Sanctions against Russia: Diamonds always get through

Russian state company Alrosa is the world's biggest diamond producer. The US has placed it under sanctions. But other players like the EU haven't.

Foto: Valery Sharifulin/Itar-Tass/imago

BRUXELLES taz | There are strong links between the Russian diamond production and the financing of Putin’s war machine, according to a report published in April by the Antwerp-based think tank International Peace Information Service (IPIS). The first is the proximity between Vladimir Putin and Sergej Sergejevitsj Ivanov, the CEO of Russia'se state-owned diamond mining company Alrosa which is the largest world producer (45.5 million carats worth 4.2 billion dollars in 2021, much less than energy sales to the EU of about $ 104 billion but much more than vodka sales). Alrosa is responsible for 90 percent of Russia’s diamond production. The Russian Federation gets a profit of about $1 billion.

Ivanov belongs to Putin’s inner circle and is an oligarch targeted by US sanctions. He is also the son of Serge Borisovich Ivanov, Putin’s special adviser on environment and transport who sits on the Russian Security Council.

Alrosa’s board includes Anton Siluanov, Russia’s Minister of Finance. Alrosa’s corporate newsletter reported in 1997 that the company was engaged in a sponsorship agreement for the Russian B-871 combat submarine. To express its gratitude, the Russian navy awarded the submarine the honorary name Alrosa in 2004.

This proximity explains why US President Joe Biden issued an executive order on the first day of the Russian invasion of Ukraine, targeting Alrosa. Sergey S. Ivanov was put on the list of the Office of Foreign Assets Control (OFAC), which means that his assets will be seized and that business transactions between US citizens and Ivanov Alrosa are forbidden.

Two weeks later, a second executive order banned the import into the USA of Russian rough diamonds and blocked entities owned, directly or indirectly, by Alrosa. Besides these official sanctions, the main US retailers, Signet Jewelers and Tiffany, communicated in March that they would no longer be purchasing diamonds mined in Russia, in order to maintain their reputation and avoid being seen as buyers of “blood diamonds“.

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The company also been sanctioned by Canada, the United Kingdom, New Zealand and the Bahamas. The UK joined on March 24th the US in sanctioning Alrosa. Chris Gordon, a British expert of the diamond market and conflict diamonds, told TAZ that on 29 April, the UK also raised an import tariff on both polished and rough diamonds from Russia and Belarus. UK companies are prohibited from doing business with Alrosa.

Antwerp does not ban Russian diamonds

US sanctions are important since the US accounts for half of the world consumption of polished diamonds. But the main hub of the world diamond trade, Antwerp in Belgium, where 80 percent of the rough diamonds are traded, is not implementing sanctions against Russian diamonds. These accounted for 25 percent of its rough diamond imports and were valued $ 1.8 billion in 2021, the equivalent of 40 percent of Russia’s diamond exports.

The diamond trade has been exempted from EU sanctions, following concerns expressed by the Belgian government and a lobbying campaign by the Antwerp World Diamond Centre (AWDC). In late March, Ukrainian President Volodymyr Zelensky urged Belgium in a video conference to stop diamonds imports from Russia. But Belgian Prime Minister Alexander De Croo disagreed and declared that if Belgium does not buy Siberian gems, the trade will move from Antwerp to Dubai.

In an interview with the Gazet van Antwerpen daily, the AWDC’s spokesman Tom Neys said that sanctions could “hurt Russia but there is a chance that we do more damage to ourselves“ since “the Russians can easily trade their diamonds with non-EU countries.“ According to him, EU sanctions against Alrosa could mean a loss of 10.000 jobs in the diamond sector in Belgium, as the Dubai Diamond Exchange has said that Russian gems were welcome there. Besides, rival diamond hubs like Dubai or Mumbai have less ethical standards than Antwerp, argue Belgian diamantaires. Efforts in favour of EU sanctions against Russian diamonds from NGOs and from the Belgian Socialist Member of the European Parliament, Kathleen Van Brempt, have not been successful so far.

According to members of the Kimberley Process Civil Society Coalition, Antwerp diamantaires have tight links with the Russian elite. In 2014, despite Russia’s invasion and occupation of Crimea, the AWDC signed a new supply contract with Alrosa.

Another important hub, Israel, which absorbs 10% of Alrosa’s production, is not applying sanctions either. According to the daily Haaretz, Israeli diamond dealers were still importing rough diamonds from Alrosa in April, but were facing growing obstacles. Banks were reluctant to make payments to Russia, since the United States prohibit the use of dollars in transactions with Moscow.

Industry sources cited by Haaretz think that even in the case of sanctions diamond dealers will find a way to pay in order to keep an access to Russian gems. The paper foresees that Israeli sightholders will likely move their activity to India where polishing is cheaper. Like the United Arab Emirates, India has not taken any sanctions either.

Technically, Russian diamonds are not blood diamonds

Despite obvious connections between Alrosa and the Russian war machine, it is unlikely that the Kimberley Process (KP) – created to curb the traffic of blood diamonds, originally to prevent Angolan rebels from profiting from the diamond trade – will take up any role in providing coordination on the matter of Russian diamonds, say IPIS experts.

The KP’s definition of conflict diamonds only concerns “rough diamonds used by the rebel movements or their allies to finance conflict aimed at undermining legitimate governments“. In addition, KP decision-making is based on consensus. China, the United Arab Emirates which include Dubai, India and African producers would probably not support the scrutiny of Russian diamonds. The March 2nd UN General Assembly Resolution condemning Russia’s aggression against Ukraine was supported by only 33 of the 59 KP’s participant states.

On 14 March, the KP Civil Society Coalition urged the KP’s Chair Botswana to call a plenary meeting to establish which measures are required to secure that diamonds produced in Russia do not contribute to financing the war. But the meeting never took place. Botswana said it could not take such a decision, which must be proposed by a member country. Furthermore, it would be sufficient for one participant to formally oppose a meeting to prevent it happening.

The Russians already blocked in September 2021 the renewal of the UN Security Council mandate for the UN Panel of Experts on the Central African Republic where Lobaye Invest, a company with suspected links to the Wagner mercenaries has rights to explore diamonds.

Unintended effects on Angola and India

A consequence of the lack of consensus on sanctions against Russian diamonds is that the effectiveness of US sanctions is only partial. The large majority of Russian gems only enter the US market after they are polished in India which reclassifies them as Indian products. For industry analysts, it remains legal for US companies to import Russian diamonds that have been cut or polished elsewhere. In addition, diamonds of various origins are often mixed together, which makes it difficult to detect Russian gems.

Nevertheless, US restrictions on Alrosa are creating concern worldwide across the industry. According to the US business news agency Bloomberg, in Manhattan’s diamond district business has stalled over the last months. Industry sources stress that the decision by the US and the EU to block Russia from SWIFT, the Belgium-based cross-border payment system operator, has complicated the task of importers. Transactions are becoming more difficult since purchasers of Russian diamonds who used dollars face prosecution.

Meanwhile, Antwerp traders also say that business is stalling despite the absence of specific EU sanctions against Russian diamonds because of the closing of the EU airspace to flights from Russia.

So far, US sanctions have not deterred the Kremlin from its aggression against Ukraine but they havie consequences fordiamond producing countries. „Bear in mind that in Angola, Alrosa is a major shareholder of the biggest mine, Catoca. If one declares sanctions against Alrosa, the joint venture which exploits the mine, the Sociedade Mineira de Catoca (SMC) will be affected. The Catoca diamonds have lost value because of the situation. Buyers are worried about reputation, ethics and that’s not good for SMC. The fear is that the public could see a jeweler or a retail seller as financing indirectly the horrors of the war we are seeing on TV“, Chris Gordon says to TAZ.

Alrosa is the operator of Catoca and the mining equipment is Russian. They are currently building a huge mine of very high value, a 400 $/carat mine at Luaxe. The problem is project finance, since the money cannot go through the SWIFT system. On 9 May, in a brochure distributed at a mining conference in Cape Town, the Angolan parastatal company Endiama admitted that sanctions could delay the supply of equipment and spare parts to the Catoca and Luaxe mines. And Endiama announced that it had revised its projection down from 13.8 million carats to 10 million carat in 2022.

Two other African producers could be affected, albeit to a lesser extent. One is the Democratic Republic of Congo, where Alrosa sealed a deal in 2021 with the 80 percent state-owned company MIBA to launch a diamond exploration and production program. The other is Zimbabwe, where Alrosa has set up a subsidiary to start mining operations after it did preliminary geological exploration several years ago.

A looming diamond shortfall

On top of the US ban, any stagnation or reduction of the Angolan production could lead to a shortage of the supply of rough diamonds worldwide. This will eventually result in rising prices of rough diamonds. Indeed, the world's second major diamond producer, De Beers – which controls the production of Botswana, the second world producer, and South Africa – has limited capacity to produce more gems in the short term. Its mines are running at full capacity and there is little chance of a production increase before 2024, when an expansion at De Beers’ flagship South African mine is expected to be completed.

Any rise of rough diamond prices may result in a recession in the diamond industry, experts fesar. In India, there is an availability problem and the fear of a consumer back-clash. There is also the financial aspect. How does one pay for Russian imports? In rubles, in rupees, in euros? There is confusion and uncertainty. Some may think of paying in gold or in bitcoin, but the amounts required are huge since the Russian production accounts for over 36% of the world total, worth about four billion dollars, explains Chis Gordon.

The payment crisis has affected the largest world diamond polishing centre at Surat in Gujarat state in India, which employs one million people, where the bazaar has gone quiet over recent weeks. Disruptions in the diamond trade could cost India $2.5 billion during the second quarter of 2022, writes The Economist of India. Meanwhile, Alrosa could for some time avoid the consequences of the ban – by selling its entire production to the Russian state fund Gokhran, according to the Russian Ministry of Finance.

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