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From Russia with Grib

06 april 2019

Recently, I have been so fascinated by the vivid initiatives of Russia’s dominant diamond miner, ALROSA that I completely lost sight of a very remarkable company - the second and at the same time the only privately-owned Russian diamond miner, which has nothing to do with ALROSA. This miner is Arkhangelskgeoldobycha, now called AGD Diamonds.

Bearing it in mind that the website of our news agency carries an AGD advertising banner, I called my editor and said I’d like to write an article about this company. “You know me, so tell me if my wish fits well with the editorial policy,” I asked him, although this was contrary to my views, but I had no desire contributing to a trash-can.

“Advertising is one thing and the editorial policy is another, which is our internal matter, so please do it,” he replied, for which I thank him very much.

So, AGD Diamonds. I think it makes no sense to describe the metrics of the diamond field being developed by this company and its structure — this can easily be found on the Web. To begin with, I should say that Lukoil, which had no experience in the diamond business before, approached its non-core diamond asset with all the financial integrity inherent to an international oil-producing holding, obviously under the influence of the magic spelt by this planet’s hardest mineral. The principle was simple, as when arranging oil fields: spare no money for anything, including engineering solutions and equipment, and buy the best there is on the market.

Lukoil invested nearly $ 1 billion in the development and capital mining operations, power facilities, water removing system, mining equipment and concentration plant, which was designed and built by South Africa’s Bateman in the best industry traditions. From the very beginning of the operation in 2014, the entire mix of Grib diamonds (with the exception of control parcels) was sold in Antwerp through an e-auction platform. The company's sales system, including sorting, follow-up operations, preparing goods for sale, organizing online auctions and developing customer policies, was organized by experienced specialists from BHP and De Beers. It is noteworthy that the oilmen, after analyzing the sales experience of international companies, did not turn to ALROSA’s sales specialists for help. Alexey Genkin, a former investment banker and businessman in the field of sunflower processing, was appointed executive director responsible for the company's revenue and controlled the sale of diamonds produced at the Grib mine until the end of last year.

The author of this article remembers how, back in 2012, the late President of ALROSA, Fyodor Andreev discussed with the management of Lukoil the possibility of exchanging non-core assets – giving ALROSA’s gas assets to Lukoil and taking from it the Grib diamond field.

However, this gave a start to a story in which “the tail wagged the dog” or where the tail turned out to be smarter or rather more agile than the dog.

Advised by ALROSA’s geological service, the company’s management considered this asset not interesting saying that in case of such an exchange ALROSA would have to maintain another operation similar to unprofitable Severalmaz. After an audit of ALROSA’s gas assets, Lukoil also was clearly not excited about the resources of these gas operations of the diamond monopoly. In general, the deal did not work out. But as they say, for some war is a curse and for some a dear mother. In this very case, it did work out quite well for some.

ALROSA’s sales people were clearly offended by the oil-industry snobbery of public online trading in diamonds mined in Arkhangelsk. The aforementioned Severalmaz is located just 30 km from the Grib mine. Both diamond pipes are comparable in content and quality of rough. Everywhere, ALROSA spoke about the lower quality of diamonds from Severalmaz, thus explaining the obvious price difference to the disfavor of the “world’s leader in the diamond industry.” But according to the Antwerp specialists familiar with the goods coming from both Grib and Severalmaz, the rough offered by AGD Diamonds - other things being equal - always sells at higher prices. It would be interesting to carry an experiment selling a control lot of diamonds mined by ALROSA, but sorted and sold on the Grib trading platform, which in fact was created by the joint efforts of BHP and De Beers specialists for Russian private money. But I'm afraid the “world’s leader” will modestly refrain from such an experiment.

In turn, Lukoil was not ready to keep the Russian diamond-mining asset on its balance for a long time and sold it for $ 1.45 billion to the more than familiar Otkritie financial group in December 2016, just one year before its bankruptcy and rehabilitation at the expense of the state budget.

This trick was even more intriguing than the sale of De Beers to Anglo American by the Oppenheimer family, if we compare the assets. But the beauty of the situation is not in this.

As it was believed by one well-known character of modern Russian history, control over management is more important than formal control over a business.

And apparently, the company’s management was actually not controlled by anyone. Suddenly, the annual flow of diamonds worth more than $ 300 million and the fate of the company worth nearly $ 1.5 billion happened to be in the hands of a modest non-public Muscovite, Alexey Genkin.

Sometimes it so happens that everything goes well. Grib Diamonds, a company based in Belgium, which incidentally was not a 100-percent ownership of its parent AGD Diamonds and therefore was not obliged to follow its instructions, used to source 100% of its rough from Russia, where it was sorted and evaluated as per the gloomy standards of Gokhran introduced by De Beers in the squeaky Soviet machine decades ago. However, the sales were already going on within a completely different commercial logic, so there was no need to worry about the earning power of this business. The understanding of the sales process by the Arkhangelsk-based company itself seemed to be tending to zero. I do not know, if there is such a person there now. I turned to the press service of AGD and they explained that “the structure of sales management was approved by the company’s board”. It is clear that this explanation is very vague. I can assume that there should be a person in charge of sales through Almazyuvelirexport of the 5% of diamonds required by the country’s legislation and able to interact with Gokhran, which sorts and evaluates Grib's goods in Russia. However, realizing that until recently, Almazyuvelirexport used to probe the world market resorting to “powerful forces” of a small group of clients, and ALROSA and AGD as owners give the final nod to Almazyuvelirexport to sell their goods at the achieved prices or not, it is not difficult to assume that this was the only link requiring attention in Russia. But as one negative character of one mystery novel used to say in such cases: “We only need to befriend Miss Hockett to put this company in our pocket”.

So then, you have diamonds worth about $340 million a year available at the Belgium-based company you are in charge of. Actually, the company is just nominally subordinate to its parent corporation, where no one knows or understands in what way you sell diamonds. You happen to witness an ongoing change in the structure of its shareholders, who are too busy with other matters to take care of diamonds, so the main thing for you is not to show losses. The sales system of your company was fine-tuned by foreigners who had good labor contracts and worked only with you. In the end, when the system is up and running, these people may be offered to quit with a good bonus - the market abides by market rules. At the same time, you are a hired manager with an incredible labor contract for this market, comparable probably with a contract of a head in charge of a public mining company, though having a minimum of responsibility since you are not the owner; as for the shareholders… Where are they, these shareholders? We ourselves have been looking for them for a long time.

The air of freedom can play a cruel joke. And it seems it did.

AGD is a private and extremely closed company that does not provide financial and commercial information to external users, therefore we can only rely on the opinions of market stakeholders. The company established preferential relations with a number of buyers, and among them buyers of stones weighing +10.8 carats could have special terms. It is difficult to say what these terms were, but it is not difficult to guess. If you have separate operations with goods sold through Almazyuvelirexport, this means you have the same clients, if not the same client. And here it is worth mentioning quite an amazing story, which is purchasing of a villa in a prestigious area of ​​Antwerp from one of these “expensive” clients.

But at this very point, the VTB bank revealed itself as an AGD’s lender, which unexpectedly to itself happened to credit this company to an amount of $ 1 billion and thus was interested to know what the Arkhangelsk miners were digging for in the Pomor Land and if they were going to pay this billion back. It looked like the company’s sales revenue reached about $ 340 million a year, but it seemed quite reluctant to pay interest, and in general the natural question was if there was any control over this business or maybe it was the case when the dream of any freedom-loving person had come true, that is to live in Europe in big way Russian style having minimal responsibility? Indeed, sometimes dreams come true.

What really happened there is not clear, maybe it was the lender which appealed to common sense, but AGD finally decided to get full control over Belgium-based Grib Diamonds, after which its executive director Alexey Genkin was fired for loss of trust.

As the ancients said, everything is poison, and everything is medicine. The total state control executed by half-public-officers/half-business-managers, bright, talented and efficient, but having not a single project implemented on their own in the face of real international competition, can derail any industrial monster. Such "efficiency" is unthinkable in the real private sector. But if a landlord ceases to understand what his land-steward is doing in his estate, then why complain about bad fate and debts. True, if such an estate was not particularly needed, then the one to complain will be its new owner.

My good friend, a former investigator from the long-gone Soviet police, told me a curious story. One policeman was put into a private apartment, which did not belong to him, to lay an ambush for a certain criminal character. The criminal did not appear, and the policeman continued to live in this apartment as if it was his job for several years. In the end, he made repairs there and started a married life. There was a huge scandal, when the authorities tried to evict him from this apartment, as he brought his case before the court complaining about the violation of freedom and oppression – after all, he had invested so much in this apartment...

Alexey Genkin continues to live in Antwerp in a spacious house that previously belonged to a buyer of Arkhangelsk diamonds and apparently is still engaged in the diamond business, since opportunities for this are still there, including Russia, while AGD continues to pay back the billion-dollar loan – so everyone is quite busy.

Segey Goryainov, Rough&Polished