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Stalin’s Secret Diamonds

26 february 2018

The sanctions and anti-sanctions game, which we have lately the pleasure to watch almost every day, cannot but put the diamond market players on edge. There are grounds for concern: the diamond trade and politics have crossed each other’s path rather often over the last century and the effect of these contacts was mixed. So, it is helpful to use the historical cases demonstrating the triumph of common sense and desire for constructive development over tactical political interests.

In our opinion, the closest historical analogy to the current events is the period from 1951 through 1953 when ‘the cold war’ between the USSR and the West developed into its ‘hot’ phase of the direct armed conflict in Korea, and numerous trade sanctions were applied against the Soviet Union. At this particular time, the diamond market saw the events that determined its development for many future decades. Only few people knew about those events so far, as the documents referring to those events were classified and could not be introduced into scientific discourse.

In 1952, Joseph Stalin, Chairman of the Council of Ministers of the USSR, signed a number of secret orders on the purchase of industrial diamonds and special equipment from Britain for the Soviet Trade Representation Office in London to facilitate the acceptance of diamonds, checking their quality, sorting and weighing (No.10503-rs dated 03.05.1952, No.25039-rs dated 26.09.1952, etc.). That was a record-breaking procurement in all the USSR period – the total value was 30 million roubles paid by gold for over 600 000 carats.

The diamonds were purchased at much lower prices than those on the market, at a discount of about 17%. In September 1952, S. Borisov, Deputy Minister for Foreign Trade, wrote to A. Mikoyan, who supervised all the diamond industry in the USSR, “The task set by the government to purchase industrial diamonds for 1952 for 17.0 mln roubles has been completed in full by the Ministry for Foreign Trade in terms of the allocated amount of money, while the volume in carats was exceeded by 17%. At present, there is a possibility to continue the procurement of industrial diamonds of the assortment suitable for us.” The letter of S. Borisov became the basis for Stalin’s order to increase the purchase for up to 30 million roubles in 1952.
As a result of excessive imports, the USSR became a holder of an industrial diamonds stock that could satisfy the needs of the Soviet industry for many years to come. It was in 1952 that the Minister of Finance of the USSR A. Zverev reported at the meeting of the Bureau of the Presidium of the Council of Ministers of the USSR, “In case of fulfilling the diamond supplies by the Ministry for Foreign Trade as per the specification agreed upon, the industry  demand … will be satisfied: for wiredrawing – for 6 years, for test instruments – for 7 years, and for diamond grit and chips used in diamond-set drilling tools, grinding-wheel dressing, watch jewels processing, manufacturing of optical glass and diamond dies – for 8 years… The other diamond grades available in the State Precious Metals and Gems Repository will meet the industry demand for 10-15 years.” 

Despite such a substantial stock, the import of industrial diamonds continued at an accelerated tempo next year, too. By the USSR Council of Ministers’ Decree No. 1486-590ss, the task for procuring industrial diamonds for 1953 was increased by 10 mln roubles to be paid by gold and was just a little less than the record amount of money spent in 1952.

The heyday of Stalin’s diamond import bonanza came at the time when the aviation and ground formations of the 64th Fighter Aviation Corps of the Soviet Army were fiercely fighting against the UN troops in Korea. Each side had hundreds of warplanes shot down. Not only the US Sabres and Thunderjets got caught in the sights of the Soviet MiGs, but also the warplanes of the British Commonwealth, including British, Australian, South African and Canadian aircraft. That's all there was to it - they were bitter enemies on the battlefield and at the same time the best friends in the diamond trade!

And what about sanctions? Oh, yes, sanctions – this is something we cannot do without! In January 1950, the NATO countries established the COCOM (Coordinating Committee for Multilateral Export Controls), an organization to control the export of defense and dual-use goods and technologies to the USSR and the Eastern Block countries. Needless to say, that industrial diamonds and diamond tools were on the COCOM lists. So, what? If we use the ‘exquisite’ way to say it in modern Russian business vernacular, De Beers just conned this COCOM, as well as all its US and British ramifications. That was an excellent kind of embargo - mutually beneficial.

Certainly, a motivation to make good money on such a huge supply was there. But it was not the main reason. The diamonds were sold at great discounts and it was not because of the scale of the wholesale delivery.

In 1950, Yakutia saw the discovery of several diamond placers with a grade ten times higher than the Ural alluvial deposits being developed by the GULAG’s labour force under the Ministry of Internal Affairs (MIA). In 1951, a MIA expert team arrived at the new deposits to work out a 3-volume project report regarding the development of this new diamond province. According to this project report, the following deposits were planned to be operated by the GULAG: Skazochnoye, Sokolinoye, Verkhnie Ostrova, Molodyozhnoye, Rybachie, Ogonyok. Power stations were expected to be built in Viluisk and Ust-Markha, as well as a wharf in Ust-Markha and two field support bases – in Turukta and Khadan. In each of these facilities it was supposed to set up a camp for 300 – 1,000 prisoners. At the first stage of the development of the diamond deposits in the Viluisky District, it was supposed to use totally about 5,000 prisoners. As early as 1952, it was scheduled to bring the materials and equipment required including a diamond dredger to the Suntarsky District. In 1952, the MIA scheduled to start pilot diamond mining in the Viluisky diamondiferous area and a full-scale diamond production was scheduled for 1953. However, … no mining started! The MIA project report remained ink on paper. So, what had happened?

It is not correct to claim that the MIA project was buried because of Stalin’s death and the subsequent restructuring of the MIA. In 1952, the leader was alive and felt all right. The first diamond dredger was expected to arrive at the alluvial mines in Yakutia in 1952. None of the officials (including ministers) could dare to sabotage the decisions on the development of the Yakutian diamond deposits. And why they should? What reason could be for such a sabotage? There were discovered very rich alluvial deposits and that was great! The expertise, personnel and technologies for their development were available at the Uralalmaz that belonged to the MIA structure. Indeed, there were big problems with the manpower and infrastructure in the Western Yakutia, but when and where could such problems withhold the GULAG from doing anything? Indeed, there were penitentiaries all over Yakutia: Aldanlag, Dzhugzhurlag, Zyryanlag, Indigirlag, Nemnyrlag, Yanlag. Gold, mica, tin, coal, tungsten – all these minerals were mined in Yakutia by the enterprises governed by the MIA of the USSR. Why should diamonds be an exception?

It might seem like here it was - a long-awaited national mineral raw material base able to satisfy the industrial demand and free the country forever from the need to import diamonds. Just start developing it! But in 1951-1953, record-breaking purchases of industrial diamonds were made from Britain. And at the same time, the MIA project on the development of the Viluisky diamondiferous area was placed on hold. It came at the time when there was an extremely low diamond production at the Ural mines showing a whopping prime cost. Did Stalin and all his ministers plunge into collective insanity?

Of course, they did not. The Soviet leadership was still of sound mind and memory. And there was only one explanation for the then existing situation. The De Beers Corporation, that was a permanent counterparty of the USSR on the diamond market at least from the time of ‘Stalin’s industrialization,’ turned out to be well informed about the discovery of the deposits in Yakutia despite all the strict security labels. And this was followed by a simple analysis - the new diamond deposits had an outstanding capacity, while the USSR experienced a persistent shortage of convertible currency, and taking into account the specific features of the existing diamond industry, it was possible to concentrate the required manpower (in other words, prisoners) and material resources in the area of new deposits very quickly. So, a significant quantity of diamonds (of much lower prime cost compared with diamonds mined in the Urals) could emerge in the world market in the nearest future beyond the control of De Beers. Of course, this would cause a serious damage to its monopoly and threaten the market with a price collapse.

So, De Beers asked the Soviet partners not rush into developing the deposits, so that the regulator could have time to prepare the market to absorb the new products without serious market fluctuations. Great efforts were required to achieve that, as it was necessary to invent new marketing campaigns to promote polished diamonds in new consumer segments and intensify their promotion in the traditional ones. This has always been De Beers’ payment for the monopoly it enjoyed the market, but under a force-majeure caused by the diamond discoveries in Yakutia, the work was to be stepped up and, certainly, the time left played a rather important role.

The proposal was reasonable, but the Soviet side demanded guarantees. Placing the new deposits on hold made the position of the USSR vulnerable as such tools like COCOM could turn from being ephemeral into real ones any time soon. As a security, De Beers commitеd itself to supplying the record quantity of industrial diamonds in 1951–1953 so that the USSR industry could be reliably provided with diamonds, even in bigger quantities than it was adequate. Plus, it offered a significant benefit – a deeply discounted price for the supplied diamonds.

Why were the Soviet diamond transactions made in 1951 – 1953 classified as ‘top secret’? Top-secret for whom? For the British partner? Ridiculous. However, soon this made some people reluctant to mock at all.

In late June 1951, a confidential intelligence memorandum CIA/RR IM-354 titled “World Production and Trade in Industrial Diamonds with Particular Reference to the US and the USSR” was put on the table of Three-Star General Walter Bedell "Beetle" Smith, Director of CIA. On page 8 of this masterpiece of the American intelligence thought, it was written in black and white that the Diamond Corporation did not and would not supply industrial diamonds “to the Soviet Bloc”. It was with good reason that the Soviet and British documents were classified - General Smith had overlooked the largest deal in the diamond market fraught with grave and long-term consequences. It's no wonder that he was asked to leave in 1953.

And for the information protection of the unparalleled deal made by the Soviet and British partners, a cover story about the “diamond embargo” was jointly developed and then leaked to mass media, especially American, starting exactly in 1951. That fake document was of so high quality that it is still a key point of all the historical studies researching the diamond theme both in Russia and abroad.

So, some choose wars and sanctions, while others prefer a constructive dialogue and trade. However, it will be possible to discuss this about fifty years later. 

Sergey Goryainov, Rough&Polished

Rough&Polished is preparing the publication of a book written by Sergey Goryainov, “Stalin’s Secret Diamonds” based on over 100 declassified documents regarding the Soviet deals in the diamond market in the 1930s-1950s that are being introduced into scientific discourse for the first time.