Vasily Vlasov, Chairman of the Diamond Council at the President of the Republic of Sakha (Yakutia) answers the questions asked by Rough & Polished. For a long time, Vasily Vlasov, Ph.D., occupied top executive positions in the diamond industry and in the administration of Yakutia and in 1998-2002 he headed the government of this republic.
What actions are being taken by the Diamond Council, which you head, in connection with the financial crisis?
The Diamond Council at the President of the Republic of Sakha (Yakutia) is a collegial body authorized to develop and introduce proposals aimed at reforming the state policy in the diamond business and creating an environment able to facilitate a higher level of competitiveness of the republic’s cutting industry on the Russian and global diamond markets. Among the tasks given to the Diamond Council there are matters to be prepared and coordinated with ALROSA and other diamond-mining companies and related to selling rough to the cutting factories located in the republic, as well as to supervising the production of polished diamonds by these factories.
The diamond-cutting industry was one of the first to be hit by the global financial crisis and first of all due to acute scarcity of and higher prices for credit resources.
It is common knowledge that cutting factories need significant funds at the initial stage of making polished diamonds – at the stage of buying rough, whose cost, in turn, reaches up to 92% of the prime cost of polished diamonds.
Currently, banks raised credit rates to 25% per annum and simultaneously delayed execution and granting credits. The market registered a drop in price for polished diamonds and a slump in sales by 20-30% in the retail and by 50% in the wholesale segments, which induced growth of stock held by polished diamond manufactures in the republic and by other Russian factories. Factories found they could not buy out all the rough diamonds offered by ALROSA.
ALROSA announced a cutback in sales on the market.
Naturally, the Diamond Council was obliged to respond to a deteriorated situation on the market and being the Chairman of the Diamond Council I submitted explicit proposals to the Government of the Republic of Sakha (Yakutia) and to the management of ALROSA. Yegor Borisov, Chairman of the Government of the Republic of Sakha (Yakutia) held appropriate meetings on October 9 and 31, while Sergey Vybornov, President of AK ALROSA, did it on October 23.
These consultations were based on:
- the necessity to maintain the level of rough output and the amount of jobs in Yakutia by ALROSA in accordance with the existing plan. In case of ALROSA’s decreased rough sales on the market it should be offset by rough diamond sales to the Federal State Fund of Precious Metals and Gems paid up from the state budget. There should be no decrease in tax proceeds to the budget of the Republic of Sakha (Yakutia) coming from ALROSA;
- the necessity to preserve the cutting industry of the Republic of Sakha (Yakutia) and the very notion of “Yakut diamonds.”
These meetings produced the following decisions:
1. The selection coefficient in rough sales to cutting factories will be initially reduced to 65% and then decisions will be based on consultations and analysis related to the fluctuations of the global diamond market.
2. There will be a VAT respite for the fourth quarter of 2008 and for the first quarter of 2009 given in case of diamond rough sold by AK ALROSA to Russian cutting factories.
3. The former procedure of selling diamond rough will be restored meaning the second parcel of rough diamonds of 5-10 carats attached to the standard lot.
4. A proposal to set up a specialized department to credit cutting factories at one of the backbone banks (Sberbank, Gazprombank and VTB) will be submitted to the Government of the Russian Federation.
To overcome the crisis, virtually all countries, including Russia, resort to state paternalism – lending support to companies at the expense of their state budgets. It is assumed that demand for luxury items will now subside, so wouldn’t it be right if the republic’s authorities take care of rendering state assistance to the cutting industry?
The problems of the Russian cutting industry have not been overlooked by the state. On October 22, the Ministry of Finance held a meeting attended by top executives of large Russian cutting factories and the Association of Russian Diamond Manufacturers where they discussed the situation on the world and Russian diamond markets.
Elaborating the ideas expressed at this meeting, we appealed to the republic’s authorities submitting some proposals on state support to the industry. They deal with purchasing polished diamonds by the Gohran Agency of the Russian Federation from the republic’s cutting factories for the amount of up to one billion roubles up to the 1st of April 2009 during the crisis period. President of the Republic of Sakha (Yakutia) Vyacheslav Shtyrov sent an appropriate letter to Alexey Kudrin, Deputy Chairman of the Russian Government and Minister of Finance. Besides, I appealed to the republic’s authorities asking them to extend a credit to the Yakut factories for one year from the funds of OAO Respublikanskaya Investitsionnaya Kompaniya to pay bank interest. The articles of incorporation of this company allow granting credits.
Both of these proposals are now being harmonized and we hope they will be positively approved.
What is the state of Yakutia’s cutting industry today? How does it feel to be a diamond cutting company with foreign capital, like for instance Choron Diamond, as compared with Yakut enterprises?
As regards the work of the cutting industry as a whole, it reported positive results for nine months. While the plan for nine months inside the republic was to produce $110.8 million worth of polished diamonds, there were actually made $111.7 million worth of polished diamonds. Additionally, there were more than $11 million worth of polished diamonds produced in Russia on a give-and-take basis and $45.6 million worth made by a subsidiary of EPL Diamond in China. The industry employs a workforce of 1193 people.
Despite the current problems with credit resources and rough purchasing, the factories continue their operation. The expected buoyancy of pre-New-Year diamond jewelry sales will help to reach production levels in 2008 which will not be lower than one year ago.
There are two factories with foreign participation in the republic: OOO Choron Diamond and OAO Sakha Diamond. The first one buys rough diamonds on the secondary market, while the other one being a customer of the United Selling Organization of ALROSA has direct access to rough diamonds produced by ALROSA. Choron Diamonds is leading by the amount of polished diamonds produced; this company made $12.2 million worth of polished diamonds in the course of nine months, while Sakha Diamond - $1.8 million.
In what way and on what terms do Yakut diamond cutting factories receive rough diamonds today? Has there been any solution to the problem of the 18-percent VAT imposed on rough diamonds sold by ALROSA?
Today there 14 cutting factories in the republic, which happen to be clients of ALROSA’s United Selling Organization. They buy rough diamonds on common grounds: they are obliged to pay in advance taking into account their production facilities and the number of cutters they have. ALROSA also takes into consideration the recommendations given by the Diamond Council at the President of Sakha (Yakutia).
As for the decision to introduce the value added tax for ALROSA’s sales of rough diamonds on the domestic market, this is the exclusive province of this company. At the same time, as is known, the company two times suspended VAT payments during this year. An amendment to the Tax Code of the Russian Federation establishing a zero VAT rate for sales of rough diamonds on the domestic market would be a solution, which could satisfy all the participants of the rough and polished diamond complex in the Russian Federation. Our republic has already twice submitted a relevant federal bill to the State Duma, but so far there is no positive solution due to negative inferences of the federal government.
Do Yakut cutting factories receive diamonds from OAO Nizhnelenskoye? Since under crisis conditions the smaller the company, the harder it is pressed, do you deem possible an acquisition of Nizhnelenskoye by ALROSA? Could you give your opinion as an expert?
OAO Nizhnelenskoye sells rough diamonds to two factories and in small amounts. I don’t think it would be reasonable for ALROSA to take it over.
