Russian Ambitions May Undermine World Diamond Cartel

The future of the dazzlingly rich world diamond market balances today on wounded Russian pride and the fragile national aspirations of 300,000 Sakha people, who live in frozen poverty in the remote province of Yakutia.

Deep in this cold ground lie billions of dollars’ worth of diamonds.

“A diamond is forever,” the South African De Beers Co. advertises, and for the past 60 years the secretive, privately owned company has succeeded in keeping diamonds valuable by controlling how many get to market from an expanding world supply.

Thanks to the De Beers cartel, impecunious suitors and fabulously rich movie stars alike can be confident that a diamond will stay among the world’s most glamorous, and reliable, investments.

But this trust is under heavy assault from Russia, which generates 26 percent of the diamonds sold worldwide by the cartel and wants a bigger share.

A five-year contract signed in 1990 between De Beers and the former Soviet Union expires at the end of this year, and a palpable air of foreboding hangs over the renewal negotiations.

If the Russian compact with DeBeers is breached, the value of diamonds worldwide could fall precipitously.

“Frankly,” says Ray A. Clark, who oversees De Beers interests in Russia, “it’s something too horrible to even contemplate.”

Russian nationalists speak darkly of foreigners wanting to cheat Russia of its national resources. Russia is bargaining for a bigger slice of the market, more profit and a share in the De Beers-controlled Central Selling Organization in London, where diamonds are parceled out as De Beers sees fit to buyers from around the world.

In the province of Yakutia, the vast frozen landscape on the northern edge of Siberia where Russia’s diamonds are mined, the local politicians want a bigger share of the pie for their own people, ethnic Russians who work and manage the mines and the once-nomadic Sakhan minority - about 300,000 of the province’s 1 million.

Many of these people live and work against a landscape of poverty and frozen desolation. Thousands of them do not have indoor plumbing.

The pressure among them for greater autonomy has grown since the collapse of the Soviet Union.

In 1993, hoping to mollify the local people, President Boris N. Yeltsin gave Yakutia a 20 percent share in diamond profits and a 32 percent share in Almazy Rosii-Sakha, the Russian mining company.

But a member of the Yakutia Parliament, Anatoly Antonov, said the people want to keep even more diamonds under the control of the republic.

“The Moscow bureaucrats want to sell all the diamonds themselves,” he said, “because they want to keep all the bribes. It’s very simple.”

“We want 40 percent of the diamonds,” said Vitaly P. Artamonov, foreign minister of the newly named Sakha Republic.

Lev Safonov, who oversees Russia’s diamond mining operations from headquarters in Mirny, well understands that De Beers and diamond merchants the world over have been getting nervous.

“They are worried, and I think they are right,” said Safonov, first vice president of Almazy Rosii-Sakha. “They understand that the market can be destroyed if Russia does not behave.”

De Beers, which last fall appeared publicly conciliatory toward Russia, is beginning to sound testy.

“We’re not satisfied with the contract either,” said Alan Campbell, deputy general manager of the Moscow office of De Beers Centenary, the Swiss-registered company that handles all of De Beers’ operations outside South Africa.

Moscow has been selling its uncut diamonds to De Beers since 1959, shortly after the diamond lode was discovered in Yakutia.

In the 1960s, when official Soviet solidarity with black South Africans made it impossible to continue the relationship openly, the Soviet Union began selling secretly to De Beers.

Now Russian politicians are complaining that De Beers is treating Russia like a colony for raw materials, taking profits that should remain in Russia.

Russians want to expand the domestic polishing industry, to add value to this natural resource and to cut into a flourishing international business.

“We’re interested in developing our own polishing industry because polishing will give additional profit on diamonds,” said Yuri K. Okoyomov, first deputy director of Almazy Rosii-Sakha.

Campbell of De Beers Centenary says he understands the desire to reap the full reward.

But he warns: “Diamond polishing and marketing is highly entrepreneurial and complex. The successful ones have been small, dynamic, family businesses that can respond quickly to fashion and wide divergence in tastes.”

While the contract negotiations themselves are secret, the diamond world has felt the tension. And it is not happy.

“I don’t see how they (De Beers) can come out of this without being hurt,” said Hilton Ashton, a diamond industry analyst in Johannesburg.

“Either they will have to spend a lot of money buying diamonds, lose some control of the market, or give the Russians something they want, such as some equity in the Central Selling Organization,” he said.

The negotiations are essentially a high-stakes game - both sides are gambling, and neither wants to blink.

De Beers has years of experience in selling diamonds on its side, and long-term relationships with 160 select buyers all over the world.

On its side, Russia has a rich supply of diamonds and the ability to destroy the market and inflict great financial harm on De Beers.

Both sides are wary of the risks.

“If prices ever fall, it will undermine confidence,” said Sergei A. Oulin, a trained diplomat who now is director of Almazy Rosii-Sakha, which mines nearly all of Russia’s diamonds.

“And that will be suicide for the diamond business.”