One of the significant trends in the world diamond-brilliant market is the development of diamond cutting productions in the diamond-mining countries such as Botswana, Angola, Namibia, South Africa and Canada. Russia has certainly become the pioneer of this process. It is one of the largest producers of diamond raw material with its advanced national diamond cutting industry operating in the market environment already more than one and a half decade. (Development of the cutting industry in the USSR in 1963-1991 represents only a historic interest these days, as the economic and political conditions of that period are obviously non-comparable with the present situation). The analysis of conflicts and contradictions, which accompanied the Russian cutting industry, can serve as an example for the countries following this way.
The industry’s criminality rate has become an extremely negative consequence of the growing number of diamond-cutting factories in Russia starting from 1992. A large part of new diamond-cutting factories became a tool of illegal export of diamond raw material under "grey" and "black" schemes. This was mostly observed in 1995 - 1997, however, even now it still continues to cause serious anxiety. In December, 2005, a round table was held in the State Duma of the Russian Federation on the “Legal support to efficient development of the diamond-cutting industry in the Russian Federation”. Speaking at this representative forum, Mr. L.Tolpezhnikov, the deputy director of administrative department at the Ministry of Finance of the Russian Federation told that despite of growth of numbers of diamond cutting factories, the volume of raw material really cut in Russia has been remaining at the same level of 3.8 – 4.5 million carat for several years. Thereat “sales of diamonds in the domestic market have increased and exceeded almost two times the volume of diamonds cut at our enterprises”. And further: “the increased supplies to domestic market do not lead to increased volumes of cutting”. Mr. L.Tolpezhnikov referred to the source of information allowing to draw such conclusion, that is the official reporting of the Ministry of Finance, under the "top secret" title. This was unfortunately passed over by the country’s newspapers, however it was de-facto recognition that almost 50% of diamond raw material is sold in the Russia’s black market. Needless to say, this level of criminality is not specific for the cutting industry only, but is generally typical for the transition-economy countries with high level of corruption and weak and imperfect law-enforcement systems. It is obvious, that Angola, Namibia, Botswana and number of other African countries enthusiastically supporting creation of national diamond-cutting industries will inevitably face similar problems and will add headache to other participants of the “Kimberley process”.
Another block of conflicts, in which Russia’s cutting enterprises frequently got and, alas, continue to get, is connected with imperfection of the tax system, fiscal procedures and administrative regulation. Some aspects of the problem, for example, excessive adherence to introduction of quotas or paranoid love to the "confidential" title on any information concerning diamonds, are the heritage of the totalitarian past. The other problems, for example, persistent unwillingness of the Ministry of Finance to organize a specialized customs office in Yakutsk have been a consequence of the understandable shock of the officials caused by the criminality tsunami. Some other problems have been caused by tactical contradictions between the interests of producing companies and cutting factories in combination with the efforts of their lobbyists. How else can one explain the fact that export of diamond raw material and sales at the home market are assessed by value-added tax differently – while exporting, diamond-mining companies return the VAT from the budget and when selling at the home market they do not? The efforts known as the “process of liberalization of the diamond market” took more than 10 years to resolve a part of the contradictions and to create conditions for the industry, though illusory but coming nearer to the standards of major competitors in Israel, Belgium, India and China. Nevertheless, these problems were of a subjective character and there was always a hope for their solution through negotiations and compromises.
But the Russian interested persons are principally not able to solve the following problems: modern technologies, equipment and well trained staff are necessary for successful operation of the cutting factories along with tax preferences and loyal administration. But the No. 1 issue is circulating funds. Traditionally, in this business cutters pay for rough diamonds straight away, and give ready brilliants to jewelers (or to a dealer) on consignment. Therefore, credits are required and taking into account the fact that the share of diamond raw material in the cost of a ready made brilliant can reach 90 %, the credit policy is the major factor of the business success. In Israel, India and Belgium, they have specialized banks such as Antwerp Diamond Bank, ABN-AMRO Bank, State Bank of India, etc. The credit rates for cutters are usually around LIBOR+2 %. In Russia, such conditions are impossible for the reasons not dependent on the diamantaires. You cannot speak seriously about credits if the refinance rate in the middle of 90-s was more than 200%!? Today, the interest rate in Russia is 10.0 %. In the European Community it is 4.0 %, in China – 3.6 %, in Israel – 4.5 % and in India – 7.75 %. Credit rates also differ accordingly. These simple arguments allow drawing a not very nice conclusion: a Russian cutting enterprise working on credits of the Russian banks, has been and probably will be not competitive with the Israeli, Belgian, Indian and Chinese colleagues for a long time. There are no low-interest credits and no banks specializing on investments in the cutting industry in Russia. Therefore, if Russian cutters “play the game” they are doomed to defeat in the market. It seems that the majority of the African diamond-mining countries wishing to enter the “club of cutters” will face similar situation.
However, until recently, some Russian cutters had an opportunity not to play “according to the rules”. The leader of the Russian cutting industry - the Crystal company (Smolensk) enjoyed suppliers' credit from ALROSA till 2004. The unique Yakutia cutting factories such as Tuymaady Diamond used similar preferences unprecedented in the world practice. Moreover, Yakutia was given 25% quota of the current production of ALROSA, which was also distributed in the form of suppliers' credit among several dozens of local factories. These conditions allowed to make both ends meet (the truth was that some Yakutia companies have managed to go bankrupt even in that favorable environment). However, Russian cutters immediately faced serious problems as soon as the suppliers' credit practice stopped. For example, Smolensk Crystal had to attend speculations in the stock exchange only to repay its interests against credits. That risky experiment was a success but it has confirmed the obvious fact: credits in Russia are very expensive, cutting business is unattractive for investors and speculation profit rates exceed by 100% those in the cutting business.
Among those Russian companies, who had no opportunity to use supplier’s credits from ALROSA, a smaller part could work normally because used circulating funds provided by their holders (for instance, Ruiz Diamonds has Russian registration, but belongs to Leviev Group), and the larger part (almost 80% of all cutting factories registered in Russia) practiced tolling. And, as soon as tollingers were given an opportunity under the Decree of 2002, to export 15% of raw material purchased in Russia, they instantly took the advantage and began to export not “raw material which is unprofitable for cutting in Russia”, but the best stones, which could be quickly resold with the highest possible margin.
Therefore, we have this picture today. Those cutting enterprises with the Russian registration are successful and competitive, which work with a foreign capital. The others’ prospects are doubtful - they need to try to use a lobbyists in order to get non-market preferences, such as quotas or to continue practicing tolling and other “grey schemes”.
Is it possible to name all this a “national cutting industry”? Yes, is possible to name. Putting the same sense, when we speak about the "development" of domestic car industry”, meaning Vsevolozhsk "Ford" or Kaliningrad "BMW". Nowadays, the brand under which the product reaches the consumer is even less connected to the country of origin. The bank rate of 3.6% against 10.0% is a powerful argument to give the "Russian cutting” a slight Chinese accent.
Rough&Polished
