Background by Rough&Polished: Valery Vladimirovich Rudakov was born in 1942, a mining engineer by training, graduated from the Moscow Mining Institute. Started his career in Yakutalmaz (at present ALROSA), headed the Main Directorate for Precious Metals and Diamonds under the Counsel of Ministers of the USSR, Almazzoloto corporation, joint stock company ALROSA.
In 1982-1988 – Deputy Minister of the USSR Nonferrous industry.
In 1999-2002 - Deputy Minister of Finance of the Russian Federation and head of the State Repository for Precious Metals. From 2002 until now – chairman of the Board of Directors of CJSC Polyus, chairman of the Committee for precious metals and precious stones of the Chamber of Commerce and Industry of the Russian Federation.
In what way does the world financial crisis affect the global and Russian rough and polished diamond business?
The global diamond business has already run into great problems because of the world financial crisis. Major deterioration trends began in the third quarter after the summer downtime. Before the summer everything was normal. Now we have several problems. What is virtually rough and polished diamond business? It includes diamond sales, buying rough diamonds by cutting factories and then selling polished diamonds to jewelry companies and further sales of jewelry. It is a four-stage mode of activity – mining, sale, cutting and manufacturing jewelry pieces and their sale. At all times all over the world there was one and the same principle of movement and financial turnover at all the four stages. In the first place, diamond cutters always bought diamonds paying straight money, but to buy their stones they usually took credits from special banks. There were many such banks in America, the Netherlands, Belgium and Israel. Crediting terms worsened due to the crisis. Many banks are currently unable to give credits, while those able are pushing interest rates up. About 10-15 years ago, the cost of borrowing in Europe or America to buy diamonds from De Beers or somewhere else was maximum 4% per annum. Today this figure is significantly increased. This is the first problem for diamond cutters. The second problem is of course the market. Due to the general financial crisis jewelry purchases dropped all over the world. There is a serious slump in diamond jewelry sales in the United States, across Europe and in India as well as in other countries. Today an enormous number of people are left without jobs; many are cut in their salaries, while diamond jewelry is after all luxury. This is why everyone – trading, mining and cutting companies – is forced to lower their prices. So the crisis results in decreased prices virtually for all types of diamonds. First of all they started to drop for Angolan diamonds, but now they keep falling at all diamond mining companies, Russia unfortunately included.
De Beers and ALROS have decided to cut rough supplies to the market to resist price decrease. Will this move help weather the crisis?
This decision is correct and I agree with it. According to our analysis, during the last months prices for large-size diamonds of +10.8 carats dropped 20-25% throughout the world, while prices for goods of 5-10 carats dropped 10-15% and prices for small diamonds of 2.5-4 carats dropped 10% whereas prices for mid-size stones decreased just a little bit – by 5%. This is related to a substantial decrease in diamond jewelry sales and this is why De Beers and ALROSA resorted to reducing supplies. The De Beers Corporation has always had its own stocks. When it was a monopolistic diamond seller, it kept up to $5-6 billion worth of rough diamonds in reserve selling them according to market requirements. Currently, De Beers and ALROSA have to cut their supplies, as I heard, by 30% and this is connected with price decrease. And if we take into account the dropping prices for rough diamonds and for all other goods including metals for the jewelry industry as well as the fact that inflation remains in any case serious and affects all the consumed resources, this remedy is quite understandable. This is an adequate reaction to the world financial crisis.
What is your evaluation of investment potential of diamonds under the current conditions?
This is a rather debatable subject. As a matter of fact, precious metals are recognized as a means of investing money in all parts of the world. Still, other alternatives may be viable as well. The global diamond mining industry and cutting industry and jewelry industry flourish only when there is demand for jewelry products. This has been evident during the last 10 years across the world, including this country and China and India and everywhere else. However, now the situation turned complicated. But we all hope that these financial crises have not been generated by impoverishment of mankind or turning all the industrial and production activities to the worse, but by political reasons. It seems to me that this financial crisis is a fallout of solely political problems.
Nowadays some experts express an opinion that the Russian State should render support to the diamond industry participants and even call for a Social Council to be set up on a state level, which could deal with this matter.
I think it is right. Our government is doing its best to prevent our industry and economy from falling apart. As for assistance to the mining industry, let’s say to ALROSA, there is a very simple way to do it – Gohran (the State Depository for Precious Metals and Gems) always used to buy diamonds and it can do the same thing today via the Ministry of Finance, in other words buying everything which is mined by ALROSA. It was like this in the past. Prior to 1991, all the diamonds earmarked for export and for De Beers were sold only by Gohran through Almazyuvelirexport. Gohran is still existing, thanks God, and employs sufficiently well versed experts in diamond sorting, evaluation, grading, etc. ALROSA does not need any help by way of irretrievable credits and so on, just let the government buy all the ALROSA diamonds, which the company cannot sell on the foreign or internal markets due to the crisis and then ALROSA will work further very well. The 30% decrease in diamond supplies should induce a decrease in mining because ALROSA cannot and should not have booked reserves. And the government may very easily help diamond miners by buying diamonds from ALROSA and all the other diamond mining enterprises, which emerged in this country besides ALROSA. The government will buy diamonds at prices approved by the Ministry of Finance, which used to approve the internal price list for diamonds during the last 50 years. As for world-scale situations… The situation in polished diamond manufacturing is especially strained nowadays. In Europe, Israel and the United States this is first of all related to the problems of sales at decent prices. This is because diamond cutters and jewelers ran into problems due to the falling diamond jewelry market hit by the crisis. In due time, when De Beers monopolistically ruled the whole diamond market, problems looked otherwise. Everything will end when the world crisis will end and when the population of the Earth will regain the 2007 level in their ability to buy diamond jewelry.
Do you think the crisis will affect De Beers?
No, De Beers will not be affected; this is the oldest and most experienced diamond trading organization and I hope that they have money and finally not all British banks went bankrupt, so De Beers may get easily credited in case of emergency. I am convinced that the Russian mining industry does not face any mammoth problem as well. Everything will be all right. However, our cutting industry is currently dealing with two problems besides the financial crisis. One problem is that the crediting terms offered in this country to cutting companies to buy diamonds from ALROSA are very hard. Today you cannot get credited at less than 15% per annum and this is a very hard figure to tackle for diamond cutting enterprises. While in the rest of the world credits are extended at 5-7% per annum, cutting factories and jewelers are able somehow to pay for them. But at 15-17% is just impossible to do it. The second problem is posed by the recently introduced VAT for purchased diamonds, which leads to closing virtually all cutting factories in Russia. I don’t think this a right thing to do. Our cutting factories have always been among the best in the world. Take for example Kristall of Smolensk, which is a unique enterprise due to its exceptional ability to make wonderful polished diamonds out of any rough diamonds. Now they face the problems connected to all these factors. What does it mean for a jeweler to pay a VAT? The VAT in the jewelry industry should be charged from sales as it was done earlier. The Smolensk factory used to export more than half of its manufactured polished diamonds. The factory can get its VAT refund later and only in Russia. This approach puts all our cutting enterprises into a rather difficult situation. The first thing to do was to cancel the VAT in reality. The second thing was to solve the crediting problem. If a cutting enterprise delivers a 15% profit it is considered as very good all over the world. However if you make the factory pay a rate of 17% per annum for crediting, it would mean to put this enterprise in the red. Earlier Russian companies took their credits in the West lent by would-be buyers of diamonds, but, firstly, Western interest rates are rising today and, secondly, there are a smaller number of banks and opportunities to give credits. Currently, the world economic crisis is hitting most hardly the rough and polished diamond industry, since they produce luxury items and in the time when people get poorer they are not in the mood to buy diamonds. But we should hope that this world diamond crisis will be solved by state leaders. The crisis is expected to end in the next year and mankind will resuscitate…
… and buy diamonds!
And buy diamonds! Because this is a great tradition existing for many centuries. Diamonds are wonderful adornments, a sign of high taste. If a man buys a diamond for his woman it means he is a real and sound man to be relied upon.
