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02 may 2022

igor_kulichik_256.pngIgor Kulichik is a well-known expert in the diamond market. He has worked in the diamond industry for 20 years: he was CFO of ALROSA from 2002 to 2017, and a member of the Board of Directors of AGD Diamonds from 2018 to 2022. He is also a member of the Board of Directors of industrial and financial groups in Russia.

In his interview with the Rough&Polished agency, Igor Kulichik speaks about what is currently happening in the diamond industry, how the blocking sanctions placed on ALROSA will impact the company and its Western partners, and which market players will receive preferences due to the new situation.

Now, a lot is written about the jewellers’ dismals after the recession, the Covid-19 pandemic and also the sanctions imposed. This is understandable. What is the situation in the diamond market?

The diamond market, or the so-called “diamond pipeline”, includes miners, traders, cutters and polishers, and jewellers. If any segment has problems, they affect every segment as there are failures in the diamond pipeline, and everything slows down, the flows of both goods and cash. Over the past six months, there has been a clear upsurge in the market as everyone began to recover from the pandemic and the restrictions were lifted, so everyone saw a huge shortage of raw materials, so the customers bought everything from everyone, and prices grew by leaps and bounds. In February, some consolidation was seen, but then, the events of “February 24” happened ...

What is the position of mining companies both in the world and in Russia?

Mining companies have drawn the right conclusions from the past crises and have learned how to properly manage their diamond production and stocks. Almost all companies important for the market are in good financial health. Now, it is too early to make predictions about the impact of sanctions regularly imposed and we must wait for the market to ‘digest’ them and see its response.

What is the impact of the blocking sanctions against ALROSA on the diamond industry as a whole and the well-being of the company? After all, this relates to a whole region associated with diamond mining as well as to tens of thousands of people depending on it?

ALROSA, as a core region-forming enterprise, can reasonably count on the State support. In 2009, an effective form of such support had already been worked out - the sale of part of rough diamonds to the Gokhran (State Precious Metals and Gems Repository). Now, it is right and wise to do the same. The rough diamond sale for $1-2 bn will allow the company to consistently fulfill all its obligations, maintain the diamond production for six to nine months, and build up a new sales and payment and settlement system during this period. Separately, it is necessary to work on a new logistics for the supply of equipment and spare parts, but “parallel imports” should help in this respect.

However, it is believed in Europe that the sanctions should not be introduced mainly to their own detriment. Will this point of view prevail when deciding on the admission of the Russian rough diamonds to the Antwerp diamond exchanges?

It is already clear that common sense in Antwerp has given way to a populist hysteria and self-restraint in fear of public censure and secondary sanctions.

The blocking US sanctions against ALROSA were just the ‘final nail’ as Antwerp began placing the self-imposed restrictions on working with Russia’s rough diamonds even before the imposition of sanctions, and Antwerp is committing economic suicide in its hysterical impulse. Prior to that, there were a lot of problems because in terms of efficiency and speed of work, the Dubai DMCC has long outperformed Antwerp, so large flows of rough diamonds are smoothly moving there, and it will be a strong and sharp spike now. Belgium was too confident in the benefits of their diamantaires, and the net result was that they were ‘asleep on the switch’ and missed the global changes in the diamond industry. 

The total Russia’s exports to Belgium amounted to $6 bn, $2 bn of which were oil products and $2 bn were rough diamonds. And although Belgian Prime Minister De Croo calls not to fight against themselves, Belgium will lose both Russian oil and Russian rough diamonds under public pressure.

Does the US get any economic benefit from the sanctions against the Russian diamond industry?

No benefit at all, except for the increase in the diamond jewellery price. In addition to this, the weakening of the Europe’s trade positions in one more sector.

If the US diamond market becomes closed to the Russian gems, where can they be sold?

Today, it is quite difficult to trace the true origin of polished diamonds, and I do not really believe in the regulatory authorities’ zeal in tracking the jewellery market. All diamond traders will confidently talk about the “non-Russian” origin of their diamonds, not always knowing exactly what rough diamond a particular polished diamond is made of. The US market consumes almost 50% of the polished diamonds sold in the world, but there are also China, India, and Japan with their growing appetites.

What restructuring will take place in the diamond market as a result of the European sanctions against Russia? Which market players will benefit from the new market structure (Dubai, India, China, and etc.)?

The main preferences will be given to Dubai and India, and their positions in the market will become significantly stronger. De Beers will be able to benefit in the short term due to the temporary problems with ALROSA and the absence of part of ALROSA’s production on the market. By autumn, the situation will be more definite when it is clear about the tactics chosen by the segments of the “diamond pipeline”.

India is under pressure to stop cutting and polishing the Russian diamonds. In your opinion, how can this affect India’s cutting and polishing sector?

India is not a small European country, so it is impossible to talk to this country using threats. Given the importance of the cutting and polishing sector for India, we can safely assume that of the US pressure in this direction will produce zero outcome.

What steps should ALROSA take to minimize the negative impact of the sanctions imposed?

I have already spoken about the State support and Gokhran. In the coming months, the company will need to get creative in establishing new customer relationships and payment options. And, of course, it is necessary to look for and establish channels for the supply of critical spare parts right now.

Currently, there are publications in the media saying that some initiatives are being launched in the diamond industry aimed at preventing the distribution of rough and polished diamonds of Russian origin. It is proposed, for example, to indicate diamond provenance in payment documents. How serious is this?

These are irresponsible populist statements by excessively enthusiastic diamantaires - this is both a difficult and unnecessary step. Having certain creativity, it is relatively easy to hide the origin of the gem stones already at the second or third stage of resales.

What are your medium- and long-term expectations for the Russian and global diamond markets?

I’m not going to jump to any predictions now - it would be irresponsible. We must wait at least for the end of the active special military operations and for the reducing of the sanction-related hysteria.

I emphasize once again that we are now in the initial phase of turbulence, and we can only assume the response of individual participants and the consequences. Also, it is quite likely that a major recession will begin in the global economy, and then, some new factors will begin putting pressure on the diamond market.

Galina Semyonova for Rough&Polished