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The same diamond bait

24 march 2014

During his visit to Yakutia in mid-March this year, Yury Trutnev, Deputy Prime Minister and Presidential Plenipotentiary Envoy to the Far Eastern Federal District, formulated a number of initiatives, which may produce a highly drastic impact on the domestic rough and polished diamond business.

The Plenipotentiary Envoy tasked the Ministry for the Development of the Russian Far East, the Government of the Republic of Sakha (Yakutia) and ALROSA to examine the issues related to establishing a diamond exchange in the Far East and developing the diamond-cutting industry in Yakutia. According to Yury Trutnev “the jewelry and diamond-cutting industries should become one of the growth points for the republic.” With that, the Deputy Prime Minister believes that it is not at all necessary for ALROSA itself to be engaged in diamond manufacturing, but instead the miner may appoint some affiliated companies to do the job. Of course, this initiative should have state support based on private-public partnership and appropriate preferences. Mr. Trutnev’s reasoning behind his initiatives was this: “We need to process the natural wealth of our country here, leaving a high added value in the territory of Russia.” Judging by the comments in the mass media the ideas put forward by the Deputy Prime Minister of the Russian Government found their appreciative audience.

The history of the Russian diamond business has already witnessed a time when similar ideas were put into practice. In the early 1990s, Academician Vladimir Larionov and President of the Republic of Sakha (Yakutia) Mikhail Nikolayev initiated the process of creating a “national diamond-cutting industry” based on the assumption of getting added value from cutting rough diamonds mined in Yakutia.

Since its inception, the Yakut diamond-cutting industry enjoyed very substantial benefits provided by the constituent authorities. It's safe to say that such preferences were not enjoined by any competitors in the field, both in Russia and abroad. The factories making part of the flagship in this “industry,” which was the Tuymaada Diamond Holding, were given buildings free of charge and the company was exempted from income tax in 1993-1994. It was granted a billion ruble worth loan in 1993, which was later cleared as a contribution from the government of Yakutia to its share capital. In 1994-1995, the authorities declared 100-percent tax amnesty for Tuymaada Diamond and introduced for it the lowest possible income tax (8%) in 1995. In addition, all Yakut diamond manufacturers were exempt from value added tax and excise duty starting from 1993.

In 1992, the Republic of Sakha (Yakutia) and the federal center concluded the Agreement on Division of Powers under which 25% percent of ALROSA’s output was made available to the authorities of Yakutia and theoretically should have been processed by local diamond-cutting factories. It should be mentioned that rough taken from ALROSA was given to Yakut diamond cutters with payments deferred up to 120 days or, in other words, as an interest-free inventory loan. However, in practice this rough en masse drifted out of Yakutia under the guise of tolling operations and Yakutia’s diamond manufacturing industry simply played the role of a practically uncontrolled mediator demonstrating red-ink performance on the background of hefty tax and credit preferences. Eventually, tens of diamond-cutting factories in Yakutia went bankrupt, while the Russian Federation, Yakutia and ALROSA suffered multimillion damages inflicted on their budgets.

The detailed history of this quiet “diamond cutting and laundering haven” and the reasons leading to its inglorious finale are quite well known. But what caused the desire of Mr. Trutnev to get caught twice with the same bait? After all, he is professionally savvy both in mining and diamond business.

Some sources clearly indicate that Yury Trutnev is the lobbyist of Lev Leviev’s interests.

The story of their relationship dates back to the days when Lev Leviev established Kama-Kristall, a diamond-cutting company, and later became the owner of Uralalmaz, a closed joint-stock company. The then Governor of the Perm Region Yury Trutnev and his successor in office Oleg Chirkunov (who is a personal friend and business partner of Yury Trutnev) supported the projects of the Israeli diamantaire. And allegedly being deprived of this support, Lev Leviev was forced to part with Uralalmaz.

Recall that during Yury Trutnev’s governance in the Perm Region (2000-2004) Lev Leviev was not only successful in developing his diamond business in the Urals, but also obtained significant preferences in Yakutia - his diamond-cutting companies received 100 percent of the output generated by Almazy Anabara (OAO)  and Nizhne-Lenskoye (OAO). Now those sources have dried up, and today Leviev Group does not even have a long-term contract with ALROSA and buys rough under one-time contracts. Participation in the reincarnation of the project to promote “deep processing” of rough diamonds in Yakutia could significantly optimize the position of Leviev Group in the Russian diamond business.

There are no doubts that creation of another “rough-and-polished diamond cluster” in Yakutia will inevitably turn into a scam a la Tuymaada Diamond, because all the underlying assumptions for such a development are still relevant. Diamond-cutting margins are tiny reaching just a few percent at best (it was 1.7% on average in Yakutia in 2004). Therefore, the mantra of “high added value” can safely be classified as unfair advertising. But the resale of rough diamonds obtained with certain preferences, which have already been mentioned by the plenipotentiary envoy, sounds as good business indeed!

In the middle of the 2000s, Yakutia’s diamond-cutting factories resold up to 80% of rough received from ALROSA with substantial benefits. They were missing a specialized customs terminal in Yakutsk to make them totally happy. This dreamboat never left the supporters of “national diamond manufacturing” and it certainly will come up now, along with the “cluster” and stock exchange. “In recent years, the number of customers buying our goods decreased due to the lack of appropriate conditions and in particular the customs terminal. And this is why diamond business is somehow not progressing in terms of selling diamond production and creating normal marketing conditions. This turned to be a problem for Tuymaada Diamond and other manufacturers. This is a longtime issue brought up during the past 5-7 years. Finally we managed to come to agreement with the State Customs Committee of the Russian Federation and the Ministry of Finance that a customs terminal will be established in our republic from the 1st of January 2004,” - this is from the interview given by Vyacheslav Shtyrov on February 18, 2003. “And the customs terminal in Yakutia is just a necessity. The more so that China and the growing south-eastern markets are almost next door to us. In this case it will be much easier to work and it will be more efficient,” - and this is from the interview given by Vladimir Kychkin on August 25, 2010. Hardly anyone will object that the contribution of these two prominent personalities into in the development of the "Yakut diamond-cutting industry" is difficult to overestimate.

The most recent example proving the "high efficiency" of diamond-cutting in Yakutia is the story of the Nyurbinsky Jewelry and Diamond-Cutting Factory, which had direct access to rough diamonds produced by ALROSA Nyurba (OAO), ALROSA's subsidiary, as well as to its credit support, and yet managed to bring its diamond manufacturing project to a natural finale - bankruptcy, leaving its own debts on the conscience of the guarantor, ALROSA Nyurba.

So, once again we are facing the “diamond-cutting cluster,” plus the preferences in obtaining rough, plus the diamond exchange, plus the customs terminal. The most interesting part remains in the mist – concealing those who will be the ultimate beneficiary of the old, proven framework. But something tells us it would be unlikely to see any new faces.

Sergey Goryainov, Rough&Polished