Role of Rough and Polished Diamond Complex in Yakutia’s Economy and Evolution of This Role in View of New Development Projects in Eastern Siberia

“The schedule of complex development for production forces, transport and energy industry in the Repubic of Sakha (Yakutia) up to 2020” (further named as the Schedule) approved by the Russian Federation Government on February 8, 2007 defines long-term goals and strategic priorities in this republic’s development. It pursues the aim of an all-round Yakutia’s social and economic development. The Schedule is minute and objective in treating the modern state of economy in the republic and discloses its potential. This will serve the basis for an intensive development of raw resources in Yakutia as well as for improving its transport and social infrastructure.

Development of Economic Branches in the Republic of Sakha (Yakutia)

 

 

 

Growth of people’s wellbeing (Growth of people’s real income 3.6 times compared with 2005 level)

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Speech delivered by V. Shtyrov, the President of the Republic of Sakha (Yakutia), at the session of the Russian Federation Government on February 8, 2007

Unlike the previous plans, this Schedule looks more attractive precisely as a strategy adopted by the republic to define long-term strategic goals and priorities based on balanced production providing for stable social and economic development, improvement of environmental organization and growth of people’s wellbeing. Fulfillment of these goals is expected to make the role of the Republic of Sakha (Yakutia) more prominent in the economy of the Russian Federation and in that of the Far East Circle optimally using its natural and economic potential as its main competitive advantage.

At the same time, although the rough and polished diamond complex (RPDC) of Yakutia gives more than one half of its industrial output, almost two thirds of its taxes and the major part of its export products, the Schedule envisages inertial development of the republic. The Schedule says that Yakutia’s multi-functionally specialized economy is fraught with dangers of unstable development brought about by changes in economic conditions specific for regions engaged in mining raw materials, which narrows the possibilities of social and economic development. The situation is aggravated by the current transition of the diamond mining industry to its new phase of development stipulated by the necessity to switch over to underground and combined technologies in developing the major kimberlitic pipes of Ayhal, Mir and International. Going deeper down to deposits and switching over to the underground method of operation result in lower production capacity of mines and in increased diamond cost.

During the III International Rough Diamond Conference in Israel in February 2008, ALROSA President Sergey Vybornov said that his company’s aggregated rough diamond stock amounted to $109.3 billion. However, the major part of diamonds (up to 45%) is located in deeper horizons of the above mentioned pipes. Moreover, some deposits are not fit not only for underground, but also for open mining and their loss-free processing in view of the current market prices for diamonds. The newly developed diamond deposits put by the company into operation cannot entirely compensate the decreasing diamond output due to their lower quality.

Under these circumstances, an important role will be played not only by newly opened deposits with high average diamond content, but also by faster development of alluvial deposits performed by smaller-scale mobile enterprises specially set up or called for these purposes. The positive results attained by OAO Nizhne-Lenskoye and OAO Almazy Anabara in the course of development of some alluvial deposits only serve to prove the above affirmation. Presence of several diamond mining companies in the republic increases the efficiency of their work and competitiveness in the foreign market.

Despite the aforesaid problems and complications, the diamond mining industry of Yakutia as before accounts for 99.8% of diamond output in the Russian Federation and around 25% of the world output. Table 1 shows the total diamond output figures and diamond selling prices in Russia in 2003-2007.

Table 1
Total diamond output in the Russian Federation in 2003-2007
 

Year	Semester, year	Weight, thousand carats	Amount, USD million	Average price, USD per carat
2003	1	14 546	729	50.12
	2	18 473	947	51.26
	one year	33 019	1 676	50.76
2004	1	17 763	948	53.37
	2	21 103	1 257	59.59
	one year	38 866	2 205	56.74
2005	1	18 001	1 209	67.19
	2	20 000	1 322	66.10
	one year	38 001	2 531	66.61
2006	1	17 548	1 167	66.54
	2	20 813	1 407	67.59
	one year	38 361	2 574	67.11
2007	1	17 923	1 202	67.06
	2	20 898*	1 340*	64.12*
	one year	38 821*	2 542*	65.48*

The author’s table is based on the data provided by the Finance Ministry of the Russian Federation.
*Author’s own estimation
The above data show that from 2003 to 2007 the mining output grew 17.6% (4.4% annually) in terms of its scale and 51.7% (12.9% annually) in terms of its price. However, starting from 2004, the diamond output in terms of its scale did not alter significantly. This situation was stipulated by objective reasons related to large-scale transition to the more costly underground mining method and the general decrease of easily accessible deposits. The industry becomes dependent on outside market conditions, which were very favorable in those years. During 2003-2005, prices for Russian diamonds went up 30.2% (10.1% annually). After that the prices stabilized approximately on the same level, but in future they may go up sharply due to the shortage of rough diamonds in the world market, especially due to diamond-cutting enterprises set up lately by some African countries.

Development of cutting and jewelry industries is suggested by the Schedule as one of the strategic goals in diversification of the rough and polished diamond complex. The hopes are laid on the growing diamond demand in China, rapidly developing countries of the South-East Asia and oil producing Arab nations, which opens a possibility for Yakutia, using its geographic vicinity to these markets, to set up a reliable sales system for its finished products.
Presently, the diamond cutting industry of Yakutia includes a network of cutting enterprises existing in the republic and subsidiary enterprises of ZAO AK ALROSA. Table 2 shows Yakutia’s diamond industry sales figures in 2003-2007.

Table 2
Diamond sales of Yakutia’s enterprises in 2003-2007

Denomination	2003	2004	2005	2006	2007
	USD million
Yakutia’s factories	157.5	217.2	218	128	148
ZAO AK ALROSA	123.4	130.9	144	134.5	146.7
Total:	280.9	348.1	362	262.5	294.7

Source: 1. Annual reports of ZAO AK ALROSA for 2003-2007. 2. Yakutia has not fulfilled its diamond production plan. REGNUM Information Agency. 16.01.2007. Yakutia’s diamond production in 2007 went up 16%. www.k2kapital.com 12.02.2008.
Despite the locally available rough diamonds and sufficiently developed jewelry industry in the republic, the diamond cutting industry in Yakutia is in deep crisis. Sales and management remain to be the weak side of this republic’s diamond cutting companies. In our opinion, the products manufactured by diamond cutting enterprises in the republic are not competitive in the foreign market due to their quality and in the domestic market due to wrong marketing. It is the absence of a development strategy taking into account modern market mechanisms led to a system crisis, which, from our point of view, can be overcome only on the basis of a cluster approach.

Yakutia’s President V. Shtyrov, introducing the Schedule to the Government of the Russian Federation, also stressed the necessity of a cluster approach. This approach will be used as the basis for a strategy of efficient deployment of resources aimed at regional development and industry-based diversification. To speed up the innovative growth of economic potential the cluster method will be widely applied to developing industrial, inter-industrial and territorial complexes, as well as to the regional economy as a whole.

In 2006, the Institute of Regional Economy completed a project entitled “Grounds for cluster approach to developing rough and polished diamond complex in the Republic of Sakha (Yakutia).” The research established that this industry has all the most important features and factors specific for industrial cluster development. Taking into account the territorial and inter-industrial economic integration Western Yakutia is actually setting up a territorial and production cluster on the basis of the rough and polished diamond complex in the Republic of Sakha (Yakutia). ALROSA, being the most competitive world-level enterprise, is considered as the core of the diamond cluster. In the process of its formation this cluster will comprise, besides ALROSA and its subsidiaries, OAO Nizhne-Lenskoye, the regional social and production infrastructure, as well as Yakutia’s diamond cutting factories. The cluster approach as a form of organizational and economic innovation should become the basis for a strategy of competitive development under the conditions of further globalization in the world economy.

Although the Schedule offers a sufficiently deep picture of all major promising development projects of the republic for the period up to 2020, it should be recognized that for the moment so far there is no general long-term development strategy for the republic’s rough and diamond complex. ALROSA’s strategy – “Major development goals of AK ALROSA for 2006-20015” – adopted in the beginning of 2007 emphasizes the increase of diamond output (Table 3) in the first place and does not take into account the emerging trends in the world economy and in particular in the diamond business. Besides, keeping in mind the objective problems related to the large-scale transition to underground mining, the diamond mining growth indicators may not be met.

Table 3
Major indicators of ALROSA Group set for 2006-2015
 

Indicators	2000	2005	Total growth in 2000-2005, % / per year	Total in 2001-2005 / per year	Total in 2006-2010 / per year	Total in 2011-2015 / per year	Total growth in 2006-2010, % / per year	Total growth in 2011-2015, % / per year
Diamond output, $ million	1623	2259	39.2 7.8	7492 1498	12100 2420	15200 3040	7.1 1.4	25.6 5.1
Diamond sales, $ million	2349	2712	15.5 3.1	10024 2005	14800 2960	17600 3520	9.1 1.8	18.9 3.8
Taxed profit, million roubles	13105	18747	43.1 8.6	71440 14288	109800 21960	117700 23540	17.1 3.4	7.2 1.4
Capital investments, million roubles	8093	14113	74.4 14.9	70606 14121	98600 19720	90900 18180	39.7 7.9	-7.8 -1.6

The author has based this table on “Major development goals of AK ALROSA for 2006-20015.”

In conclusion it should be said that the Schedule is a flexible document, which may be completed with investment projects, like for instance “Comprehensive development of South Yakutia.” Currently, to work out a project of comprehensive development for Western Yakutia the Government of the Republic of Sakha (Yakutia) has announced an open bid for scientific research in this field. It is planned to set up the “Corporation for Development of Western Yakutia” to employ the natural wealth of Western Yakutia and to develop an integrated unit of industrial and infrastructural enterprises on the basis of state and private partnership.

Yuri Danilov, Acting Chief of Mining Economics Department,
Institute of Regional Economics of the North