Russia's diamond deal is Asia's best friend


	January 18, 2002	atimes.com

Central Asia/Russia

Russia's diamond deal is Asia's best friend
By John Helmer

MOSCOW - A new diamond trade deal with Russia, which De Beers chief executive Nicky Oppenheimer signed last month, is the first to be drafted to satisfy not only the Russians, but also the European Commission in Brussels.

It also opens up the first opportunity for diamond-cutting centers in India, Sri Lanka, Thailand and China to buy directly from Russia, without having to pay the price of European intermediaries.

Russia and De Beers have agreed on terms which consign the single-channel marketing arrangements, quotas, and exclusions of past contracts to the scrap heap. The new commercial arrangements are regarded as a "transition" by Russian officials, but that's because they have yet to decide how to reorganize Alrosa, Russia's principal diamond mining company; how to market their diamonds independently; and how to assure a predictable flow of export revenue at a time when global, especially US, demand for diamonds has been dwindling, rather than growing.

The terms of the deal must be approved by the European Commission's competition watchdogs before they can take effect. This is expected by March.

If the European Commission agrees that the new deal meets its anti-monopoly criteria, then Asian diamond buyers should be able to start negotiations for direct purchases of at least US$200 million worth of Russian goods this year. Indian buyers have been especially keen to negotiate new deals; Thai and Chinese deals may follow. But until now the largest of the Indian and Thai diamond manufacturers have preferred to channel their diamond purchases through De Beers, paying higher prices for the reliability of the contracts.

In its Russian contract, De Beers has committed to buying $4 billion worth of rough diamonds, valued according to the Diamond Trading Company's (DTC) price book, over five years starting now. At $800 million per year, this is half Alrosa's annual production of $1.6 billion; or about 20 percent less than the DTC has been buying from Russia in the agreement that expired on December 31. But the value is significantly larger than Russian officials were proposing to offer at the start of 2001. It is also a much bigger slice of the Russian output than De Beers is getting from Canada or Angola.

The small print of the contract - insisted on by the Russian government at the last minute - sets out a three-year commitment for $800 million per annum, but reserves the option of cutting this amount by $100 million in each of the last two years. Thus, the total deal could be worth $3.8 billion.

Referring to alternative buyers for Russian rough, who were considered during the year, Valery Rudakov, Russia's chief diamond policy maker, said, "We think it would be insane to break with De Beers during the transition period. Why should we change De Beers for [Lev] Leviev, BHP or Rio Tinto?"

Leviev, the Israeli diamantaire, owns two diamond manufacturing plants in Russia. He was suspected of trying to oust the DTC from the Russian market, as he has already done in Angola.

The Israeli government also offered the Kremlin inducements to sell more rough to Israeli cutters like Leviev and less to De Beers. For the time being, the Russians didn't have the confidence to accept. As market demand for diamonds has slumped, and prices have fallen, none of the competing proposals could match De Beers' offer.

Although he was outspoken on the point early in the year, Rudakov conceded that the DTC should get the run-of-mine assortment it had demanded. The new contract guarantees the DTC $500 million in run-of-mine goods annually for the first three years of the deal. This is just $23 million short of the amount in the old contract.

Early in the negotiations, the Russians were trying to talk this down to between $450 million and $250 million. Reflecting how much Rudakov has lost his nerve for independent marketing of diamonds, the contract allows Moscow the option of cutting the run-of-mine assortment to $450 million in the last two years of the deal.

For the first time, Rudakov conceded that the price terms may have been better for Russia than they are for De Beers. After accusing De Beers of undercutting world prices by up to 30 percent or more in the past, he said: "The prices are good now, when the market is low. But yesterday, when the market was good, they were good for De Beers."

Rudakov also admitted that the diamond stockpile he has administered will play no significant part in future diamond trading. After his predecessors had sold off most of a stockpile worth about $6 billion, Rudakov said that Russian stockpile policy in future will avoid "hard to value goods", and concentrate instead on "the most liquid goods [ingots] that are given an exact price every day, making state stocks transparent for the government and law enforcement".

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