Alexey Moiseev spoke about the results of the RF chairmanship in the Kimberley Process and the prospects for the restoration of the Mir mine
(interfax.ru) - Russia this year held the chairmanship of the Kimberley Process (KP) - a permanent intergovernmental organization, without certification of which not a single parcel of diamonds entering the value chain can do. In this post, Russia was able to facilitate the decision to send a survey mission to the Central African Republic (CAR) to assess the country's compliance with the requirements for legalizing diamond circulation. In this interview to Interfax, Russian Deputy Finance Minister Alexey Moiseev, who represented Russia as Chairman of the Kimberley Process talks about how a compromise was reached on this difficult issue, as well as about the Gokhran's diamond sales strategy and his vision of the lab-grown market development.
- What are the main results of Russia's chairmanship in the Kimberley Process? What inheritance will be left to the successor of the Russian Federation in this post - Botswana?
- I believe the main result is progress in the field of digitalization. Before Russia came to the post of the KP chairman, this topic was not on the agenda, unlike many others that we inherited from the previous chairmen. Our task was to implement pilot projects. The first pilot project has been launched. This is an exchange of digital certificates with Belgium, which accounts for more than half of Russian diamond exports. A similar agreement is on the way with India, the largest consumer of Russian diamonds and a major international diamond cutting center. When Russia, Belgium, and India go digital, other participants in world trade will strive to join them. And if, for example, Israel and the Persian Gulf countries will join, this will actually mean that other countries will have no choice but to switch to digital. The digitalization process, of course, will not be fast, since many traders, mainly mining countries, are significantly lagging behind in the development of digital technologies.
We also agreed on digital certificates with Belarus; that is, certification agencies will now communicate directly electronically. We plan to switch to electronic circulation with all the EAEU states.
We also managed to agree on the admission to the KP of three countries that are quite important for the world diamond trade - Qatar, Mozambique, and Kyrgyzstan. We believe that any countries that participate in the global diamond trade should be members of the KP. This is the only way to put a barrier to the notorious "blood" diamonds. That is diamonds used by rebel groups and their allies to finance armed conflicts in order to undermine legitimate governments. The presence of countries that are not part of the "Kimberley family" suggests that black markets may form there, which significantly reduces the effectiveness of our work in general.
An important achievement is the commitment by the diamond community to our Responsible Supply Chain proposals. This is, in essence, the agenda for sustainable development in the diamond industry. I do not know of any other industry that has committed itself to implement the sustainable development agenda without waiting for the Glasgow summit and decisions at the level of their governments. It includes not only environmental topics but also all issues on the agenda of sustainable development and responsible business conduct, which are primarily related to corporate governance, social development of local communities, especially in Africa, where corporations are mining diamonds not being residents of those countries on the territory of which they operate. Commitments in this area are related to the implementation of various kinds of programs - to provide electricity and clean water, educational programs, assistance to local authorities, and so on.
In terms of the environmental component of the ESG agenda, the problem of the carbon footprint is not as significant for the diamond industry as the negative impact from the excavation of large quarries. Therefore, the industry assumes responsibility for the reclamation of such facilities, although, of course, no one removes the responsibility to reduce emissions from the agenda. Speaking specifically about ALROSA, the company is pro-active in its work to transfer mining equipment from diesel fuel to gas motor fuel, simultaneously switching over industrial installations from fuel oil to electricity and pursuing the development of long-term strategies for ecology and climate.
What we leave as a legacy to Botswana as the next chairman of the KP includes the issue of creating a permanent KP secretariat, preparations for adopting the definition of conflict diamonds in 2023 as part of the next cycle of revising this main KP document. And also - holding a meeting at the level of ministers or heads of departments authorized in the participating countries of the KP to implement the KP certification scheme in order to give an additional impetus to the KP and determine its further development paths. The meeting will be symbolic in terms of timing - twenty years from the date of adopting the KP certification scheme by the KP member countries in the Swiss Interlaken.
- Have any decisions been made on the compliance of several CAR regions with the minimum requirements of the KP within the framework of the current plenary meeting? Can we expect the legalization of the diamond turnover in this country and the lifting of the current partial embargo regime?
- We have reached a very important agreement on the need for a review mission of the Kimberley Process in the CAR in response to an official invitation from the leadership of this country. The attitude towards the CAR is very politicized, the participation of this country in the KP is limited, due to the fact that since the civil war it has not been able to establish control over the production and export of diamonds, and some time ago our partners did not even want to hear anything about it. Nevertheless, literally at the last moment, we managed to convince our Western partners (the working group on CAR is headed by a US representative). Since the leadership of the World Bank has come to this country to get acquainted with the course of reconstruction after the civil war, then the KP may well decide on a mission.
I am very glad to note that this decision was virtually unanimously supported by the representatives of African states. After all, we are talking about an African country and the representatives of this continent know better whether it is worth moving further on the issue of legalizing the diamond trade in the CAR. So far, no one is talking about lifting sanctions against the CAR. But it is necessary, at least, to go and see with the so-called review mission what is actually happening there, whether it is necessary to raise questions about lifting the sanctions, or whether it is necessary to present any new requirements for the government. At least we will never know this until the experts go and see. Even the inclusion of candidate countries such as Qatar, Kyrgyzstan, and Mozambique also required KP missions.
The KP mission in the CAR will have two main tasks. The first is to check the correspondence of the actual position of the existing "green" zones to their status. The second is to check the "red" zones that the government will submit as candidates for "repainting" in the "green" color, for compliance with all the requirements.
- When will this visit to the CAR take place?
- We would like it to take place next year, at least, such a decision is reflected in the final communiqué of the KP, and we will work on it. But this depends on a large number of factors, first of all, on consultations with the MINUSCA organization - the UN mission to stabilize the situation in the CAR, as well as the CAR government. Only after an understanding is reached with MINUSCA and the government of the republic regarding the situation in the country, a delegation of the KP can go there.
- Turning back to the digitalization of certificates. How serious is the economic effect for Russian diamond exporters, ALROSA and AGD Diamonds, from the transition to digital certificates leading to higher rates of product turnover?
- I have no exact estimates, but the effect is, of course, significant, because the turnover rate will decrease by several days. Now we already have the opportunity to exchange information on KP certificates with Belgium. Of course, the exchange of information will not replace the digital certificate, since the obligation to send a paper document will remain, but this step has already been taken within the KP, so the next is the transition to digital certificates with enhanced EDS.
As soon as a parcel with a digital certificate is sent to Belgium, they will already know what specific stones are in it, it will not need to be unpacked. This is especially important for AGD Diamonds, which trade using minimal inventories.
But the main result is still that "digits" radically increase the reliability of the system and confidence in it. Paper certificates are easy to counterfeit. For example, we faced a situation when exporting from one country under one certificate number, several deliveries were recorded or deliveries were made with incorrect certificates. In the case of digitalization, this is simply impossible, the system is organized in such a way that it will not accept the same number twice and cannot issue a number if all the necessary data is not filled in. That is, human errors are excluded here.
- Will digitalization solve the problem of admixing conflict diamonds to certified parcels since certification still applies to parcels and not to individual stones?
- Already today, diamond miners acting at the request of major jewelry houses are implementing tracking programs (tracking from mine to finger), which makes it possible to trace in detail all stages of the passage of a diamond along the value chain.
- But so far these programs refer only to diamonds weighing one carat and more ...
- So far, this is so, but as the system is being introduced, it is obvious that this level will decrease. Technologies are getting cheaper. Who could have imagined 20 years ago that we would be surrounded by so many cameras, which were then considered very expensive? It also plays a role the fact that there is simply no special economic benefit in admixing a handful of synthetic diamonds. Besides, if such a parcel for the sake of discussion will go to Tiffany, then the big question is whether they will want to continue dealing with such a supplier. In Russia, it seems to me, it is impossible to admix stones because of the multistage control - first by the companies and then Gokhran at the stage of extraction and sorting. That is, all stones marked as “mined in Russia” were produced in Russia.
- Let's touch on synthetic stones. It seems that over time, the market began to increasingly agree with the arguments of diamond miners about the fundamental difference between natural stones and lab-grown stones and the niche status of the latter, by analogy with man-made and treated rubies and emeralds.
- Yes, there are really many such examples. You can also remember cubic zirconia. It is clear that the situation here is more complicated because the chemical and physical characteristics of man-made and natural stones are almost the same. But the fundamental difference is that natural diamonds have matured for several million years, this is a truly unique product that will no longer exist, while synthetics can be produced in large quantities within a few months. And synthetic stones do not make up for this uniqueness, although they make it possible for a person with any income to purchase a piece of jewelry. I think quite often a person buys a synthetic stone wishing that in the eyes of others it looks natural. If a person cannot afford a natural diamond, he or she has an alternative. I believe that each product will occupy its own niche.
And it is still unknown, by the way, which production is more environmentally friendly - during the synthesis, a huge amount of energy is consumed, and the carbon footprint is at least no less than during mining.
- Is it true that finding a lab-grown niche is more and more logical in the context of a structural deficit in the diamond market? After all, something must be cut and supplied to jewelers...
- Yes, quite right, it is.
The answer to a possible shortage of diamonds can be both in the development of existing low-grade deposits and in the discovery of new ones. ALROSA and De Beers, like other companies, are actively pursuing geological exploration. After all, in the second half of the 1950s, no one thought that such large-scale discoveries could be made in Yakutia. At that time it seemed that diamonds were only in South Africa, and nowhere else.
But if we proceed from the current data, it seems that major discoveries are not expected. And, of course, the deficit should lead, all things being equal, to an increase in diamond prices and an even greater separation between synthetics and natural stones. Synthesis technologies will become cheaper and easier against the background of great competition in this area. On the other hand, mining technologies become more and more expensive over time, because medium-sized deposits will have lower and lower diamond grades.
- Could the shortage in the diamond market result in the emergence of a liquid secondary market? A huge number of diamonds lie dormant in old jewelry because their owners are not ready to take their jewelry pieces to a pawn shop and sell them at a loss of most of their value. But if large market stakeholders having expertise in the assessment of stones will be involved in this process, this resource would make it possible to saturate the market...
- Only large participants in the diamond mining and cutting market have the ability to carry out a full-fledged examination. Now in many countries, people are looking more and more for alternative ways of investing their accumulated funds, therefore, the demand for diamonds is also growing. Therefore, the current and future traceability systems, already implemented by large players, will accumulate all available information about the origin of a stone or diamond product, including certificates from gem laboratories and so on. And this will be followed by an increase in demand for such stones since investors will know both the entire chain of movement of diamonds and the fair value formed on the basis of this information, which will lead to an increase in the turnover of diamonds in general.
- Will diamond miners become superfluous when a full-fledged secondary market is formed?
- They won’t. Today ALROSA and De Beers are building their policies on a monthly basis in such a way that the market does not experience ups or downs. If the demand for stones continues to grow, then naturally diamond miners will not become superfluous under other conditions.
- Against the background of the existing deficit in the diamond market, can the issue of restoring the Mir mine be considered resolved?
- A decision on this matter will be made next year. What it will be, we do not yet know, as this, of course, depends very much on the price forecast. At the moment, it looks like it is probably more yes than no. Although in 2020 the picture was seen differently. It is clear that the underground part of the mine is not flooded, it is very attractive in terms of the quality of kimberlite. For the company, this will be one of the most serious decisions in terms of strategic development, taking into account the cost and complexity of the technologies that will be used, many of them for the first time.
- Another possible channel for market saturation is Gokhran, which this year exceeded its budgetary limit by $ 160 million, or more than doubled. After changes in legislation in this area, the limit will no longer restrict Gokhran next year. Can we expect more significant sales?
- Sales from the State Fund of Russia will be carried out approximately according to the same logic as this year. Gokhran bought quite a few diamonds that were not in demand on the market in order to support the industry during the 2008 crisis in the diamond market. The entire mix of production was bought, including small diamonds of non-gem quality. It is advisable to replenish the State Fund of Russia with diamonds, which retain their high liquidity even during the time of crisis because it is during this period that the State Fund's reserves may be required to ensure financing of the expenditure obligations of the federal government. There is practically no liquidity for small inexpensive stones at such moments, so it is advisable to sell them during increased demand. Such stones, which are not unique on the backdrop of demand, will first of all be offered for sale from the State Fund. This, firstly, will help to maximize revenues to the federal budget, and secondly, it will have a certain stabilizing effect on the market and increase the liquidity of the State Fund.
Gokhran acted as such a stabilizer this year, when there was an acute shortage on the market, ALROSA's reserves were depleted, and prices could be the same as what we see on the gas market. When replenishing the reserves of the State Fund of Russia, we give preference to gold, which is stronger in terms of if not price then liquidity.
- But Gokhran didn’t sell too much, and this raises questions about whether its diamond reserves are sufficient...
- You know, in the stock market, very often the largest movements occur at the smallest volumes, with an empty order book. Then even the smallest intervention has a significant impact. Interventions are rarely aimed at balancing the market, their goal is to prevent market failure. Gokhran did just that.
As for the diamond reserves of the State Fund, their condition allowed us to include in the budget a rather ambitious forecast for proceeds from diamond sales for the next year (10 billion rubles).
At the same time, diamonds of special sizes (+10.8 carats) and even significantly smaller stones that meet the criteria are inviolable. Some of the good gem-quality stones will go on sale, also because Gokhran has obligations to support the diamond cutting industry. As you know, Russian diamond cutters are interested in high-quality diamonds.
From the point of view of the speed with which the Russian State Fund's diamonds are sold, there are limitations that are natural. Pre-sale preparation of diamonds, unlike gold, is a rather laborious process. It is necessary to assess, sort, show the stones to the auction participants, divide them into boxes. This is done by highly qualified specialists, whose number is relatively small. At the same time, the sale of stones from the State Fund in large volumes and at an accelerated pace cannot be carried out without a sorting procedure that requires additional time.
In addition, one of the priority tasks for Gokhran remains the inventory of a huge volume of stale products of the Soviet jewelry industry. The overwhelming majority of such products are melted down, refined because they have no cultural value. In turn, Gokhran strictly fulfills its function, which is, firstly, to have liquid reserves of the State Fund in case of a financial crisis, and secondly, to store unique objects that will be of a historical nature for future generations.
- You mentioned the roadmap for the development of diamond cutting. How much has the situation changed since the activities stipulated by this document began to be implemented? Are there any other initiatives needed to improve the competitiveness of the industry? Have the eternal contradictions between ALROSA and diamond cutters regarding the resale of rough diamonds been resolved?
- I believe that the difficulty of competition for the Russian diamond cutting industry is partly due to the fact that it tries to cut small stones as if they were five-caraters. The problem is that finely cut small stones cannot compete in value with diamonds of the same size produced in India. It seems to me that for small stones it is necessary to deliberately reduce the quality, thereby reducing costs. Reducing the number of facets will significantly reduce the cost while providing a greater yield of final goods. Most often, such stones in a piece of jewelry are set in such a way that their lower edges are even invisible. We are talking, of course, about small stones - half a carat, a quarter or less. In large stones, the Russian cut style has no alternative and Russian cutters have no competitors in this segment.
Another problem has always been the high share of purchases of raw materials in the cost of cutting business. We were very often reproached for this. Now the cutting segment has the ability to pay ALROSA with a significant installment plan. That is, those companies that have been in the market for a long time and are trusted as responsible borrowers can use such a mechanism to pay for rough, which, in fact, covers the full cycle of processing and subsequent sale of a polished diamond.
But I am returning to what can still be done in this area. Yes, we cannot refund the export duty on rough diamonds due to our WTO commitments. But we keep the import duty. Now there is a discussion on the abolition of the duty for small-sized diamonds, up to 0.2 carats, in order to support Russian jewelers who cannot buy such stones on the territory of the Russian Federation due to the unprofitability of their cutting and polishing. Therefore, they are forced to buy small diamonds with a substantial premium abroad. Because of this, our jewelry products are losing competitiveness. All EAEU countries, with the exception of Armenia, support the initiative. Even the Armenian jewelry industry supports the zeroing of duties on such diamonds, except for the state authorities.
We see that a significant amount of gemstones used in inserts have no confirmation of the legality of their origin, which entails the emergence of signs and an economic basis for smuggling.
- To whom can the function of selling these control parcels be transferred in the event of the privatization of Almazyuvelirexport? Does it make sense to sell this 5% by a government institution?
- Increasing the transparency of the industry and the transition to the payment of severance tax on actual sales to a certain extent reduces the state's need for this function but does not completely eliminate it. Only by carrying out parallel sales, we can be 100% convinced that there is no transfer pricing when selling diamonds. The problem, again, is the lack of an understandable exchange price. Therefore, this function remains, and we apparently will transfer it to Gokhran. There are certain difficulties associated with the fact that Gokhran is a federal budgetary institution, and a federal budgetary institution cannot afford such flexibility in sales as a state unitary enterprise or joint-stock company. Because of this, the function that Almazyuvelirexport is currently performing will be slightly changed.
In addition to this function, Almazyuvelirexport has a cutting business, the Smolensk plant Kristalldiam, with its own client base. But the main share in its financial result of course belongs to the property complex. We have certain fears that Almazyuvelirexport will be bought not as an operator on the rough and polished diamond market, but as the owner of a large number of real estates, for example, in Moscow’s Ostozhenka district. Let's see if its cutting business finds its interested party. It is too early to talk about this, the Federal Property Management Agency has not yet done any actions either in assessing or working with potential buyers, due to the fact that the issue of transferring powers for the sale of representative parcels and for the export of low-liquid precious stones from the State Fund has not yet been resolved.
- Tax changes this year affected all stakeholders in the mining industry. Since January of this year, ALROSA has been paying MET tied to real sales prices, and not to the price list of the Ministry of Finance, which made the tax burden increase up to 9% of revenue. Are any new tax changes possible for the company?
- I have not heard that something else is being prepared in this regard. In terms of the diamond industry, our goal was to move to the calculation of MET from actual sales. Tying the tax to the price list guaranteed a constant misunderstanding: sometimes we were told that the price list lagged behind the rise in prices, and we took too little, then the companies said that the price list lagged behind the fall in prices, and we took too much. Now it is much easier in this sense: they sell diamonds, receive money, pay tax, and forget about it.
- If ALROSA starts restoring the Mir mine, will it not be necessary to cut dividends? The state of the diamond market can now be regarded as a phase of cyclical growth, during which companies around the world traditionally invest in the future commissioning of new capacities. But with the approach of this commissioning, the phase may change, and then the financial position of the company, which gives 100% of the cash flow to shareholders and introduces a capital-intensive project, may become more complicated.
- It's too early to talk about it. Now, it seems to me, there are no prerequisites for a decrease in the dividend flow.
Indeed, 2020 taught us that the market situation is subject to change and sales volumes can be zero in a quarter. This scenario in any long-term analytical model was considered as an event about as likely as a nuclear war. But it happened. While the debt burden appeared to be at a fairly comfortable level after paying off a fairly significant amount of debt between 2015 and 2018, it turned out that this was not enough to ensure financial stability in a stressful situation. Therefore, the supervisory board and management have revised approaches to the level of debt making them more conservative. The debt/EBITDA ratio has been tightened, given the understanding that EBITDA may become zero at some point.
And I think that these measures are enough. The company should not accumulate some incredible financial cushions that will allow it to operate for 10 years and be funded by equity. Shareholders must understand why they own shares in this company. The more so, ALROSA has areas where to invest, including the mentioned Mir mine, active geological exploration in Yakutia, and projects in Africa. In order to master a large project, you need the ability to quickly build up debt.
