ALROSA’s 2Q 2009 report and its 2008 consolidated financial statement prove that the main problem faced by the Russian company is its debenture debt exceeding 150 billion roubles. Structurally, current liabilities account for over 40% of that amount and the company is expected to pay more than 130 billion roubles to its creditors in 2009-2010. It is quite evident that in any case, even if the situation on the world diamond market will be most favorable, ALROSA will not be able to sustain credit payments in 2009 and 2010 unaided.
Such a burden of debt commitments if imposed on a classic-type private company would inevitably bring the latter to a sudden bankruptcy which could cause a virtually one-time dumping of Russian diamond stocks. It is not hard to imagine what would happen to diamond pricing in this case.
However, ALROSA’s ownership structure with over 90% of government-owned stock has so far allowed avoiding such a vagarious outlook for the global diamond industry. Judging by numerous information “leakages” ALROSA has virtually obtained guarantees from Gokhran for purchasing $3 billion worth of its produce in 2009-2010. As it does, this amount will be even greater since some of the Russian clients of ALROSA and first of all the biggest of them all, Smolensk-based Kristall, will be buying rough diamonds also using the system of state preferences. (Polished diamonds manufactured by their factories will be sold to the State Repository and the money they get is to be used to buy rough from ALROSA.) Possible re-structuring of ALROSA’s debt to the Russian banks, and first of all to VTB, as well as likely sale of the company’s oil and gas assets, which would serve to significantly optimize its budget, will also be more the result of government aid than that of market dealings. It is not impossible that ALROSA’s major shareholders, the Russian Federation and Republic of Sakha (Yakutia), will contribute some property and money to build up the company’s capitalization proportionally to their stakes in the joint stock. Such solutions would lay a sufficiently reliable financial foundation to make ALROSA able to bring into full-scale operation at least three of the four underground mines currently under construction and modernize its mineral resources base by 2012 which would allow the company to avoid a technological break in its output and preserve it on a level close to what it is now.
The above mentioned measures will stabilize ALROSA’s financial position and minimize social risks in Western Yakutia in the autumn of this year and winter of 2010. The ever growing diamond stocks of Gokhran objectively representing a threat to the modern diamond industry without a global regulator may be considered an unpredictable consequence of such a policy. The probability of using such stocks for purposes being far from the interests of the diamond market may increase on a pro rata basis to Russia’s growing budget deficit, that is starting from this year and at a sufficiently brisk pace. There is an evident historic precedent: when Gokhran sold its stocks in 1996-1997 this brought about rather serious consequences, but at that time there was a market player able to purchase most of these diamonds thus maintaining the prices. Today there is no such a player on the market.
There is only one way to avoid or at least to substantially decrease the growing threat of a salvo emission of Russian rough to the market: by developing a stable pool of foreign buyers ready to work on a long-term contract basis purchasing at least one half of ALROSA’s diamond output and later the whole range of diamonds produced by the company. This is an utterly uneasy task in the current crisis but the necessity of this solution should be evident to all the diamond dealers and cutters who are intent to continue their operations on the diamond market. Otherwise the measures taken by the Russian government to back up ALROSA will look like playing into one and the same goal.
Sergey Goryainov, Rough&Polished
