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On the monograph by N. G. Khromova “Diamond Facets of Russian-Indian Cooperation”

07 june 2021

In 2020, RuScience publishers, Moscow, released the monograph by N. Khromova “Diamond Facets of Russian-Indian Cooperation” (Russian: Алмазные грани российско-индийского сотрудничества). As the abstract says, “The monograph - for the first time in Russia - gives a comprehensive analysis of the prerequisites and trends of the Russian-Indian cooperation in the diamond industry in 1992-2018. It contains some practical recommendations for the development of the domestic rough and polished diamond industry and offers some promising forms of Russian-Indian cooperation in this sector of the economy. In addition, the issues of the development are studied and the individual characteristics of the Russian and Indian diamond industries are considered ....”

The large-scale analytical studies of the diamond market by the Russian authors are relatively rare and deserve very close attention, at least because of Russia’s role in the global diamond industry. In this case, the interest in this book is also explained by the fact that the author has a direct and significant experience in the diamond business as the CFO of the Choron Diamond company. It should be noted that at present, N. Khromova works at the Department of World Economy at the Moscow State Institute of International Relations (MGIMO) and her monograph largely repeats her Ph.D. thesis (specialty 08.00.14 - International Economics) on the topic “Russian-Indian cooperation in the sectors of the diamond complex” (Russian: Российско-индийское сотрудничество в отраслях алмазно-бриллиантового комплекса) successfully defended in 2019.

The undoubted merits of the monograph include the abundant sources used and the in-depth study of the Russian and foreign sources on the state of the world diamond industry in the period from the early 1990s to the present day. The book may well be considered a reliable statistical reference book, not only for the Russian-Indian cooperation but also for the global diamond business. The reliability of the sources used is beyond all doubt, and the original data structuring by the author deserves high praise.

However, in those cases when the author goes beyond the specified historical range, unfortunate mistakes arise like “In Russia, the diamond business began to develop after the discovery of the richest primary diamond deposits in Yakutia in the mid-1950s. In the Soviet times, an important feature of the diamond market was its small size, as well as the fact that the state represented by the Yakutalmaz association was the owner of the rough diamonds it mined and the polished diamonds manufactured at the cutting and polishing factories.1

In fact, the diamond business (as far as it is possible to apply this term to the Soviet realities) had been developing in the USSR since the 1920s in the form of dumping exports of the polished diamonds confiscated from wealthy people and the church; in 1946, the Resolution of the Council of Ministers of the USSR “On the Development of the Domestic Diamond Industry” was adopted, which marked the beginning of the industrial diamond mining in the Urals by the GULAG prisoners, and in the late 1940s, the USSR was one of the most important suppliers of polished diamonds (including the ones captured from the enemy) to the USA.2

The assertion that Yakutalmaz was the owner of the rough diamonds it mined and of the polished diamonds manufactured at the Soviet cutting factories, can be attributed to the genre of fantasy. Yakutalmaz handed over all the rough diamonds it mined to the State Precious Metals and Gems Repository (Gokhran) at fixed non-market prices and had nothing to do with the fate of these diamonds in the future. The Soviet cutting and polishing factories (PO Kristall) belonged to the USSR Ministry of Instrument-Making, Automation Facilities, and Control Systems, and Yakutalmaz was part of the USSR Ministry of Nonferrous Metallurgy, so, just by definition, the ownership of their products could not overlap.

The statement about a certain “small size” of the diamond market in Soviet times is also bewildering. In one way or another, the Soviet diamond industry comprised over fifty enterprises belonging to five ministries, and their relationships were very difficult, including administrative barriers, which is why serious efforts and costs were required to overcome them. To a large extent, it was bad governance - attributed in no small measure to the administrative “gaps” - that brought the Soviet diamond industry into the catastrophic state observed in the early 1990s.

Unfortunately, we are compelled to note N. Khromova’s very superficial understanding of the history of the diamond market, which, however, does not keep her from acting as a kind of a “rebel” destroying its foundations, “Over the past three and a half years, the industry has faced an increase in the rough diamond production, financing problems, the demonetization in India, the trade war that slowed down China’s economic growth, and the strengthening dollar. In this regard, prices for polished diamonds continue to decline resulting in the lower profitability of the manufacture. According to the author of the study, to resolve this situation, it is necessary to decrease the prices for rough diamonds, and the supply from the major mining companies - De Beers Group and ALROSA - should be less rigid in the long term. Thus, it is necessary to stop controlling the demand for supplies. In this situation, it is necessary to focus on auctions or tenders where the market sets prices and manufacturers can buy what they need. That is, in order to ensure a long-term profitable future for the diamond industry (in all segments of the diamond pipeline), the demand3 must be the driver in the rough diamond market.”

Six years before the publication of N. Khromova’s monograph, the author of these lines discussed a similar problem with M. Shkadov (the then director of the Smolensk Kristall); here is a fragment of this interview, “Today, the sales models of the leading diamond miners - ALROSA and De Beers - are built in a way that creates the illusion of a constant high demand for rough diamonds from numerous buyers. But in fact, there exist practically one buyer - India. The sightholders can be registered in Belgium or any other country, but 90% of the rough diamonds actually go to India. And the goal of the Indian colleagues is to control the market, and they do not conceal their intentions. The Indian diamond business today is a logistically well-organized $15-bn business operating with strong government support. Considering that the world’s credit resources through which the purchase of rough diamonds and the manufacture of polished diamonds are financed are just about $18 bn, it should be admitted that the diamond market becomes a “buyer’s market”. And this leads to the situation when the buyer begins to control the price as only India buy roughs and cut and polish diamonds that are under “7” cts now, and according to the price dynamics, it can be argued that the price for these diamonds will never rise since it is dictated by the monopoly buyer. And a lot of such rough diamonds are mined. Simply put, the ALROSA’s sales totally depend on the state of the Indian economy and its banking system. De Beers has also the same problem.”4

So, in the “buyer’s market” (Indian market, of course), N. Khromova sees a bright prospect, and M. Shkadov sees a serious threat to the Russian diamond industry. It is not difficult to determine the winner in this sort of dispute, it is enough to turn to the history of the diamond market, “... demand must be the driver in the rough diamond market” - the statement sounds great, but it would be nice to remember where the demand came from. It is unlikely that anyone would deny that as a matter of fact, the markets for gem-quality rough diamonds and for polished diamonds are project-based and that the demand for these goods is the result of many years of generic marketing carried out mainly by De Beers. It is due to its capital that the market “survives” up to the present. Have the Indian diamond manufacturers invested a lot in generic marketing? It’s a rhetorical question.

The idea about the “project-based” nature of the diamond market, perhaps, is closely connected with the most interesting question - who was the “author” of the Indian diamond industry rise and why did this rise take place in the 1970s? The monograph by N. Khromova contains a chapter with the promising title “India Turning into the Leading Cutting Centre of the World” (Russian: Превращение Индии в ведущий гранильный центр мира), but, unfortunately, it does not give an answer to this question. It describes in detail how the transformation was launched and what factors contributed to this, but the author does not even suggest who and why the thought of turning the industrial quality diamonds and the “near-gem” diamonds into polished ones, “The rise of the diamond industry was in the second half of the 20th century largely due to the use of the most industrial quality diamonds and the “near-gem” natural diamonds. All this resulted in a “revolutionary breakthrough”, and a new niche - “Indian goods” - appeared on the world market (the smallest cheapest rough diamonds of various weight and quality categories costing about $30/carat). In other countries, cutting and polishing such rough diamonds were unprofitable and they were considered unsuitable for processing. But the large low-cost manpower and the centuries-old high level of craftsmanship of the local cutters have turned India into the world’s most cost-effective workshop for cutting and polishing small-sized and low-quality diamonds.

At the beginning of the modern stage of India’s diamond cutting industry development, the quality of cutting and polishing was low, and mainly small stones were processed. But gradually, the quality improved, and since the 1970s, India has taken its niche as a monopolist in cutting and polishing small-sized and low-quality diamonds.

In the 1980s, the significant role of the Indian diamond sector in the global diamond industry was recognized since only India had the capabilities and experience of cutting and polishing cheap, small-size, and labour-intensive rough diamonds with a low yield (even a generally accepted term appeared - the rough diamonds were called the “Indian goods”). Due to the unprofitability, the world diamond centres - Belgium and Israel - completely refused to cut and polish this category of rough diamonds. But at the same time, the polished diamonds obtained from the rough diamonds of this quality were widely sold in the United States, the largest consumer market for diamond jewellery. In fact, this led to the creation of a new segment in the diamond market. The stereotype was broken that polished diamonds were very expensive and only the elite could afford them.”5

That is, according to N. Khromova, everything happened as if with a wave of a magic wand - all of a sudden, industrial quality diamonds were “cut and polished” (why were not they “cut and polished” earlier?), for some reason they had “widespread sales in the USA” (probably, organized by the Indians?), and even the stereotype was broken (obviously, under its own ‘weight’?).

But here is a different (and more constructive, in our opinion) point of view on this process, “In 1979, the Argyle diamond pipe (Australia) was discovered with colossal reserves of small and cheap rough diamond featuring also a higher hardness. Cutting and polishing Argyle roughs turned out to be completely unprofitable at the traditional diamond centres due to the high labour intensity and high cost, and this gave the Indian cutters a chance, which they used with brilliance. Having started the cutting and polishing of the Australian diamonds, the Indian cutters have created a separate niche of the “near-gem” or “Indian” goods in the global diamond market using an archaic, “family-based” system of production, as well as a huge pool of cheap manpower, traditional high craftsmanship of the cutters and the family labour. This has transformed the country into the world’s most cost-effective “near-gem” diamond cutting facility. Moreover, India’s managers and experts in marketing and promotion these goods (with the help of the experts from the De Beers group, which thus successfully solved the company’s problem (i.e., how to profitably sell the inventories of the similar goods accumulated from Zaire’s and the USSR’s mines at the Central Selling Organization) built a new class of consumers consisting of the rapidly growing middle class in the developed countries that could not afford fine expensive jewellery offered by famous brands.”6

To put it simply, De Beers was once again able to build up a new market that was able to “digest” a huge flow of small-sized rough diamonds from the new African, Russian, and Australian mines. And with all due respect to the “Indian marketing managers”, they played a secondary role in solving this task. That is, India owes its emergence, development, and current triumph to the “seller’s market”; given any other scenario, the “Indian diamond miracle” would have culminated in failure at its very source.

In for a penny, in for a pound, N. Khromova adds another brilliant prospect to the statement about the need to move to a market controlled by a buyer (obviously, the Indian one), “The shortage of rough diamonds in the next decade is also predicted by the Bain & Company’s experts noting that “… based on the analysis of the economic situation and the market environment, it is foreseen that the global supply of rough diamonds will decline by an average of 1% to 2% per year from 2016 to 2030 because of the aging and depletion of existing mines”. Consequently, at present and in the future, it is risky for Russia to rely on diamond mining only, it is necessary to develop diamond cutting and polishing while maintaining and improving its existing positions in the world diamond market”.7 And further it reads, “For example, in the world economy, the following global diamond market distribution (GDMD) has taken place over the past 3 years (on average): “13 -21 -76”, that is, the share of the value-added attributable to each link in the chain is as follows: assuming that $13 bn worth of diamonds is mined (1st link), loose polished diamonds are worth of $21 bn (2nd link = 13 + 8), and the retail sales of diamond jewellery make $76 bn (3rd link = 13 + 8 + 55) (the ratio is 1-1.6-5.8). Thus, each link adds the newly added value to the original one. If we consider Russia’s rough and polished diamond industry for 3 years, the following proportions are seen (on average), “1-0.1-0.2”, that is, per unit of mined rough diamonds there are only 0.1 polished diamonds and 0.2 diamond jewellery sales. In the Republic of Sakha (Yakutia) - the main region of Russia’s rough and polished diamond industry - the proportions are even lower “1-0.03-0.003”. Thus, the rough diamond orientation of the Russian diamond industry is confirmed as well as the ineffective use of rough diamonds due to objective reasons hindering the development of the cutting and jewellery industries. In this regard, it seems reasonable to develop the cutting and polishing sector and the cooperation with world cutting and polishing hubs, first of all, with India.”8 N. Khromova proposes tolling as one of the main schemes of such cooperation.9

The accusations of the “rough diamond orientation” of the Russian diamond industry, ineffective use of rough diamonds, and the intentions to correct this nightmare by creating a miraculous cutting and polishing industry have existed for almost as long as the Soviet (later - Russian) diamond industry itself. Two large-scale attempts to create a domestic cutting and polishing industry are known - in the USSR, these were the “Kosygin” cutting and polishing factories of the Kristall Production Association, and the so-called “national cutting industry” in the Republic of Sakha (Yakutia) represented primarily by the “Tuymaada Diamond” holding. Both of these initiatives were unprofitable from start to finish, despite the fact that they really had great advantages over their foreign (including Indian) counterparts in terms of the rough diamond supply, tax regimes, and loans. It is telling that the adherers of these wildcat ventures used the same argument about the “value-added” that N. Khromova uses. This is an attractive argument, but for some reasons, the diamonds of “Kosygin” were cheaper than the rough diamonds from which they were cut, and dozens of the Yakut factories were mainly engaged in selling the rough diamonds abroad (often at dumping prices) received from ALROSA as an interest-free commodity credit. As for the tolling scheme, many market players still have quite fresh memories of how the huge Gokhran inventories accumulated since the Soviet times were fast sent abroad in the mid-1990s using the tolling schemes. However, the Israeli partners benefitted then, not the Indian ones. So, this kind of “practical recommendations for the development of the domestic diamond industry“, unfortunately, are not new and have a long and impressive history.

Summing up my impressions of reading the monograph by N. Khromova, I can say that if I were an employee of an Indian cutting and polishing company (well, “Choron Diamond”, for example) I would applaud every paragraph of this book. This is an excellent text that can be used as a reference base in lobbying the projects - at any level - aimed at obtaining preferences for access to Russia’s rough diamonds. It is from these positions that the work under consideration is of the most significant value.

Sergey Goryainov, Rough&Polished

1Khromova N.G. Diamond facets of Russian-Indian Cooperation. M.: RUSCIENCE, 2020, p. 93
2 Russian State Archives, Economy. Ф. 413. O. 24. Д. 6151. Л. 59.
3Khromova N.G. Diamond Facets of Russian-Indian Cooperation. M.: RUSCIENCE, 2020, pp. 46-47.
5Khromova N.G. Diamond Facets of Russian-Indian Cooperation. M.: RUSCIENCE, 2020, pp. 139-140.
6Vecherina O.P. Fantastic Rise of the Cutting Industry in India: 70 Years of Success. // Works of the Institute of Oriental Studies of the Russian Academy of Sciences. 2018. No. 12. Pp. 89-108. 
7Khromova N.G. Diamond Facets of Russian-Indian Cooperation. M.: RUSCIENCE, 2020. Pp 88-89.
8Ibid. P. 92.
9Ibid. P. 193.