Roundabout route to India for Russian diamonds

'The difference between Russian and Indian manufacturing lies in the specialisation.' Source: Press Photo

'The difference between Russian and Indian manufacturing lies in the specialisation.' Source: Press Photo

Russia and India play significant roles in the global diamond market, the former as a biggest rough diamond producer and the latter as a largest cutting and polishing centre. However, they are yet to find a short and trouble-free way to make the diamond trade profitable.

Russia continues to be the largest producer of rough diamonds in the world by volume. According to Kimberly Process (KP) statistics and Alrosa, Russia’s largest mining company reports, Russia’s production in 2011 increased 12.3 percent in value to $2.6 billion.

“Russia accounted for 23.5 per cent of the total diamond production in terms of volume, and 25 percent in terms of value, in 2010. Alrosa, the state-owned company, was the largest diamond manufacturer in the world, followed by De Beers, Rio Tinto and BHP Billiton,” says the Frost & Sullivan’s Outlook of the Russian Diamond Market.

India along with Belgium and Israel are the main buyers of Russian rough diamonds. According to Russia’s Ministry of Finance, in the first 6 month of 2012, Russia exported diamonds worth $1.8 billion, an increase of 7.5 percent over the previous year. However, the volume of export decreased 15 percent from 18.1 million carats in first half 2011 to 15.4 million carats for the same period of 2012.

The decrease of rough diamond exports is a global trend. The volume of global production declined by 3.4 percent last year to 124 million carats while the value of the output increased to 20-25 percent since 2011 as demand is driving the prices. Through rough prices declined by 8-15 percent in the second half of 2012, they still remain too high for diamonds importers experiencing a liquidity crisis. In 2011-2012, rough diamond imports decreased globally up to 7.1 percent by volume and almost 35 percent by value, according to Kimberly Process report.

India, the largest diamond importer after London and Belgium and a leader in the polished diamond market holding approximately 60 percent market share by value and 80 percent by volume, decreased its imports of rough in past nine month by 12.8 percent, to $7 billion according to Indian Gem & Jewellery Export Promotion Council (GJEPC) data. India’s export growth this year is expected to stay flat considering the global economic environment, the latest developments in US (India’s largest export market), fluctuations in the value of the Rupee in the last six months and overall increase of prices of rough diamonds. India's polished diamond exports in 2012 dropped 41 percent from $13.28 billion in the same period of 2011 to $7.8 billion.

 

Over the barriers

Almost 50 percent of diamonds exported from India are sold to US, according to GJEPC statistics. Exports to Russia are far less, totalling $8.2 million in 2011. Russia with its small local diamond manufacturing industry but impressive retail market with $16 billion annual turnover is an attractive target for Indian diamantaires. However the import duty structure on polished diamonds in Russia remains a grave barrier.

“Custom duties are flat 20 percent on invoice value, on top of that the importer pays 1 to 2 percent of inspection levy and 18 percent VAT which raises the value of the imported jewellery to retailer by almost 42 percent. Such duties are not reasonable at all. Nowhere in the world does one pay such duties as we do in Russia. The government should understand that imposition of tax on diamonds leads to illegal diamond trade and the government loses more”, says Alex Popov, the President of Moscow Diamond Bourse (MDB).

In order to bypass the charges, importers opt for better routes. “Most of the goods from India are now going to Russia via Dubai, Antwerp, Israel and other countries through different resellers usually associated either with Indian manufacturers of Russian buyers. But from now, we believe, the direct business will be developing faster. The middlemen need to be cut,” says Sanjay Kothari, vice chairman of GJEPC. “We also believe that duties in Russia will be reduced, especially after Russia enters the WTO.”

Alex Popov agrees that the presence of Indian jewellery in Russian market is growing. “In the past, foreign jewellery in the Russian market was represented mostly by Turkey, which almost had a 60 percent share in the import market. Today Turkey contributes 35-40 percent, same as China, and the rest is divided by India, Italy and other exporters.”

According to Russian industry experts, even considering Russia’s entry to WTO, the process of abolition of diamond-import duty may take significant time, though it would give Russia a better position in diamond markets. “Six years back the Chinese Government reduced value-added taxes on polished diamond imports from 17 percent to 4 percent and it gave a huge impact in the market along with more income from diamond taxes.  Today China is one of the trade and manufacturing centres of diamond jewellery competing with India, Israel and UAE,” Popov says.

Popov considers Russia as a promising market not only for exports from India but as a platform to create joint manufacturing units. “Indian technology is very advanced; add some Russian quality control and such a joint venture would be successful. Moreover, such joint ventures can also export jewellery to CIS countries where the demand for good quality jewellery is growing.” Popov said.  He added that diamond manufacturing in Russia remains on the level of a cottage industry as a proper supply chain required for industrial manufacturing does not exist in Russia.

 

“The difference between Russian and Indian manufacturing lies in the specialisation. While India produces mass products we in Russia focus on the exclusive segment,” says Maxim Shkadov, CEO of Russia’s state-owned Kristall Production Corporation and chairman of the Board, Association of Diamond Manufacturers of Russia.  He added that uniqueness of Russian domestic diamonds can benefit both Russian and Indian manufacturers. “What India can’t process, Russia can, and vice-versa”.   

 

Competition for the rough

Earlier in September 2012, Russian scientists revealed the discovery of a diamond field in Yakutia under a 35-million-year-old asteroid crater known as Popigai Astroblem.  The new field is claimed to contain “trillions of carats” which is enough to supply global markets with diamonds for another 3,000 years. Well even if those diamonds won’t be suitable for jewellery production, as experts warn, Russia will still remain the world’s largest source of rough diamonds.

In comparison with the global market Russia still has the potential to exceed production capacity. “In a bid to increase market transparency, Alrosa recently disclosed the size of its resources and reserves to be 1.3 billion carats. It is probable that De Beers is not far behind in the size of its reserves, but the company does not publicly disclose those figures. Rio Tinto and BHP Billiton lag significantly, with the estimated size of their reserves and resources at approximately 400 and 115 million carats, respectively,” Bain & Company analysts corroborate.

Alrosa expects its rough and polished diamond sales will reach $4.5 billion in 2012 while rough diamond production expected to reach 34.4 million carats that is comparable with last year volumes.

Just as Indian polished diamonds not going by a direct route to Russia, the rough from Russia, according to industry sources, comes to India via different channels. “Out of all export about 70 percent of diamonds end up in India as India buys Russian diamonds in Russia, India, Dubai, Israel, Antwerp and South America. The figure this comes to $2 billion against official figure of $650 million,” Alex Popov says.  Therefore in the last few years, Indian diamantaires have been looking for ways to secure the stable rough supply by reaching long-term contracts with. The company’s spokesperson told RIR that Alrosa has direct long-term agreements with several Indian companies but the question of getting rough directly from Alrosa remains on the agenda of many Indian manufacturers.

 

Direct Access

Indian companies may be looking for other ways of direct access to Russian rough diamonds. Recently Indian state-owned Minerals and Metals Trading Corporation (MMTC) was reported to have interests in buying a 25 percent stake in Alrosa as part of company’s privatization programme announced by Russia, according to The Economic Times.

The corporate communication department of Alrosa told RIR that any decision on privatisation of Alrosa will be taken by the Russian Government. As of now Russia decided to have a public issue of Alrosa Group shares by 2016, however the exact terms and procedures are not defined yet. Alrosa spokesperson neither confirmed nor denied the talks with India regarding its interest in buying company’s shares.

“I have not heard about that before, however it seems to be very logical”, said Maxim Shkadov, “All companies are competing for the raw material sources. If there is privatisation with the participations of Indian companies, all diamonds won’t be sold to India only, such deal won’t affect the market much”, he added.

Andrey Shenk, analyst of Investcafe, said the market value of Alrosa is $5.64 billion while fair market value would be $ 6.5 billion. “I haven’t heard but admit that there could be talks between Russia and India regarding the participation of Indian companies in the privatisation. India is a huge market and it’s of course interested in Alrosa. However, India won’t be able to buy more than 25 percent stake without permission of Federal Antimonopoly Service of Russia,  thus I think supply to other countries won’t be reduced,” Shenk said.

The Russian Government owns a 50.9 percent stake in Alrosa via the Federal State Property Management Agency, the government of Sakha (Yakutia) holds a 32 percent stake, while the republic’s municipalities jointly own an 8 percent stake. Initially Alrosa planned an IPO on the Russian stock exchange but the plans were postponed due to financial market instability and volatility of diamond market. Later it was decided to go for a government-designed privatisation program implying that government should retain a controlling stake in the company by offering only 7 percent of its and 7 percent of the Government of Yakutia shares. The federal government will then hold 42.9 percent in Alrosa while 25 percent would remain with the Yakutia government.

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