Watch that glitter in the Russian Far East

Svetlana Skarbo

In two months from now Russia is to launch its first Diamond Centre in the Far East, with the country's giant Alrosa aiming to 'at least triple' direct rough and polished diamond sales to countries of Asia-Pacific region.

A pilot display and sale of rough diamonds is planned for the end of August in Vladivostok. During the Eastern Economic Forum at the beginning of September, dedicated to boosting investment in the Russian Far East, Alrosa will auction gems manufactured by its own cutting and polishing division.

The company is setting its branch in Vladivostok, arming it with a task to collect data about the Asia-Pacific markets and expand the co-operation with companies in near neigbhours China, India, Singapore, Japan and South Korea.

The opening of the new diamond centre is expected to see Alrosa increase direct rough diamond sales in the region, which are currently a modest 5-6 per cent of its total sales.

"We've got to be ambitious and aim to at least double, triple the sales," Alrosa president Andrey Zharkov said, setting targets to meet president Vladimir Putin's personal drive for a better return on Russia's diamond wealth.

Swiss-born and Moscow-educated Zharkov, 43, took over Alrosa a year ago after an impressive career which saw him at leading positions in Norilsk Nickel (2001-2006), Rusal and EN+ (2008-2009), Novosibirsk Affinage Plant and Prioksky Non-Ferrous Metals Plant (2009-2010), Gokhran (EXPLAIN) of Russian Ministry of Finances, and Kristall, Russia's leading diamond manufacturer. Zharkov has been reshaping the management team since he got the position, and was recently quoted saying that he was satisfied with the result.

Alrosa's 2015 revenue grew 8 per cent year-on-year to 225.5bn roubles (US $3.9bn), helped by the favourable DX market conditions; net income rose to 32.2bn roubles (US $481mln) as compared to net losses of 16.8bn roubles (US $252mln) in 2014. At of April 2016, the company reduced its loan portfolio by more than US $400 million.

Russia's new diamond centre in Vladivostok will not be a traditional gem exchange, despite it being announced as such a year ago when the idea first appeared in the media, but rather a one-stop shop with traders, diamond and jewellery manufacturers, gemological laboratories, banks, insurance companies, specialised transport companies, custom checkpoints and state control gathered - like a miniature of the Antwerp diamond quarter - under one roof.

Another key difference is that the trading will be organised directly by Alrosa.

"The aim is to create not an exchange, but a trading scheme with us attracting investment to the region, to help build the diamond centre and a diamond cluster around it," said Zharkov.

"The new centre will offer comfortable environment, with tax and other preferences for market players trading diamonds and raw materials, aiming first at Asia-Pacific countries; however, all countries are welcome to take part.

"Currently the potential capacity of the new Diamond Centre depends primarily on contracts that Alrosa already have with the clients in the region."

The model of a one-stop shop that Alrosa is using for its new project has been successfully implemented by the China Diamond Exchange Centre, established in 2000 - the only legal entity that allows diamond import and export in the country.

Before it was set up, taxation, including import tariff, value added tax (VAT) and sales tax on imported diamond was around 35 to 40 per cent. Now all diamonds imported into China are refunded 13 per cent VAT, leaving the net VAT charge at 4 per cent.

Currently about 5 per cent of Alrosa's diamonds go to China. A long-standing partner of the company is a large jewellery retailer Chow Tai Fook; another Chinese company Luk Fook buys diamonds via Alrosa's spot sales.

Yuri Trutnev, Vladimir Putin's point man to the Far Eastern Federal District, has been often quoted questioning the logic of Russian diamond sales via Europe.

"We mine diamonds on Yakutian land, sell them via Antwerp, and then they go to South-Eastern Asia - a kind of a strange knight's move. It's obvious that when the chain is so long, with prices set by middleman, there are always doubts over how correct and clear is this system," Trutnev said as he spoke to journalists about Zharkov's recent meetings banging the drum for Russian diamonds in Hong Kong.

"He (Zharkov) was asking if they were interested in buying diamonds direct, not via a long route though Europe. The more direct relations and the more clarity, the better," Trutnev said.

The China Diamond Exchange Centre is base to the Shanghai Diamond Exchange, with its president Mr Lin Qiang saying that the new trading floor in Vladivostok might bring new bilateral trade opportunities.

"I admire Mr. Zharkov for attaching great importance to the Chinese diamond market," he said.

"In the meantime, I'm trying to attract the attention of Alrosa. I work on giving them a clear understanding of the Chinese diamond market, and the role that the Shanghai Diamond Exchange plays in the industry.

"We're also trying hard to build direct trade and business ties of mutual benefit and sustainable development between the world's largest diamond producer and the second largest consumer, and to let our Russian friends share the opportunities brought by the rapid development of China.

"As friendly neighbours, we understand Russia's strategy to facilitate the development of the Far East, as well as the active participation of the Chinese diamond industry."

The idea of the new Diamond Centre in Vladivostok is part of a broader surge by the Russian government to pay more attention to the development of the Far Eastern Federal district, comprising Yakutia (Republic of Sakha), Primorsky Krai, Khabarovsk Krai, Amur region, Kamchatsky Krai, Magadan region, Sakhalin region, Jewish Autonomous region and Chukotka Autonomous Region. This area is one and a half times the size of the European Union.

In 2015 (data from January to September) the foreign trade turnover figures held at $15.7bn export (6 per cent of whole-Russian), import at $4.6bn (3,4 per cent of whole-Russian).

Putin in his 2014 address to the upper house of the Russian parliament said that it was 'necessary' to pay more attention to investment-starved eastern regions to bolster federal economic growth.

"Russia has a high potential as a major power in the Asia-Pacific region. I propose to give to Vladivostok the status of free port with an attractive easy customs regime," Putin said.

This is now implemented.

With a population of 600,000 Vladivostok is located at the head of Golden Horn Bay, two hours flight from China capital Beijing and within reach of Japan, South Korea, Singapore and India.

Currently home to the Russian Pacific fleet, it was a free port for foreign imports in the late 19th century. This turned it into one of the largest ports in the world rivalling Hamburg and London, but the status was removed in 1909.

Trutnev reported that 36 residents had registered at the free port by the and of April, with the total volume of announced investment at more than 100bn roubles (US $1.5bn). Speaking to Russian Vedomosti newspaper, he said it would be 'strange' to expect Vladivostok Diamond Centre to immediately compete with long-established world diamond trading sites.

"We've got to give this new centre a test. The market is huge," he said.

"Currently we are selling rough diamonds like cobblestones, losing out even at this stage. We have to move towards increased added value.

"There will be no revolutions; we are not planning to a raise a flag in Vladivostok and declare that from now on Alrosa's diamonds can only be bought here. There are no such plans, but we've got to give this site a try, to start talking with traditional buyers from China and ask if they might find it more comfortable to go to Vladivostok, not Antwerp.

"These are the kind of chats we are having, and the reaction is positive."

Favourable reaction to the idea of buying rough diamonds direct from Vladivostok is quite likely to come from Russian southern neighbour.

Vipul Shah, former chairman of India's Gem and Jewellery Export Promotion Council, CEO and Managing Director of Asian Star Group, said that his country would support each and every step of the new initiative.

The so-called eastward pivot - a key Putin's objective - is in part driven by sanctions from Western countries over Ukraine, the slow growth in EU markets, and low oil prices which have stymied the Russian economy.

The sanctions didn't block Alrosa, or the rest of Russia's diamond sector, from direct access to foreign capital markets. According to the company's president Zharkov, it was the world's oldest diamond trading centre of Antwerp that got the most anxious when the situation in Ukraine escalated.

"As far as we know, Belgian officials even requested the European Commission not to touch the Russian diamond sector, should the sanctions against Russia grow broader. Alrosa brings Antwerp a quarter of all rough diamonds," Zharkov told Yakutia24 newspaper.

The Russian Federation is indeed Antwerp's first trading partner in terms of rough imports, according to Antwerp World Diamond Centre (AWDC). The bulk of rough diamonds leaving Antwerp is destined for India, followed by the United Arab Emirates and Hong Kong.

So far there were only a few polite comments made about Russia's intention to try its own trading floor in Vladivostok - which, should the project take off - might have a direct impact on Antwerp.

Willy Rotti, President of the Diamantclub van Antwerpen expressed his hope to see the new diamond centre as member of the World Federation of Diamond Bourses, stressing the necessity to adhere to the highest ethical standard and the principle of free and fair competition between all diamantaires.

"An Asian summit is of course in the first place a matter of the Asian bourses and their representatives. It is always interesting to have a meeting with them, and to work together with them," Rotti said.

The Antwerp rough diamond trade reported gradual recovery after a downturn in 2015. April trade figures published by AWDC showed rough trade surging 32 per cent in value, 39 per cent in volume compared to April 2015. The polished diamond trade faced more headwinds, declining slightly compared to April 2014.

"While we are certainly heeding the cautionary warnings about strong rough sales from the major miners and overly optimistic purchases from the middle of the pipeline, and are therefore not jumping to the conclusion that a full-blown diamond-industry recovery is underway, the results we have seen over the past few months are certainly cause for optimism," AWDC spokeswoman Margaux Donckier said.

"Antwerp is clearly the preferred global marketplace and bellwether of the industry, so if one wishes to know how the diamond industry is performing, look no further than Antwerp".

As Russian government suggests to look as far from Antwerp as five thousand miles to the east, Smolensk Kristall Production Corporation, the country's top luxury retailer and one of the world's leading diamond centres, points to how much needs to be done for the new Diamond Centre to succeed.

Maksim Shkadov, Director General and CEO of Smolensk Kristall Production, explained that simply setting up the new Diamond Centre is not enough.

"We have an extremely complicated custom and tariff politics with equally tangled logistics for rough and polished diamonds import and export," he said.

"If the current system doesn't change, the new initiative will not work.

"Should the new Diamond Centre offer tax deductions to companies registered within the free economic zone, as well as efficient logistics, than any manufacturer - us being no exception - would be interested to work there."

While Alrosa cautiously attempts a tectonic shift from being the world's major rough supplier towards becoming a more independent diamond manufacturer and trader, and tests the water with its new trading floor in Vladivostok, Anglo American-owned De Beers diamond producer 'watches reports about a new sales outlets 'with interest'.

The company also actively sets up new branches and brings its most advanced technologies to the Middle East, Far East and India.

Mrs Lynette Gould, Head of Media Relations at De Beers, said: "Whilst the US is still the leading diamond consumer market accounting for some 45 per cent of global polished diamond demand in 2015 with a record value of $39bn, the second largest and fastest growing market is China, followed by India, Japan and the Gulf."

The projected "boom of the middle class" in these regions offers a huge opportunity for growth in the diamond industry.

"I think we would agree that there is a growing opportunity for midstream activities in the east," she said. "In 2011, De Beers established a branch of its auction sales business in Dubai to provide an opportunity for UAE and Indian based businesses to participate in the online auctions.

"In 2013 we relocated the purchasing, production and sales base for our auctions to Singapore.

"To cement our position at the heart of the diamond industry, De Beers opened the newest and most technologically advanced Forevermark diamond inscription and grading operation in the world in Surat in March last year.

"In February this year, to cater to the midstream players in the diamond industry, we launched a grading service in the Middle East, Far East and India."

With Russia starting up its first rough and polished diamond trading floor in the Far East, Surat launching new initiatives to have more diamantaires to process diamonds in India, De Beers and Alrosa active in the Asia-Pacific region, is there a 'looking East' trend that might re-shape the global diamond market?

Ehud Laniado, one of the diamond industry's most prominent industrialists, president of Cora International says that the recent tendency of rallying Eastern commercial centres has become an established fact due to the combination of several factors: governmental incentives, more lenient tax policies compared to the West, cheaper labour and export-oriented policies.

He suggests that the West will be concentrating more on diamonds as an alternative for capital preservation, or as an investment.

"If we consider diamonds merely as a component of jewellery, then the diamond business is indeed moving towards Asia," he said. "However, if diamonds are considered as an alternative for capital preservation or as an investment, then the move towards Asia becomes less relevant.

"Diamonds intended for capital preservation or as an investment vehicle are the rarer, more unique ones.

"Given the longstanding tradition of Western centres, and while these centres are more invested-oriented markets, they are actually better suited for these diamonds, which can range from 1 carat D flawless white to very special coloured diamonds.

"These centres will continue to focus on rare diamonds, as well as coloured diamonds. This area constitutes a growing investor base, which is not the same as jewellery consumer base."

Russia's move to the east was welcomed by its third largest exporter of polished diamonds and the biggest gem manufacturer in Yakutia, EPL Diamonds. The company said the new project was of great interest with its promise of direct access to Asian market, along with new possibilities to strike long-term partnerships and to open new branches in the region.

'The project is listed as part of Alrosa's 2018 strategy, therefore we also brought it as part of our longstanding plan,' the company's head of advertising department Marianna Balagurova said.

Alrosa will indeed need this time to complete a long list of essential actions after the pilot show in Vladivostok is over. Customs and tariff legislation will have to be improved, relevant checkpoints in Vladivostok set up to ensure smooth logistics, trust with the new partners will have to be gained, and a good number of years will have to pass to see if Russia managed to catch the right moment - and the right location - for its attempt to become a major world diamond player, beyond mining.

This page was last updated on 15 June 2016 at 09.58