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Working according to one’s weaknesses and strengths

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26 august 2019

The diamond business is yet bright and has a good future in the coming days

Hitesh Patel, Managing Director of Dharmanandan Diamonds Pvt. Ltd., joined the family business in 1997 to help his father Laljibhai Patel, the founder of Dharmanandan Diamonds Pvt. Ltd. Egged on by its success, Hitesh set up the overseas presence of...

19 august 2019

The Kosygin Line and Titan of Diamond Renaissance

26 august 2019

At the end of 2018, the Russky Mir Publishing House published a two-volume edition, titled “The Diamond Industrial Complex of Russia.” The book has a considerable circulation of 2,500 copies for our times, a bulky volume of 1,480 pages, and Vyacheslav Anatolyevich Shtyrov is indicated on the cover as its author. According to the book’s annotation: "The edition is intended for specialists in the mining industry and other segments of the real sector of the economy, managers, economists, historians, teachers and students of all levels of education." The personal website of V. A. Shtyrov announced the publication of this book simply and modestly: “There has been published a history of the ALROSA Company.”

Since Shtyrov, who headed ALROSA in 1996-2002, is a major functionary in the Russian diamond industry of the post-Soviet period, such a voluminous work that went beyond his pen will certainly become a significant milestone in diamond historiography and will eliminate many of the contradictions and inaccuracies so characteristic of it. Surely this is how a historian should reason opening this well-published book - designed in a strict academic style - with understandable trepidation. And what will he or she read there?

“The gift of a strategist, powerful intellect, encyclopedic education make it possible to compare Vyacheslav Anatolyevich with personalities of the Renaissance and put him on a par with outstanding statesmen and scientists of our time” (Volume 2, Page 319 of this work).

Such an impressive self-esteem is unlikely to stun a mature historian, but it’s rather difficult to vouch for the mental health of “students of all levels of education.” If a person, whose name is put on the cover as that of the book’s author, is quite seriously compared in it with Leonardo da Vinci, Galileo and Michelangelo, this is, of course, a clinical case.

Thank God, a closer examination reveals that the work, the authorship of which is ascribed to V.A. Shtyrov, does not contain a single page written by V.A. Shtyrov himself, but is just a compilation of newspaper, magazine and online publications. The “cut-out job” to produce these extracts was done by V. Novikov, the former ALROSA press secretary using obviously the simplest criterion: a publication was included in the book if it was complimentary to Shtyrov and his deeds. Of course, to study the history of the Russian diamond industrial complex from such a book is the same as to study the history of the USSR using the files of the Pravda Daily, which was the newspaper of the Central Committee of the CPSU and which continuously informed the Soviet people about grand victories and successes until everything finally fell apart.

However, careful reading of this opus still allows you to find a fragment, the authorship of which perhaps can be attributed to V. A. Shtyrov. This is a lecture on the subject of “ALROSA in the Diamond Complex of Russia and the World,” which he delivered at the St. Petersburg Mining Institute. From the mouth of Shtyrov, the students learned the following:

“Since in 1950 an embargo was announced on the supply of diamonds to the countries of the socialist camp, and their production in the Urals was extremely small, the USSR, acting through numerous intermediaries, was forced to import diamonds into the country illegally, paying significant amounts for the raw materials it needed” ( Volume 1, Page 867 of this work).

And further: “The maximum amount of polished diamond production in the USSR over the entire existence of the diamond cutting industry was $ 570 million, while the consumption of rough diamonds for these purposes reached $ 460 million. Thus, the maximum value added received by the Russian diamond cutting industry amounted to $ 110 million. The diamond cutting industry has always been export-oriented. Up to 97% of the polished goods produced in the country was supplied to the outer market” (Volume 1, Page 870 of this work).

The first quote simply shows that the lecturer knows the country’s diamond industry history superficially and broadcasts stories about the "diamond embargo" devoid of the slightest documentary evidence. The second quote deserves a more detailed analysis.

Opening the book “Phenomena of the World Diamond Market and Russia” (authored by A. A. Fridman, O. P. Vecherina, University Book Publishing House, 2017) on page 45 we can read the following: “The maximum amount of polished diamond production in the USSR over the entire existence of the diamond cutting industry was $ 570 million, while the consumption of rough diamonds for these purposes reached $ 460 million. Thus, the maximum value added received by the Russian diamond cutting industry amounted to $ 110 million. The diamond cutting industry has always been export-oriented. 97% of the polished goods produced in the country was supplied to the outer market.” Funny coincidence, isn’t it?

Despite the fact that this is not the only coincidence, we are not talking about plagiarism. When Shtyrov was president of ALROSA, A. A. Fridman and O. P. Vecherina were most directly related to the Analytical Center of this company. It is not difficult to assume that it was they who wrote the text of Shtyrov's lecture. There is nothing reprehensible in the fact that the company’s head used the analyses of his consultants and subordinates in a public speech, especially since the lecture format does not involve references. The problem is in fact much more serious.

Professor Friedman is known in the diamond industry as an apologist for A. N. Kosygin, the “outstanding reformer” in the USSR. Thus, Friedman wrote a very interesting article, “On the Role of A. N. Kosygin and the Central Economics and Mathematics Institute of the USSR at the USSR Academy of Sciences in the Formation of the Country’s Diamond Industrial Complex,”1 in which he tried to prove that the Soviet diamond cutting industry created by Kosygin was highly efficient. Friedman led the Central Economics and Mathematics Institute (CEMI) laboratory on diamonds since 1964, that is almost from the very start of the Soviet diamond manufacturing industry. He personally knew Kosygin, participated in negotiations with De Beers and was one of those few people whose level of awareness of the diamond industry economics was close to maximum. Shtyrov, who joined the diamond industry thirty years later than Friedman, fully shared the latter’s point of view as evidenced by at least his interview with the headline “Russia will continue the ‘Kosygin line’ in the diamond industry.” (Volume 1, Page 559 of this work). One can easily guess who formed who’s views on the diamond industry history.

There is one very interesting detail in the matching fragment of Shtyrov’s lecture and Friedman’s book, which is the value of rough delivered to the Soviet diamond manufacturing factories. The figure is 460 million U.S. dollars. But the problem is that domestic supplies of rough diamonds from Yakutalmaz and Uralalmaz to Gokhran and from Gokhran to diamond manufacturing factories were valued exclusively in rubles and at absolutely artificial prices. A significant part of the accounting documentation held by Soviet diamond manufacturing factories is now available in the archives and there are no U.S. dollars mentioned there. Moreover, rough diamonds were domestically supplied without considering their quality; for example, Yakutalmaz handed over its goods to Gokhran at a price of 8 (eight) rubles per carat, and it did not matter if they were gem-quality diamonds or industrial-quality garbage. Rough diamonds of excellent quality were selected to be supplied to the USSR diamond manufacturing factories, but their domestic price did not have any relation to the prices established by the international market, and all documents contain prices in ordinary Soviet rubles, not even in foreign currency and not in Comecon rubles. Where did Friedman and after him Shtyrov get the $ 460 million from? In his lecture, Shtyrov does not explain the origin of this figure, but in the book of Friedman there is a link: "An expert estimate of the processed rough value if it were sold on the international diamond market." That's the whole source. Neither documents, nor names of experts, nor assessment methods are given.

But suppose that Friedman’s figure is correct. So, we received $ 460 million worth of rough and netted $ 570 million from sold polished goods. The difference is $ 110 million. Is it the outstanding efficiency of the “Kosygin line” regarding diamonds? And how about the construction and maintenance costs of buildings for 8 diamond manufacturing factories? And the costs of employing many thousands of workers? And the contracts for "scientific support" including, by the way, CEMI? How about taxes? Equipment? How about the cost of fighting the emerging black market for rough diamonds? And so on and so forth... Alas, the apologists for the “Kosygin line” avoid such calculations.

Today we have every reason to believe that the positive difference between the value of exported polished goods and the value of the rough from which they were made is fiction. Here is the opinion of I. S. Alekseev, the former deputy head of the General Directorate for Precious Metals and Diamonds of the USSR (abbreviated as Glavalmazzoloto): “The internal pricing system, artificially lowered prices for rough (the italics is mine - S. G.), low wages and economic short-sightedness of many leaders in this system allowed producing fine polished diamonds from even finer rough diamonds with negative efficiency over many years. The Syndicate was ready to pay us more in real prices for this rough, which was converted into polished goods at our domestic diamond-cutting factories. It was ready to pay, but did not pay, because we could not get it for export.”2 Unlike Friedman and Shtyrov, Alekseev cited the data of a special experiment performed by Almazyuvelireksport, which showed that ‘Kosygin’ polished diamonds were 14% cheaper than the rough from which they were made. And this is not a vague "expert estimate," but quite specific numbers, names and dates.

It remains to add that Alekseev was an employee of V.V. Rudakov, the head of Glavalmazzoloto and the first president of ALROSA. And Rudakov, as you know, was a strong opponent speaking out against the development of the diamond-cutting industry in the diamond-mining country. He had reasons for this point of view, since he knew the history of the diamond industry perfectly. But in the end, the “Kosygin line” in the persons of Shtyrov-Friedman won. This resulted in the creation of the “Yakutian national diamond-cutting industry,” in pumping up to 25% of ALROSA’s production into this industry, in exporting this rough by hook or by crook, even at bizarre damping prices, and in the end all this boiled down to total theft and bankruptcy of dozens of diamond cutting factories. The story repeated itself as a sad farce.

Alekseev mentions the long-standing "economic improvidence of the system’s leaders." It is a polite euphemism. This should be given a different name. Kosygin was aware of the Almazyuvelireksport experiment - he himself gave permission for it and then put the results into cold storage. The "great reformer" was chicken-hearted and did not like responsibility.

The role of Kosygin is far from being exhausted by the creation of a wonderful diamond manufacturing industry generating “maximum added value.” Now we have a chance to look at the long-declassified Decree of the Council of Ministers of the USSR dated April 28, 1969 No. 307 "On the allotment of precious metals and precious stones in 1969." Paragraph 8 of this document reads: “8. In 1969, the USSR Ministry of Finance is also obliged to allot 10,000 carats of gem-quality diamonds to the Ministry of Foreign Trade for sale in freely convertible currency. The Ministry of Foreign Trade should use the hard currency proceeds to buy and supply 5,000 carats of industrial diamonds weighing 0.17-0.40 carats to the USSR Ministry of Finance to produce drawing dies in 1969.” The document was signed by Kosygin and M. Smirtyukov, Chief Executive Officer of the USSR Council of Ministers.

It is the year 1969 out there in the street! Yakutalmaz is churning out diamonds by millions of carats; by that time the USSR has been producing synthetic rough of industrial quality since 1963, while the “great reformer” continues to purchase technical diamonds abroad, and at prices an order of magnitude higher than their market value! As a result of this outstanding operation, a certain partner received 10,000 carats of magnificent gem-quality diamonds (I suspect they were of exclusive size) having actually paid for them with 5,000 carats of industrial-quality garbage “to produce drawing dies.” Who is this benefactor? Alas, as usual, the documents accompanying the Decree have been destroyed.

It remains only to assume that De Beers not only sold the idea of ​​a national diamond-cutting industry to Kosygin, the true role of which was to reduce pressure on the monopolized market, but also regularly swindled the "great reformer" in trading operations selling its own illiquid stock of industrial-quality in exchange for gem-quality rough.

Today, many researchers are reasonably regarding the Kosygin-Liberman3 reforms as the starting mechanism that laid the foundation for the collapse of the USSR economy. The effect of the “Kosygin line” in the diamond industry continued through the efforts of Shtyrov-Fridman has yet to be evaluated. And we can only thank those who initiated the publication of the two-volume edition, “The Diamond Industrial Complex of Russia” for the additional impetus given to these studies.

Sergey Goryainov, Rough&Polished

1The Economic Science of Modern Russia. 2016 (2), Pages 125-136 
2The Diamond Book of Russia. M., “Gornaya Kniga,” Volume 2, Page 73
3Professor Evsei Liberman was a consultant to Kosygin and a true generator of ideas for “Kosygin” reforms. In the West, these reforms are usually called Kosygin-Liberman reforms.