The new reform of the diamond-cutting industry will add to the problems of ALROSA
By Elena Kiseleva and Denis Skorobogatko
The Kommersant Daily came to know that the Ministry of Finance prepared a "roadmap" for the development of Russia’s diamond industry, which could become one of the biggest reforms in its history. In particular, it is said to be aimed at serious mitigation of state regulation and reducing the tax burden on Russian diamond manufacturers, as well as at expanding their access to raw materials. This threatens to revise the marketing and investment policy of ALROSA and add to its financial burden. Experts believe that the time for these reforms was not chosen well, given a possible drop in future revenues of ALROSA due to the accident at the Mir underground mine.
The Kommersant was told about the plan prepared by the Ministry of Finance to develop the diamond-cutting industry in Russia by two market stakeholders and this was confirmed by a federal official. According to one of them, this set of measures is aimed at "increasing the competitiveness of the Russian diamond manufacturing industry and attracting new investors." "This can be one of the most important stages in the liberalization of the domestic market for precious stones," the source said, adding that the plan covers the period until February 2018 and contains about 30 items.
The final decision on the implementation of certain state support measures will be taken at the government level after a detailed report on each of them. A source in the Ministry of Finance confirmed to the Kommersant the fact that this document is being prepared and currently undergoing interdepartmental harmonization. The ministry declined any official comments.
One of the key points of the plan is the allocation of additional amounts of rough diamonds to the domestic market (at least 10% of the mined rough in its most demanded categories) under the obligation to process it within this country. According to the plan’s authors, this will attract investments into the industry, but it will require a change in ALROSA's marketing policy. Right now, Russian diamond manufacturers buy rough on a common basis with non-resident companies within the frame of the ALROSA Alliance program.
The program includes more than 50 clients holding three-year contracts, through which ALROSA sells about 70% of rough (the rest is sold on the spot market and at open tenders). The majority of these contracts expire in 2018.
Another measure to expand the rights of diamond manufacturers is the possibility of splitting the boxes (lots) containing rough diamonds purchased from ALROSA. The draft of the relevant government resolution has already been submitted to the government of the Russian Federation.
It is not the first time that Russian diamond manufacturers are trying to achieve preferential access to rough. In the summer of 2016, the Ministry of Finance was asked about this by Maxim Shkadov, CEO of Smolensk-based Kristall, who had been lobbying for a merger between his company and ALROSA. Kristall, Russia's largest diamond manufacturer (wholly owned by the state) was experiencing difficulties in recent years, and last autumn, after the abolition of the export customs duty on diamonds (6.5%), the situation worsened. The "roadmap" provides for the possibility of creating a vertically integrated industry structure with the participation of the both state-owned companies, one of the Kommersant’s sources says adding that the final decision may be made by December 1, 2017. Formally, Kristall is included in the privatization plan for 2017-2019.
New shareholders may come to ALROSA itself. According to the Kommersant’s sources, the plan mentions a possibility that the Finance Ministry, Ministry for the Development of the Far East and ALROSA will hold negotiations with potential investors in diamond mining before December 1, 2017. There are no specific names mentioned in the document. A few years ago, businessman Suleiman Kerimov, whose family controls PJSC Polyus, was considered a key contender for the role of strategic investor. At that time, ALROSA was included into the privatization plan with a prospect of selling 100% of its shares. But the plan was corrected, and in October 2013, ALROSA held an IPO on the Moscow Stock Exchange. Since that time, speculation was on and off on a possible acquisition of ALROSA shares by Suleiman Kerimov with a subsequent merger of the two companies, but neither of the companies confirmed this officially. Yesterday, ALROSA refrained from commenting, saying that the document has not yet been approved.
The Ministry of Finance is trying to protect the interests of all the major industry players, the Kommersant’s source says, adding that the "roadmap" takes into account most of the proposals for liberalizing the market submitted by Maxim Shkadov, including financial support from the government and ALROSA to industry players. The “roadmap” also mentions a federal law being prepared to zero the VAT rate for diamond sales operations on the domestic market. By mid-November, the Ministry of Finance plans to report to the government on the feasibility of zeroing the VAT for transactions involving diamonds and jewelry, as well as ingots of precious metals.
In addition, the state is ready to simplify a number of control procedures using electronic document management, for example, when moving precious stones for the purpose of temporary import/export and re-import/re-export operations, as well as for processing them outside the Russian Federation. In addition, the Free Port of Vladivostok may implement a pilot project introducing a tax-free regime for jewelry goods and a simplified procedure for forex and banking operations.
Sergey Goryainov of Rough&Polished doubts that the "roadmap" can be implemented on a full scale. The expert calls the allocation of additional amounts of rough to diamond manufacturers a “vicious practice,” saying, "There was a period when rough was supplied under the terms of commodity loans for a period of 120 days, but in the end, this only generated speculation. We witnessed all this in the case, which involved support rendered to diamond manufacturing in Yakutia." According to Mr. Goryainov, the state authorities are going to support diamond manufacturers in many respects at the expense of ALROSA, but this is "hardly a good idea given the fall in future revenues of ALROSA due to the accident at the Mir Mine and a possible suspension of operation at the company’s other underground mines for the period of their inspection by the commission of the Federal Environmental, Industrial and Nuclear Supervision Service." According to the expert, ALROSA may lose nearly a tenth of its diamond output as a result.
