In October 1959, the sale of a 13,000-carat batch of rough diamonds marked the beginning of official trade cooperation between the USSR and De Beers. In 1960, the parties signed an agreement, which included two key points: the Soviet Union was deprived of the right to enter the market independently, while De Beers undertook to purchase all of the Soviet diamonds intended for export. Thus, the USSR was integrated into the single-channel system of the world diamond market as a passive seller without any real abilities to influence prices and therefore having no levers to control the market.
Initially, the irredeemable loss-making generated by the diamond mining in Western Yakutia due to unprecedented expenditures to create an infrastructure of the diamond field and the high cost of labor was a reliable guarantee against attempts of the Soviet side to view the idea of a "price war" in any near-term scenario. But this positive (for De Beers) solution concealed a problem that sooner or later the world diamond market regulator had to face. Over time, the huge spending inevitably became crystallized in a rapidly growing flow of rough diamonds. In accordance with the seven-year plan in 1959-1965 the Soviets expected to increase the scale of diamond mining in Yakutia about 25 times and the characteristics of the mineral resource base of Yakutalmaz were quite sufficient to do it. Already in 1961, after the Mir Diamond Pipe the Russians started developing the Aikhal Diamond Pipe which featured a high percentage of diamonds in the ore, as well as several placer deposits. And the pace of field development was over and above all the world records in the industry: if De Beers in South Africa considered normal working out their open pits for 10 meters a year, in Western Yakutia the average development rate was twice that figure, while this rate at the International Mine exceeded 40 meters a year. Such a prodigious intensity of field development was the main argument for justifying the existence of the Soviet diamond project - only such a rate made it possible to recoup the expenses in a more or less acceptable time. But the global market was not able to absorb the flow of diamonds unhurt.
In June 1961, the USSR Council of Ministers decided to build a diamond-cutting factory in Smolensk - the first of the nine which subsequently became a part of Kristall, a production association under the USSR Ministry of Instrument Engineering. In addition to Smolensk, diamond-cutting factories were established in Moscow, Kiev, Vinnitsa, Gomel, Barnaul, Yerevan, Chita and Shakhrizabze.
Thus, virtually simultaneously with the extensive program aimed at increasing production of rough diamonds the USSR adopted a program of "multi-channel diamond export,” according to which some part of the output generated by Yakutalmaz should have been sold to De Beers, another part should have been processed at domestic factories and exported as loose polished diamonds and still another part of manufactured diamonds should have been exported as set into jewelry. The authorship of this remarkable idea is usually ascribed to Soviet Premier Alexey Kosygin.
The jewellery component of the "multi-channel export" died without having really been born. The Soviet experience in jewelry marketing was puny, and this played a decisive role. De Beers’ financial expert and consultant Nikita Lobanov-Rostovsky once noted: "At one time Almazyuvelirexport tried to sell diamond jewelry in Europe (and there was a lot of Russian goods), but jewelry pieces would not sell. I think that they were perceived as dowdy and low- quality products."
The situation around the diamond-cutting industry of the USSR was much more complicated and fascinating. Since the early 1960s and right up to the collapse of the Soviet Union, it was developing in a steady way regularly consuming a significant amount of raw materials mined in Yakutia. The Soviets established strict diamond-cutting standards, whereby it was possible to produce almost perfect diamonds. The "Russian cut" became synonymous to quality in the diamond market, a sui generis industry brand name, and consumers paid premiums of up to 10% to the retail price for this product. But this level of quality was reached at great cost - the average yield for round diamonds was about 30% or one and a half times less than that achieved by competitors.
But it is not that much of the high quality raw materials turned into dust. All over the world the diamond-cutting business is characterized by low profit margins - the cost of finished diamonds contains 85% to 95% of the rough diamond cost. This is a well known fact, and the one who took the decision to create a cutting industry in the USSR should have been aware that the margin gained in this field, which almost never exceeded 15%, would be insufficient to pay either for maintaining the multi-thousand army of diamond cutters (especially given the quite worthy "social package" given to workers in the state of "developed socialism") or for the organization of security necessary to deal with inevitable emergence of a criminal diamond market, or for the creation of a new industry infrastructure, or for the export costs. And so it was - the whole diamond-cutting industry of the USSR was unprofitable from birth to death. Diamond sales brought less money than was the cost of raw materials from which the diamonds were made.
In a country with market economy such an industry would be instantly ruined. But the USSR was good in the sense that there virtually could be no loss-making enterprises because manipulation of internal prices - entirely conventional and detached from the world practice - allowed the diamond cutting factories look like "pace-makers of the socialist industry.” But in reality they were just subsidized from the national budget.
Thus, the multi-channel diamond export of the Soviet Union was actually lined up as follows. Some part of rough was sold to De Beers - this volume was established in such a way as not to overheat the market and overburden the global regulator with maintaining excessive stocks. The second part of rough was utilized by the Soviet cutting industry, a totally red-ink balance of which suggests that its main function was to reduce the pressure on the world rough market. Finally, the third part was simply dumped into the Gokhran stocks which stayed immobile. Of course, these stocks were maintained at the expense of the Soviet national budget.
It should be recognized that the difficult-to-explain events associated with the Soviet diamond project, or namely the unwillingness of the USSR Ministry of Non-Ferrous Metals Industry to start developing the Yakut deposits earlier in 1957 later followed by applying the most expensive scheme of development and finally the creation of a loss-making cutting industry, objectively played into the hands of De Beers. Was it the result of coincidence, or was it a display of some management process, informal and not stringently deterministic, but nevertheless efficient?
The key to this mystery may be concealed in the confidential communications between the Soviet Union and De Beers, which were maintained long before the discovery of the Yakut diamond fields. And it's not about the diamonds of the Urals, but about the fate of assets such as the Diamond Fund of the Politburo (mentioned by former Stalin’s Secretary Boris Bazhanov, who defected to the West in 1928). The diamonds of the Tsarist Russia were the basis of many curious relations established in the early days of Soviet power and played a significant role in the fate of the USSR. But this is the theme for other articles.
Sergey Goryainov, Rough & Polished
