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Analysts react to U.S. sanctions against ALROSA

21 march 2022

excl_21032022.pngThe United States recently banned the importation of Russian diamonds in a move that sought to strengthen sanctions made against the diamond giant, ALROSA early March.

The U.S. is the leading consumer of diamond jewellery while Russia is the world’s largest producer of rough diamonds, according to the Kimberley Process.

Russia mines 30% of the world’s rough diamonds, 90% of which are produced by ALROSA.

Rough&Polished’s Mathew Nyaungwa contacted diamond industry analysts Paul Zimnisky (pictured left) and Edahn Golan (pictured right) to find out the potential impact or lack thereof of the U.S sanctions against ALROSA.

Below are excerpts of the interview.

ALROSA, the Russian state-backed diamond mining giant and its CEO were recently sanctioned by the US. What is the potential impact of these sanctions on the company?

Paul Zimnisky

I think the impact on the industry is significant, and I think the impact on ALROSA is significant. While, at least at the time of this interview, the sanctions do not directly prohibit the trading or purchase of primary market Russian diamonds, banking and financial transaction restrictions will certainly hinder the trading of primary market Russian goods, especially in the near term.

This could lead to acute supply shortages especially as the industry approaches mid-year, a seasonally busy time of year when the supply chain begins stocking for the holiday season. The fact that industry excess inventory levels are already at historic lows will further exacerbate the situation.

Edahn Golan

Not simple. One of the most important things for a company is cash flow. For a mining company, there's an added issue. Mining is a very cash-intensive operation. Therefore, generating sales for a miner is especially important. The sanctions may therefore be a challenge for it, even if it has a serious cash reserve and/or the backing of its bankers.

Given that about 30% of the world's rough diamonds come from Russia, the bulk of which is produced by ALROSA, what sort of impact will the US sanctions have on diamond supply and prices?

Paul Zimnisky

I do think significant supply shortages are possible, especially in the coming months. A lot of how this plays out will depend on how the downstream segment of the supply chain responds to the situation.

If major jewellers in the West decide that they do not want to carry diamonds of Russian origin, this will reverberate through the supply chain.

This could lead to premiums of non-Russian goods, and discounts of Russian goods in markets where they are still accepted. Perhaps ALROSA will instead choose to stockpile inventory until more clarity ensues. There are a lot of open-ended scenarios right now.

Edahn Golan

Currently, there's limited impact. Prices of rough diamonds are easing. Smaller size rough diamonds have cooled and larger items are following. 

The dynamics are that manufacturers have an adequate inventory of polished diamonds. There is moderate trade in polished diamonds in the midstream and demand for it from retailers doesn't warrant an increase in current manufacturing levels. Therefore, from a rough diamond demand perspective, the market is not experiencing a rough shortage, leading to price declines.

How will sanctions on Russia’s financial sector impact diamond trading for non-U.S. consumers?

Paul Zimnisky

I think at the very least it will slow, and likely disrupt, trading in the coming weeks and months. I am sure there will still be industry participants and end-consumer markets in the world that will still want Russian goods, so I do believe that trading will not completely halt, but I don’t see things returning to “business as usual” for a while.

What is your opinion on ALROSA’s decision to voluntarily suspend its membership of the Natural Diamond Council?

Paul Zimnisky

The circumstances are unfortunate as the NDC was starting to gain momentum. I don't think the NDC gets the credit they deserve for driving consumer demand growth in recent years, especially in 2021.

While the organisation does not publicly disclose the budget and member contributions, I think it's fair to speculate that ALROSA was one of the largest contributors. Perhaps the current members will decide to increase contributions to close the gap. I believe this would be in the industry’s, and the member’s, best interest.

Edahn Golan

ALROSA is an important market player and sought to influence it positively, which is why it joined and helped establish these organizations. They are important organisations because they show what the industry does in terms of CSR, environmental protection, traceability, community support, and much more. All these efforts are genuine, long-term, and consumer-facing. 

Considering current consumer sentiment in the most important consumer markets, the expectation from ALROSA is to respect the great efforts it and others made over the years, and allow the good work to continue.

With ALROSA under sanctions, the general sentiment is that insisting on staying in these organizations may have a chilling impact.

Mathew Nyaungwa, Editor in Chief of the African Bureau, Rough&Polished