 percent
of the trade in rough diamonds, as well as
non overnment or anizations participated.
Under the certification scheme launched
worldwide on 1 January 2003, rough dia-
monds may only be transported across
frontiers in sealed containers and must be
accompanied by a certificate of origin from
the producing country attesting that they were
mined outside of African insurgency areas.
The WTO General Council in May granted the
Kimberley Process a waiver allowing signa-
tories to refuse to trade rough diamonds with
nonsignatories and with signatories that fail to
successful compromise diamond certification system
based on individual country legislation and industry
self-regulation.
? Russia demonstrated its commitment to the Process
by being among the first governments this spring
to issue regulations implementing the certification
Moscow has acknowledged di Fliculties controlling
diamond smuggling and culled on the international
 reports that as much as a quarter ol'the $800 million
in rough diamonds allocated to local cutting enter-
prises arc smuggled out of the country, depriving
Moscow of an estimated $]Q million in export duties.
Furthermore, a provision of the deregulation
program will give diamond cutters a new informal
export channel. Beginning this year, they are pcr-
mitted to send diamonds duty-free out to foreign
cutting centers with the understanding that they will
he returned for additional processing. According to
investigative reporting by the Russian press, several
diamond-cutting enterprises in the mid-1990s used
this "give-and-take" scheme to transfer out the bulk of
their large, gem-quality rough diamonds and roplaced
them with smaller stones smuggled in IYom Africa
umil Moscow banned the practice.
? Taking advantage of the current give-and-take
regime, foreign cutting enterprises, for example,
could process the rough Russian diamonds and ser
them in jewelry, which does no[ require cerHfrcates
of origin, at:d then return smuggled diamonds to
the Russian enterprises with the certificates that
l:ad accompanied the Russima stones.
? Small Russian diamond-cutting enterprises arc espe-
cially likely to engage is such smuggling schemes
hecause these companies are chronically short of
working capitah according to industry ohservers.
? Russia's largest culling enterprise, Krisutll is head-
yuartered in Smolensk, an Oblast with a reputation
lix atrruption and smuggling that is on the main
road connecting Russia with Western Europe.
The Baltic states have provided conduits for illegal
diamond exports. Latvian banks used their diamond
export licenses to funnel diamonds smuggled from
Russia into legal trade channels, and Estonia has
a reputation as a transshipment point for the ille-
gal exports of Russian precious metals and stones,
according to press reports. Until they join the Kim-
berley Process, however, middlemen in Latvia and
Estonia will face more difficulty "laundering"dia-
mands because the major cutting centers are in sig-
natory countries, and they may not itnport diamonds
 Alrosa's commitment to developing new dffarnortd
fields probably will ensure that Russia remains a
major producer of rough diamonds for many years
to come. Growth in export revenues, however, will
depend ort Russia increasing the portion of polished
to rough diamonds it sells overseas and foreign
demand for gent-grtality stones growing fast enough
to absorb a serge in Canadian mine output predicted
Russia's fuhtre influence insetting irdernatimml
policy to control smuggling will depend, in part,
on whether it can demonstrate a good faith effort
to implement the Kimberley Process certification
program. Altltougk Russia's position as a large
producer wit! always give it a seat at the table,~l
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Russia has the largest proven diamond reserves in
the world, and the Sakha Republic in eastern Siberia
is the site of most ot'thc country's diamond mining.
Because they havo been in operaton since the 1950x,
however, most of the open-pit mines arc ncarexhaus-
tion, forcing diamond-mining companies to explore
Almost all Russian diamonds are exported. The
Almazy Rossii-Sakha Company (Alrosa), which
mines 99 percent of Russia's diamonds, sells half
of its rough stones overseas, and provides most of
the rest to domestic diamond cutters. These cutting
enterprises, in turn, export 97 percent of their output.
The Russian State Depository for Precious Metals
 and Precious Stones (Gokhrun), which is under the
Finance Ministry, buys small portions of Alrosa`s
output, which it later resells to domestic and forei n
buyers to raise funds 1'or the governmem
The I'edcral government controls key pans of the
diamond sector, and senior officials have signaled that
they want w maintain a grip nn the diamond trade.
The govermnen[ retains 100-percent ownership of the
Kristall cutting enterprise in Smolensk, the largest
diamond-polishing firm in Russia, and has postponed
privatization plans. The Russian Government owns
37 percent ol'theclosed-stock company Alrosa, and
the Sakha Republic holds another 32 percent oF'the
firm's shares. The rest ol'the eyuiq~ is divided among
cmployces and local governments in Sakha.
? Finance Minister Kudrin, who chairs Alrosa's
Supervisory Board, has justified a decision to inde0-
nitcly delay plans to open the company to private
im~cstors, saying that Alrosa has to continue allocat-
ing half of its earnings ut social infrastructure in
Sakha.
? Moscow's decision last year that valuable natural
resources such us diamonds, gold, and oil remain
federal property lurther reduces the likelihood that
Some 4Q00(1 people ow of Sakha's population of
I million work atAlrosa. Its fees for mining rights
fund 70 to 80 percent of the Republic's budget, and
the company's promissory notes make up a substan-
tial informal component o1'the Sakh 's m pply,
according to press reports.~~
Rising production casts, as the company switches
from open-pit to subsurface mining, are calling into.
question whether Alrosa can maintain its goal of
making $200 million in prolits annually, according to
industry analysts. They predict [hat Alrosa will have
to invest $ I million in developing underground mines
in the Arctic region just to replace the Udachnaya
open-pit mine, which provides 65 percent ofAlrosa's
current output.
facilities and increase production at its Catoca mine
in Angola, where mining costs arc half those in
Russia: the mine is a,joint venture with the govern-
ment ofAngola and one of Levaycv's companies.
Alrosa has enhanced its reputation as a Russian blue-
chip asset by rolling over some of its $I.I billion
ruble deM into longer term, lower interest foreign
debt instruments. Last year, Alrosa secured a
$91 million loan from a consortium of Western banks.
? Earlier this year,.4Gosa's $300 million Eurobond
issue was oversubscribed, allowing Alrosa to raise
the amount to $.500 million. Moodys rated the
ALROS.4 bond, "B3;' and S&P gave it a "B;' just
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