'Roadmap' To Aid Russian Diamond Polishers Could Impact ALROSA

Mining and Exploration
24/08/2017 15:36

According to an article in The Kommersant Daily, Russia's Ministry of Finance has prepared a 'roadmap' for the development of Russia’s diamond manufacturing industry, which could become one of the biggest reforms in its history. "In particular", the news agency writes, "it is said to be aimed at serious mitigation of state regulation and reducing the tax burden on Russian diamond manufacturers, as well as at expanding their access to raw materials. This threatens to revise the marketing and investment policy of ALROSA and add to its financial burden. Experts believe that the time for these reforms was not chosen well, given a possible drop in future revenues of ALROSA due to the accident at the Mir underground mine." One of the key points of the plan is the allocation of additional amounts of rough diamonds to the domestic market (at least 10% of the mined rough in its most demanded categories) under the obligation to process it in Russia.

According to the plan’s authors, this will attract investments into the industry and bolster its competitiveness, but will require a change in ALROSA's marketing policy. Right now, Russian diamond manufacturers buy rough on a common basis with non-resident companies within the frame of the ALROSA Alliance program. The program includes more than 50 clients holding three-year contracts, through which ALROSA sells about 70% of rough (the rest is sold on the spot market and at open tenders). The majority of these contracts expire in 2018. Another measure to expand the rights of diamond manufacturers is the possibility of splitting the boxes containing rough diamonds purchased from ALROSA. The draft of the relevant government resolution has already been submitted to the government of the Russian Federation.

Kommersant notes that this is not the first time Russian diamond manufacturers have tried to achieve preferential access to rough. In the summer of 2016, the Ministry of Finance was asked about this by Maxim Shkadov, CEO of Smolensk-based Kristall, who had been lobbying for a merger between his company and ALROSA. Kristall, Russia's largest diamond manufacturer (wholly owned by the state) has experienced difficulties in recent years, and last autumn, after the abolition of the export customs duty on diamonds (6.5%), the situation worsened. The 'roadmap' provides for the possibility of creating a vertically integrated industry structure with the participation of the both state-owned companies, one of the Kommersant’s sources says. Sergey Goryainov of Rough&Polished doubts that the roadmap can be implemented on a full scale. He calls the allocation of additional amounts of rough to diamond manufacturers a “vicious practice”. 

According to Mr. Goryainov, the state authorities are going to support diamond manufacturers in many respects at the expense of ALROSA, but this is "hardly a good idea given the fall in future revenues of ALROSA due to the accident at the Mir Mine and a possible suspension of operation at the company’s other underground mines for the period of their inspection by the commission of the Federal Environmental, Industrial and Nuclear Supervision Service." According to the expert, ALROSA may lose nearly a tenth of its diamond output as a result.