Economic Aspects of Reforming the Rough and Polished Diamond Complex in Russia

The history of the domestic diamond industry began more than half a century ago. Without going into details of those distant years of the past, let us give a brief overview of its Russia-related part with regard to its re-organization, which was connected with its privatization and subsequent re-distribution of property belonging to the rough and polished diamond complex. Since virtually all the new enterprises of the rough and polished diamond complex have been started from scratch, let us dwell on the history of its major company – ZAO AK ALROSA.

Corporization of the company
When the process of corporization of state-owned enterprises was underway in the early 1990s, on February 19, 1992 there was issued a decree signed by Boris Yeltsin, President of the Russian Federation, approving the establishment of joint-stock company Almazy Rossii – Sakha, which became the legal successor to PNO Yakutalmaz (originally, from January 1957 known as trust Yakutalmaz). The company was registered in the City of Mirny of the Republic of Sakha (Yakutia) on August 13, 1992. Initially, its authorized capital amounted to mere 500 million roubles split into 200 000 registered ordinary shares with a face value of 2 500 roubles each. The shares were distributed under the standard pattern: 77% went to the state (of which 37% went to the Russian Federation; 40% to the Republic of Sakha (Yakutia) and 23% to the workforce). The latter shares were at first handed over as one package into the trust management of AO Almazy Yakutii, a specially established company headed by V. Mazur, the former director of the Udachninski Mining and Concentration Complex. Then, at the extraordinary meeting of shareholders in October 1994 it was decided to convert the shares of Almazy Yakutii into registered ordinary shares of Almazy Rossii – Sakha, which meant the package of shares belonging to the workforce would be split up. These 23% or 46 000 shares were distributed in a peculiar way; while the company’s workforce strength by the date of corporization was 39 000 people, each of the workers received one share. The remaining 7 000 shares (3.5%) were placed with the management of the company.

In September 1997, the face value of shares was raised to 13 502.5 roubles, while the authorized capital of the company reached 2700.5 million roubles. This done, the privatization of the company could be deemed completed, although relations between shareholders in terms of influence on the company’s policy and re-distribution of stakes in ownership were maintained virtually from the date of its inception.

The first investment company, which started buying in shares from physical persons in 1995, was ZAO Diamond-Invest (currently Mirninski Fondovyi Tsentr). They have purchased approximately 2% of the stock. Along with this company, it is worth to single out the Corporate Securities Department of ZAO AK ALROSA, which has been buying in shares from company workers in favour of third persons for a long time.

Federalization of the company
The problem of federalization of ZAO AK ALROSA emerged as a follow-up of the inspection performed by the General Control Department of the President of the Russian Federation, when in April 2001 Vladimir Putin encharged the Government to take measures in protection of the state property in the rough and polished diamond complex of the Republic of Sakha (Yakutia) and to restitute the federal interest in the authorized capital of ALROSA by June 1, 2001.

If in the period from 2001 to the middle of 2004 the price of one share did not exceed 60 000 roubles, in the middle of 2004 the price rose to 100 000 roubles, when big investment companies came out to the market: IFK SakhaInvest, IK Russkiye Fondy and IG ALROSA. In the course of 2005, the prices went up to 220 000-230 000 roubles per share. Then, in February 2006 MAK-bank belonging to ZAO AK ALROSA started to buy in shares for Vneshtorgbank (VTB), which was acting on behalf of the federal center and set the price for one share at USD12 000 (338 000 roubles). The company was valued at USD2.4 billion.

In July 2006, VTB officially declared that it owned 10.5175% of AK ALROSA’s ordinary shares, which totalled to 47.5175% of shares belonging to the federal government. This permitted the federal government to overcome the resistance of the republic’s authorities in the problem of domination in the diamond company. Eventually, in 2006 Russia and Yakutia signed an amicable agreement, which envisaged bringing the federal interest to 50% + 1 share (controlling stake) preserving 40% of shares to the Republic of Sakha (Yakutia) by means of their additional issue and payment with the property complex of former PNO Yakutalmaz.

In February 2008, the Federal Service for Financial Markets (FSFM) of the Russian Federation registered the additional issue of AK ALROSA’s shares. They will be placed by way of private offering; totally there are 72 726 shares with a face value of 13 502.5 roubles.  The offering price will be 841 000 roubles per share. They will be paid for with property (common property rights for facilities of the property complex). Thus, there are now 272 726 shares of which:
the interest of the Russian Federation together with the shares purchased by VTB is 50.85% (138 670 shares);
the interest of the Republic of Sakha (Yakutia) together with eight uluses is 40% (109 090 shares);
the interest of the workforce and other corporate and physical entities is 9.15% (24 965 shares).

The authorized capital of the company has increased to 3 682 482 815 roubles. With the placement price of 841 000 roubles per share the company’s capitalization is 229 362.566 million roubles or USD9.454 billion at the average rate of 24.26 roubles per dollar in the first quarter of 2008. This figure is significantly higher than those previously cited, but it is still below the author’s estimated USD13.6 billion, which may be reached in the future if the company will be re-organized into an open joint-stock society.

The completion of federalization will bring nearer ALROSA’s re-organization from ZAO (closed joint-stock company) into OAO (open joint-stock company), which may happen before the end of 2008, and in this respect the process of reforming the rough and polished diamond complex of Russia may be given a positive evaluation.

Yuri Danilov, Senior Research Fellow, Department of Rough and Polished Diamonds Complex Economy, Institute for Regional Economics of the North (Federal State Scientific Entity)