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Diamonds and secret services

04 february 2019

The image of an elegant spy as an integral feature of a diamond market has been hardwired in the brains of diamond jewellery mass-market customers after the “Diamonds are forever” novel by Ian Fleming was published in 1956. Since that time, a huge number of films and books have been created about the involvement of the intelligence services in the rough and polished diamond operations and they were rich in unbelievable story lines, as a rule, rather far from the reality. Even though the reality is more down to earth, still there are interesting details allowing make several important points on the historiography of the diamond business.

Let’s begin with the excerpt of the record of interrogation dated 02.04.1937 of Genrikh Yagoda, People's Commissar for Internal Affairs of the USSR in 1934 to 1936 (he was shot in 1938)1:

«Question: Were the polished diamond operations secret?

Answer: For a foreign state, yes, if they did know that the seller was the Soviet state. And since they knew that Lurier was a private person and Frenkel was a private one, too, there was no need in secrecy.

Question: Did Frenkel know that Lurier was an NKVD (People's Commissariat for Internal Affairs) man?

Answer: Yes, he did, of course. I remember this.

Question: Why did you allow Lurier to make operations via the obvious spies?

Answer: Because only Frenkel was suspected of spying.

Question: Did you know via whom Lurier sold polished diamonds? He did inform you in advance via whom he was going to make his operations.

Answer: Yes, I told you, via Frenkel, Oppenheimer, Gerstein and Berenzon.

Question: Why did you authorize Lurier to sell to these particular people?

Answer: They were major polished diamond customers and paid better.

Question: It is wrong. Did you receive several signals from a number of organizations, for example, from Kustexport, that Lurier, having private transactions with these buyers sells polished diamonds to them at the price lower than they cost?

Answer: The Kustexport has never told me that. To put it right, Kustexport wrote to me that Lurier sold polished diamonds at a lower price than that of the Kustexport, but this, to my mind, was not correct, it was wrong, because when the polished diamonds were compared their quality was different.

Here, some clarifications should be made. А. Ya. Lurier mentioned above held the rank of the ‘major of state security’, at that time it corresponded to the Army rank of a ‘brigade commander’ (one-star general), he was awarded the Order of Lenin, the highest state award of the USSR, and had been involved in the polished diamond trade since 1922 when he was an intelligence officer working under diplomatic cover in Latvia. He was executed by a firing squad in 1937.

Gerstein and Berenzon were the largest European diamond dealers at that time. Frenkel was an intermediary agent between the diamond dealers and the NKVD. There is no need to introduce Oppenheimer - a ‘major polished diamond customer’ to you.

The Kustexport was a public company operating in 1928 to 1936 under the aegis of the People's Commissariat for Foreign Trade of the USSR and dealing – among other things - with selling the polished diamond bought by the Torgsin from the population.

The relations of the top level NKVD officials with the ‘major polished diamond customers’ were rather strong, one can say, friendly, as evidenced by another excerpt of the record of interrogation cited:

«Question: Have the similar agent information reports about repeated secret meetings of Lurier with Ulrikh been submitted to you by the Operations Department for several years?

Answer: Via the Operations Department, one or two agent information reports from the National Hotel were given to me once about the meeting of Lurier with foreigners - Berenzon, Oppenheimer and Frenkel.

Question: What information was in those reports?

Answer: About the dinner that Lurier had with the foreigners.

Question: Is that all?

Answer: I was also informed about the loathsome behavior of all the foreigners mentioned and Lurier with call-girls. I told Bulanov to call Lurier and warn him that if the same happens again he will be arrested.“

Official historiography suggests that the first visit of the Oppenheimers’ dynasty representative to the USSR was in 1959, but according to the revelations made by Genrikh Yagoda, this outstanding event took place somewhat earlier. More details should be given about the events that preceded the grotesque adventures of the ‘major polished diamond customers’ in the apartments of the Moscow National Hotel specially rented for such piquant purposes pursued by the NKVD.

In 1926, the USSR diamond traffic was divided into two unequal parts. The first – legal one (although quite secret) - was supervised by Anastas Mikoyan, who was appointed the People's Commissar of Foreign Trade of the USSR that year and was elected as an alternate member of the Politbureau of the CPSU CC. From that time on, Mikoyan held various posts in the government and the party and kept on supervising the diamond industry of the USSR until early 1960s. He supervised all the organizations somehow involved in the export-import rough and polished diamond operations: the Soviet trade representative offices, AMTORG, ARCOS, DERUTRA, Kustexport, Antikvariat, Soyuzpromexport, the Department of State Material Reserves. Those were the channels used to sell the polished diamonds bought by the Torgsin and the Yuvelirtorg from the population, as well as the property confiscated by the Customs and - after the World War 2 – the polished diamonds captured from the enemy and the rough diamonds mined by the Uralalmaz.

The second part of the diamond traffic was conducted by secret services. In 1927, Genrikh Yagoda started supervising this field who was appointed the Chief of the Secret Operations Directorate of the OGPU (All-Union State Political Administration). The operations with polished diamonds made under the aegis of the secret services were in fact illegal: they were not documented, did not go through customs or accounting control. To some extent, it made perfect sense because the money from selling the polished diamonds were mainly used to finance the agents abroad. As compared with the Mikoyan’s scope of activities, there were not many deals but the goods offered were unique and rare polished diamonds of exclusive quality from the stones confiscated from the representatives of the upper class and the Church. The clients were of the same level, the «major polished diamond customers» were not interested in people of modest means, by default.

It is worthy of note that the period of 1926 – 1927 was a kind of a landmark in the history of the Soviet rough and polished diamond industry. At that time, Lev Trotsky lost his political influence, and his protégés were dismissed from all the bodies dealing with the rough and polished diamond trade (People’s Commissariat for Foreign Trade, People’s Commissariat for Finance, Gokhran (State Precious Metals and Gems Repository)) and replaced with the Stalin’s sympathisers. Interestingly, all the important documentation of the Gokhran from 1927 to the present day is still classified.

Later on, the role of the rough and polished diamond industry gradually enhanced. In 1939, the Gokhran became a part of the NKVD. This key organization remained under the secret services until May 1960. The Gokhran was an accumulator and distributor of all the diamond flows, so from time to time it was a scene of collision of competing groups in the secret services.

One episode is of interest that took place in 1949 when the Gokhran was a Special Department under the Ministry of State Security of the USSR. At that time, the MSS was headed by Viktor Abakumov, and Nikolai Baulin was the Head of the Special Department (Gokhran). Abakumov (arrested in 1951 and shot in 1954) had many influential enemies in the top tiers of power. No wonder that in summer 1949, the Gokhran was audited by the Ministry of State Inspection of the USSR and L. Mekhlis personally run this audit. For any Soviet official, when hard fisted Mekhlis ‘came down’ on him it was a black ordeal and in most cases the outcome was fatal for those under auditing. The fact that you belong to the MSS was not a kind of protection – everybody understood that Mekhlis fulfilled the Stalin’s will, and the leader was already distrustful of Abakumov at that time. But miracle happened! The inspectors of Mekhlis left the Gokhran and came away none the wiser, and Mekhlis was forced to confer the Order of Lenin upon Colonel Baulin. This case – unique for the practice of the Ministry of State Inspection – shows that Colonel Baulin was higher than many generals and even marshals in the informal power structure. Indeed, all the ministers who were Baulin’s superiors during Stalin's time came to a bad end: two of them (Abakumov and Beria) were shot, and the third one (Kruglov) was expelled from the party, deprived of his general’s retirement benefit, apartment and he died under mysterious circumstances under the wheels of a commuter train near Moscow. There were tens of deputy ministers, chiefs of directorates, heads of the departments at the NKVD, MIA, MSS who died by their colleagues’ hands from 1939 to 1953. However, a person who knew absolutely everything about the official and unofficial channels used for the distribution of huge fairy tale treasures and for many years held a really ‘hit’ post being put solidly in the cross hairs by the country's top leaders - but he escaped with his life. Around him, both men of political stratagem and world-class intelligence and counterintelligence officers died and were deposed, as well as the people faithful to the regime, but he remained safe and sound and gained orders, including the combat decorations, without leaving his comfortable office.

After Stalin’s death and deposition of Beria (1953), the Soviet secret services practically wound down their independent rough and polished diamond trade operations. The diamond industry was withdrawn from the Ministry of Internal Affairs, and the Gokhran – although it remained under the law-enforcement agencies – was in fact controlled by the Ministry of Finance. Nevertheless, the role of intelligence services in the diamond space remained significant in solving the tasks of legendizing the industry, ensuring   informal contacts with De Beers, developing and handling the operations in a number of African diamond mining countries.

It should be noted that the Soviet diamond industry was fully transparent for De Beers since the time when the major polished diamond customers had fun in the National Hotel under the support of the NKVD agents. On the whole, such transparency was useful for the market and allowed De Beers timely neutralize all the possible sudden and quick moves made by the Soviets that could really threaten the monopoly of the corporation and, hence, the pricing fundamentals on the diamond market. Their undoubted achievement in this respect was the ‘freezing’ of the MIA’s project in 1951 aimed at the development of the Yakutian diamond fields. For this success, De Beers had to pay the price and deliver the unprecedented volume of industrial diamonds to the USSR in 1952 - at dumping prices. In return, they managed to postpone the ‘injection’ of the Yakutian rough diamonds into the market for several years.

This consensus was about to be destroyed after the discovery of the first primary diamond deposit in Yakutia in 1954. The matter is, that Nikita Khrushchev who replaced Stalin as a Soviet leader was very good at under-the-carpet battles in the administration, but had neither experience nor intuition of his predecessor in understanding the foreign political realities and tended to take rash ill-advised decisions,   next door to his display of idiocy. Moreover, Khrushchev was a poor negotiator who preferred to raise the stakes up to the critical level without providing for all the consequences. There existed a blunt threat of the uncontrolled unloading of the Soviet rough diamonds in the market.

In some months after the Zarnitsa deposit was discovered, in late 1954, De Beers set up an International Diamond Security Organization (IDSO), a corporate service to fight against the illegal diamond turnover. This new organization was headed by Percy Sillitoe, a former Director General of MI5, the United Kingdom's internal secret service. Today, the official MI5 website says that Sillitoe was appointed the IDSO Director General because De Beers wanted to curb the illegal diamond supply channels from Sierra Leone, which was not true to the fact. Sillitoe took charge of the United Kingdom's internal secret service in 1946, and earlier, he was at first a Chief Constable of Police in Sheffield, Glasgow and Kent, and had never anything to do with Africa. However, he had a bone to pick with the USSR. ‘The Russian direction’ was the main for MI5 in the period from 1946 to 1953, and Sillitoe suffered a great defeat on this front. In 1951, Guy Burgess and Donald Duart Maclean, the members of the so-called ‘Cambridge Five’, the Soviet intelligence network in England, defected to the Soviet Union. Burgess was a MI5 agent, in other words, a subordinate of Sillitoe. As a result of the investigation of this incident, Sillitoe had to step down. De Beers could have found an experienced expert to fight against the African illegal trafficking in their own country – in the Union of South Africa. However, it was difficult to find a better professional than Sillitoe to fight against the anticipated USSR expansion on the diamond market. He knew the ‘Soviet direction’ perfectly well, and the possibility to take revenge for the previous defeat he suffered from the USSR was an excellent professional motivation. It is interesting to note that when Sillitoe started forming an IDSO team and invite his former MI5 colleagues, John Collard was appointed his deputy, who had never worked in Africa but had been a key figure in the counterintelligence operation to catch Klaus Fuchs, an ‘atomic spy’, in 1950.

Setting up the IDSO became a weighty argument in the negotiations between De Beers and the USSR in London within the framework of the regular purchases of industrial diamonds from 1954 to 1956. There was no longer any sense in those purchases as the USSR had a 10-year inventory of industrial diamonds starting from 1953, and after the discovery of the Yakutian diamond fields the import of the industrial diamonds was of no interest to the Soviet party. However, the purchase of diamonds were continued in significant parcels – for 5 mln gold roubles. It was the only opportunity to take part in the negotiations in a civilized way. By the end of 1956, the scope of the agreement was outlined, the USSR refused to enter the diamond market independently and was satisfied with the role of a De Beers’s satellite. In January 1957, the collegium of the Ministry of Non-Ferrous Metallurgy of the USSR took the decision about the establishment of the Yakutalmaz group, and launching the commercial rough diamond production in the Yakutian diamond fields. In April 1957, the IDSO was disbanded.

Starting from 1957, the relations between the Committee for State Security and De Beers could be called a partnership. This partnership was especially efficient in the eradication of the apartheid regime in South Africa. The main reason of the ‘struggle against the apartheid’ lay in the old 'Boer issue’: the white government of South Africa claimed to have their control over the diamond mining corporations and did this increasingly aggressively from one year to another. The USSR having diplomatic relations with South Africa since 1942, suddenly expressed the concern about abusing the human rights of the black population of this country in 1956, just exactly at the time when the negotiations with De Beers in London were over, and it broke off the diplomatic relations unilaterally. Later on, the USSR assumed the role of a patron and sponsor of the radical organizations of the black people (African National Congress, Umkhonto we Sizwe (Spear of the Nation), etc.) striving for overthrow of the white government via a military coup. Interestingly, a considerable part of funding the black rebel fighters went through the KGB’s London embassy station, one official of which, Oleg Gordiyevsky, who coordinated such operations, was at the same time an agent of the British intelligence service. The KGB also played a key role in depriving South Africa of the possibility to have nuclear weapons (the mission of Colonel A. M. Kozlov), which was considered by the country’s white leadership as the only effective chance to resist Cuban expansion from the territory of Angola. Modern Russian sources indicate: “The documentary evidence collected by Alexey Kozlov in South Africa regarding the atomic bomb tests in 1979 performed jointly with Israel and the development of enriched industrial uranium in the occupied Namibia made it possible for the USSR to persuade the United States and a number of Western European countries to strengthen the international sanctions against South Africa. The work of Alexey Kozlov resulted in an embargo on South Africa imposed by all countries, which led to a change of this country’s government.” 

Sergey Goryainov, Rough&Polished

1The Central Archive of the Federal Security Service. Ф. 5446. О. 86. Д. 1244. Л. 2.



We continue to publish archive documents on diamonds:
 

1. The Russian Centre for Storage and Study of the Modern History Documents. Ф. 17. О. 84. Д. 96. Л. 2. 1920. Telegram of the VChK (All-Russian Extraordinary Commission) about the deliveries of the polished diamonds to the Southern Bureau of Comintern. 

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2. the Russian State Archives, Economy. Ф. 8153. О. 5. Д. 1195. Л. 154. 1951. The Letter of N. Baulin, Head of Special Department of the Ministry of State Security, to F. Kharitonov, Head of the Special Chief Directorate of the Ministry of Internal Affairs, about the lost rough diamonds.

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3. the Russian State Archives, Economy. Ф. 8153. О. 5. Д. 1166. Л. 161. 1951. The proposals of the Special Chief Directorate of the Ministry of Internal Affairs, about the transfer of the Yakutian diamond deposits to the Ministry of Internal Affairs of the USSR. 

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4. The State Archive of the RF. Ф. 5446. О. 51а. Д. 4839. Л. 10. 1949.The Ministry of State Security of the USSR as the exporter of industrial diamonds. The Stalin’s order about the deliveries to Germany.

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