The bear necessities

A traditional Kremlin fix seems to have saved the diamond market. Paul Farrelly reports; 'The point is De Beers has a deal it thinks Russia will stick to'

"THE OLD Russian way of doing things" may - just - have saved the value of the diamond on your finger.

Boris Yeltsin, kickback allegations and Kremlin skulduggery all featured in last-minute brinkmanship to preserve the control of South African mining giant De Beers over the world's $7.2bn (pounds 4.7bn) rough diamond industry.

In a new "framework agreement" drawn up a week ago, De Beers gained a three-year marketing deal to replace the five- year contract that expired at the end of 1995.

Crucially, Moscow's huge diamond stockpile was included, a move aimed at stopping a flood of cheap Russian stones on to the market.

But details were kept secret - pending further talks stretching to the end of March - so much so that the deal looked more like a face-saving statement before De Beers' annual results this Tuesday.

Over the plast week, though, the trade has begun to penetrate the veil. Under the terms of the agreement, De Beers has pledged to give Russia 26 per cent of global sales, worth $1.3bn of a possible $5bn this year, according to the trade magazine Diamond International. Independent sales of rough and polished gems may bring Russia's total income to $2bn a year.

In return for a pledge to stop leaks, the deal cements Russia's position in the industry.

"The major point, though, is that De Beers has got an agreement that it thinks Russia will stick to," said Roger Chaplin, a mining analyst at brokers T Hoare & Co. But others are not so sure.

Diamonds were first found in Russia in 1953 in the vast Siberian province of Yakutia by a femal geologist Larissa Popugaieva. Two years later a coded radio message, "smoking the pipe of peace", signalled discovery of the first commercial depsoit, the huge Mirny (Peace) mine.

The opencast pit is sunk like a gigantic wormhole, at the edge of Laikal, the diamond city of Russia that stands on steel legs pitched deep into the permafrost to prevent it from sinking into the slush of the summer thaw.

The Russians first signed up to De Beers' global cartel in 1958, but leaking has gone on almost ever since.

By 1970, half a million Russian gems - called "silver bears" - were already arriving in Europe annually. But the scale of the illicit operation in the past two years - involving $1.8bn of stones - has dwarfed what had gone before.

A key figure, Yevgeny Bychkov, chairman of Russia's State Committee for Precious Metals and Stones (Komdragmet) and controller of the stockpile, was sacked mysteriously by Mr Yeltsin on the Wednesday before the deal.

Long thought to have been supporting the leaks and taking bribes, Mr Bychkov was indicted on criminal charges in mid-February, but the charges have since been dropped. Previously, he sheltered behind his close ties with Mr Yeltsin, forged when the Russian President was Communist party boss in the Sverdlovsk region in the 1960s.

The train of events was far from coincidental, observers believe; election politics and hard-currency needs outweighed old loyalties. But there was still a pay-off.

"The KGB lives," one Mos- cow source said. "Since the deal, prosecutors have gone quiet, and Bychkov now has a pension - in the old Russian way."

Komdragmet has now changed its hardline stance, but observers believe De Beers will be hard-pushed to stop the leaks for the following reasons:

q Nobody knows the value of the stockpile, nor where it is. One source puts it at near 50 million carats, half world output, with rumours of a secret hoard in the Urals as well as Moscow.

q Much past leaking has come from the local ARS mining company, whose output is tough to measure.

q Russia's diamond cutters, who will receive half of production, are unhappy about the deal.

q Wars and disruption mean Russia's hard-currency needs are vast and unpredictable. It plans huge sales of precious metals to cut its budget deficit and could turn to diamonds again.