Double deals in Russia's new stone age

According to De Beers, Moscow is not playing fair in the diamond game. Paul Farrelly reports

It Was a sprawling, concrete, Soviet monstrosity of a hotel in which the great and the good of the Russian diamond industry gathered for a glittering reception on the Thursday before Christmas. The celebration? Russia's accession, after 40 years of production, to the Inter- national Diamond Manufacturers Association.

One by one, at the Moscow Renaissance Hotel, the power brokers of this most byzantine of industries, lauded Russian achievements. Alexander Livshits, the finance minister, gave a glowing tribute; then came Yevgeny Bychkov, newly installed at the top of Russia's manufacturing club.

However, Ray Clarke, the head of De Beers' office in Moscow, was unusually muted. De Beers' director, Tim Capon, explained last week: "Wisely in his speech, Ray limited himself to saying just a few words of congratulations."

Mr Clarke's reticence was due to the fact that the day before, after taking part in a marathon talks session, De Beers had finally tired of Russian duplicity over diamond leaks. From Tuesday, the South African giant - which controls two-thirds of the world's diamond sales - will no longer buy Russian gems unless it revives a dormant deal that was finalised in September. Meanwhile, De Beers itself has announced sales of $4.8bn for 1996 - an all-time record.

The Russians, though, are fighting too - among themselves for control of one of their top hard-currency earners.

Mr Capon said: "Either the agreement is ratified, or it is ditched. We are happy to buy from Russia, but only on a fair basis. They will probably want to sell a significant shipment in January. And we will discuss it with them."

Relations with Russia have never been easy. In the early 1960s, at the height of the cold war, Krushchev and Brezhnev denounced South African apartheid. But behind the scenes, business went on.

In 1963, De Beers' chief Ernest Oppenheimer wrote in its annual report that a Russian boycott meant trade was off. Secretly, though, he cut a deal to buy all of Russia's diamond exports, an arrangement that persists, by and large, until this week.

Russia first entered De Beers' cartel in 1958 after discovery of vast deposits in Yakutia - now the semi-autonomous republic of Sakha - 5,000 miles east of Moscow in Siberia. Until then, De Beers' Central Selling Organisation (CSO) had been dominated by Angola, Namibia and the South African industry built up by De Beers' buccaneering founder, Cecil Rhodes.

Now, Russia is the second largest producer by value, behind Botswana which was co-opted by the CSO in the1970s. Last year, Russia sold $1.4bn of rough diamonds, a fifth of the world's total. Sakha's Udachny mine is the world's second biggest after Australia's Argyle, the big new arrival of the 1980s. Leaks were always a feature of the trade. But by 1995, they had reached epidemic proportions - worth more than $1bn a year - threatening De Beers' ability to mop up gems and hold up the prices. In February, De Beers finally reached a new outline agreement with Almazy Rossii-Sakha (ARS), the joint Moscow and Sakha firm that markets Russian output. The deal was to be for three years, not five; and there was a guarantee to give Russia 26 per cent - $1.2bn - of global sales. Finally, Moscow's huge, leaky stockpile was tied in.

This deal also eventualy included letting the pick of $650m of stones go to Russia's own cutting industry. De Beers would buy the "rejects", but only if the other $550m was "run of mine" - that is, a normal sample of production.

According to De Beers, however, the Russians showed bad faith all round. Leaks started again in June, in the run-up to Boris Yeltsin's re-election, and have escalated to reach $500m this year. The company also suspects the Russians of cheating on official supplies. "We were getting shipments that others had cherry-picked. We were treated as a dustbin," Mr Capon said.

However, De Beers still holds some cards. Russian stones are mostly small, the market least crucial to the company. In June, Argyle, a small- stone producer, quit the cartel. De Beers hit back by cutting bottom-end prices - while luxury price rises stuck. Now, while dealers in the top cutting centres of Antwerp, New York and Israel, are celebrating this Christmas, India's industry, at the bottom, is in turmoil.

"From the quality coming out of the Russian stockpile, it appears that it is running down," said Roger Chaplin, mining analyst at brokers T Hoare. "There will be more pressure on small-end prices. That is not good news for Russia, nor Argyle, but not necessarily bad for De Beers."

De Beers also has some Russian allies. And the country needs hard currency. Last week, ARS chief, Vyacheslav Shtyrov, complained to the Moscow government about delays in the deal. ARS needs to invest in its mines and a $500m loan through the National Westminster bank depends on a deal with De Beers.

Ultimately, however, Russian politics, helped along by De Beers' upping the stakes, will be the ultimate arbiter. Mr Shtyrov's stance reflects a battle between Sakha and Moscow for control of the industry. There is much to sort out. The Russian tax police are now investigating ARS and Moscow, too, is riddled with intrigue. Mr Livshits' finance ministry is tussling with the industry ministry for control of the key Committee for Precious Metals and Stones, Komdragmet.

The re-emergence of Mr Bychkov is hardly a good omen. A key Yeltsin confidant, he has long been a thorn in the sides of ARS and De Beers. He was fired in February as head of Kondragmet after allegedly raking off money from illicit diamond sales.

Statements in the past few days also point to a struggle between the Kremlin and Prime Minister Viktor Chernomyrdin for the glittering spoils.

"Diamonds are one of the few things they can readily turn in to hard cash," Mr Capon said. "So we are reasonably optimistic that we could conclude a deal, if they resolve these issues."

Start your day with The Independent, sign up for daily news emails
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

SThree: Talent Acquisition Consultant

£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...

Recruitment Genius: Experienced Financial Advisers and Paraplanners

Negotiable: Recruitment Genius: This extremely successful and well-established...

Guru Careers: FX Trader / Risk Manager

Competitive with monthly bonus: Guru Careers: We are seeking an experienced FX...

Day In a Page

How to stop an asteroid hitting Earth: Would people co-operate to face down a global peril?

How to stop an asteroid hitting Earth

Would people cooperate to face a global peril?
Just one day to find €1.6bn: Greece edges nearer euro exit

One day to find €1.6bn

Greece is edging inexorably towards an exit from the euro
New 'Iron Man' augmented reality technology could help surgeons and firefighters, say scientists

'Iron Man' augmented reality technology could become reality

Holographic projections would provide extra information on objects in a person's visual field in real time
Sugary drinks 'are killing 184,000 adults around the world every year'

Sugary drinks are killing 184,000 adults around the world every year

The drinks that should be eliminated from people's diets
Pride of Place: Historians map out untold LGBT histories of locations throughout UK

Historians map out untold LGBT histories

Public are being asked to help improve the map
Lionel, Patti, Burt and The Who rock Glasto

Lionel, Patti, Burt and The Who rock Glasto

This was the year of 24-carat Golden Oldies
Paris Fashion Week

Paris Fashion Week

Thom Browne's scarecrows offer a rare beacon in commercial offerings
A year of the caliphate:

Isis, a year of the caliphate

Who can defeat the so-called 'Islamic State' – and how?
Marks and Spencer: Can a new team of designers put the spark back into the high-street brand?

Marks and Spencer

Can a new team of designers put the spark back into the high-street brand?
'We haven't invaded France': Italy's Prime Minister 'reclaims' Europe's highest peak

'We haven't invaded France'

Italy's Prime Minister 'reclaims' Europe's highest peak
Isis in Kobani: Why we ignore the worst of the massacres

Why do we ignore the worst of the massacres?

The West’s determination not to offend its Sunni allies helps Isis and puts us all at risk, says Patrick Cockburn
7/7 bombings 10 years on: Four emergency workers who saved lives recall the shocking day that 52 people were killed

Remembering 7/7 ten years on

Four emergency workers recall their memories of that day – and reveal how it's affected them ever since
Humans: Are the scientists developing robots in danger of replicating the hit Channel 4 drama?

They’re here to help

We want robots to do our drudge work, and to look enough like us for comfort. But are the scientists developing artificial intelligence in danger of replicating the TV drama Humans?
Time to lay these myths about the Deep South to rest

Time to lay these myths about the Deep South to rest

'Heritage' is a loaded word in the Dixie, but the Charleston killings show how dangerous it is to cling to a deadly past, says Rupert Cornwell
What exactly does 'one' mean? Court of Appeal passes judgement on thorny mathematical issue

What exactly does 'one' mean?

Court of Appeal passes judgement on thorny mathematical issue