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02 september 2013

The Russian market of precious stones was joined by a new player, which immediately attracted attention having suggested a range of innovative services. The DGTS.RU Company is actually an ongoing auction engaged in purchasing and selling certified polished diamonds and other precious stones, using a specialized online trading platform based in Russia where legal entities and individuals registered and accredited at the auction may act as buyers and sellers. In an interview to Rough&Polished Evgeni Zyablov, the chief ideologist of the project and Member of the DGTS.RU and Art Consulting Boards of Directors told about the work of this company.

What made the DGTS.RU auction come into being?

The whole story began in 2009, when ALROSA and Leader, a management company, were discussing the possibility and prospect of establishing an investment fund where its assets were to be diamonds. Accordingly, the parties discussed the need to create an infrastructure which would be able to maintain the turnover of stones having appropriate expert and service facilities. To join the discussion, the parties invited Art Consulting, an authoritative expert and appraiser of valuables ​​in the Russian art market, recognized by the international insurance market, and the current partner of the International Jewelry Economic Forum to be held in Moscow on September 13, as well as the expert team of the Gemological Institute, which then functioned within the system of the Russian Geological Exploration University. The panel was given two tasks: to establish a certification center based on the GIA standards and create a trading platform compliant with the requirements of the modern investment market in terms of transparency and technology.

These plans were somewhat delayed due to the crisis and meanwhile ALROSA changed its strategy, so Art Consulting, having attracted a wide range of experts, continued to create such a framework. This resulted in establishing the Centre of Gemological Identification and Certification, or the GIC-Centre, which is certifying diamonds and colored gemstones by the Russian standards and GIA classification, and a little later we started to develop the trading platform. Our group of analysts decided that the trading platform to be created would operate as an “auction” in the first phase of its development, a form prescribed by the Civil Code of the Russian Federation, and this was put into operation in the autumn of 2012. The certification center started its work even earlier.

It took about one and a half year to develop the trading platform under the working title of “DGTS” (DGTS - Diamonds and Gemstones Trading Systems). The auction was launched in late September 2012. In fact, it is operating in a test mode, which is scheduled for the entire 2013.

What are the specific features of this auction?

Its first distinctive feature is that DGTS.RU is fundamentally a trading floor in the secondary market. This is a basic condition, though in fact the auction is also offering services to participants of the primary diamond market, in other words to the participants of the “diamond pipeline,” who want to get into open markets outside of their direct business ties.

The second feature is that all the stones being sold are either certified or sold having the specifications of manufacturers – cutting and polishing companies.

The third feature is that the DGTS.RU auction allows both professional market operators and individuals to take part in trading as sellers and buyers.

The next feature is that trading sessions are conducted online. At this point it should be stressed that all transactions are documented and collateralized “on the ground” in accordance with the legislation of the Russian Federation.

An important aspect of the DGTS.RU marketplace is to ensure secure supply of purchased goods. To this end, only those stones are put up for auction, which are physically available in the DGTS vaults.

Generally, it would be more correct to call DGTS.RU a "trading floor" or "trading platform," which provides universal services to the participants of the Russian diamond market. The auction is one of the services rendered by our company to market players. It is a most obvious and understandable form of service and it was the one which was chosen by the DGTS.RU trading platform to start its operations.

What can be said about the strategy of DGTS.RU?

Diamonds across the world and in Russia are increasingly considered as potential investment vehicles. However, to make an investment product emerge we need a transparent infrastructure for property acquisition and property management and also appropriate information, clear pricing, as well as the market efficiently providing the liquidity of such property.

The strategy of our project can be defined as "creating a modern high-tech infrastructure in the secondary market for diamonds and other precious stones in Russia, in the midst of one of the world centers of diamond production."

Right now, there is no such infrastructure in Russia. Hence, there is practically no secondary market in spite of the fact that there are legal grounds for its existence, while consumption is very high. Without the secondary market we see weak activities in the primary market.

We are enhancing the secondary market. This implies the development of advanced friendly services providing auction and non-auction sales, as well as a comfortable environment for both Russian investors and foreign market participants. The turnover of polished diamonds in the world is many times higher than the volume of initial sales of polished diamonds. We believe that the same trend will develop in Russia.

As we believe, the fact that Brillianty ALROSA turned to be one of the clients of DGTS.RU proves the usefulness of our project, on the one hand, and its professionalism and growing reputation, on the other hand. Brillianty ALROSA started to sell certified diamonds through DGTS.RU and certify diamonds at the GIC-Centre in a test mode.

How many auctions has you company held? Are there any results of this work in figures?

Online diamond auctions have never existed in Russia, and the first and foremost feature of DGTS.RU is that it is the first and only one. Now all services are being fine-tuned and almost every month we change auction formats introducing new services, so for us at this stage it is important to have qualitative criteria, not quantitative. If we talk about numbers, then we have held only about 150 trading sessions (auctions) offering approximately 2,000 lots.

To operate an online auction you need a sound technological footing and competent staff. Can you say a few words about your team and technology?

DGTS.RU ensures confidentiality of transactions for auction participants in accordance with international standards and the laws of the Russian Federation. DGTS.RU has a SSL-certificate confirming the absolute level of data protection and communication security. The certificate has been issued by Thawte, the most authoritative international center of digital certificates.

The project has a strong team of programmers. Suffice it to say that program calculations are done and project data are stored in the cloud platform of Windows Azure, which is located in the high-tech, 4th generation, Microsoft data center in Amsterdam. There are only 10 such centers in the world and 2 of them are in Europe, while the information about our project is contained in promotional materials of Windows Azure as an example of a complex project stationed on their platform. Being located on the Windows Azure platform ensures high operational reliability of the DGTS.RU Trading Platform ("the highest level of stability reaching 99.95%").

The second component of the DGTS.RU technological basis is the work of gemologists. Their expert base is the Centre of Gemological Identification and Certification, GIC-Centre. Almost all the experts of the Centre have been educated at the GIA or Gemological Institute of America, and some of them have advanced degrees of GG, that is Graduate Gemologist. For colored stones and jewelry, as well as for stones fixed in jewelry we use the Gemological Centre of GEMEKSIM, well known in Russia, as our expert base. In general, we believe that this is the highest concentration of experts in Moscow, which gives a possibility to apply state-of-the-art technologies.

Who certifies diamonds sold at the auction? And to what extent this certification is compliant with international standards?

Right now we use the newly established Centre of Gemological Identification and Certification or GIC-Centre as our major certification authority. At the same time, the auction accepts certificates of other certification bodies. In addition to this, every stone is subject to the process of verification.

Certificates issued by GIC-Centre are strictly compliant with the GIA standards. In particular, the certificate reads: "The standards of this agency are established and used in strict accordance with the international system of research and classification for natural polished diamonds developed, introduced and promoted by the GIA and used around the world by gemologists having GIA diplomas. The standards of GIC-Centre have been introduced by gemologists working there and having GIA diplomas of GG (Graduate Gemologist) and / or Diamonds Graduate using all the knowledge, skills, information and expert examination standards obtained during their training at GIA."

If stones submitted to the auction have foreign documents, we also carry out verification. In particular, if there is an expert report issued by GIA, we check it using the GIA data base. It is noteworthy that the GIA Diamond Grading Report, though being a most important document for the market, is not considered to be a certificate in the territory of Russia from the legal point of view. This is very important. From the point of view of Russian legislation, a certificate is a document issued on the basis of the Voluntary Certification System registered in Russia under the Russian law. The certification system developed by GIC-Centre is compliant with and directly refers to the standards and classification of GIA, but registered under the Russian law. Due to this, GIC-Centre automatically issues 2 certificates, 2 independent documents for every stone. One certificate is given under the Russian standard, the other – under the GIA standard.

Note that GIC-Centre is the only center that has a GIA certification system registered in Russia. It is also important that GIC-Centre is the only certification authority, which is also a member of the Russian Jewelers Guild.

Has the buyer a possibility to verify the authenticity of diamond characteristics with the assistance of his or hers own expert?

Yes, there are all the possibilities and conditions to do that. Any potential buyer can see a stone or stones with the assistance of those experts whom he or she trusts.

What categories of diamonds are sold at your auctions and where have they been manufactured?

The DGTS.RU trading platform does not limit the range of diamonds that are sold, but in fact we usually sell inexpensive stones at the auctions of certified stones for individuals. If these stones for instance exceed one carat in size, they tend to have relatively low color and clarity characteristics and hence the price: a two carat stone may cost $7,000-10,000 and one-carater may be worth $2,000-3,000, i.e. these are inexpensive stones. But expensive stones may also fit into this picture.

At auctions for certified stones we do not sell gems below 0.3 carat, because certification for this category is counterproductive for certification services are too expensive. At the same time, at auctions and in trading operations outside auctions, which we launched for non-certified stones, the focus is just on small stones starting from 0.2-0.3 carat. These auctions are held for professional participants of the market and jewelry manufacturers. The bulk of stones put on the block are in the range from 0.15-0.20 to 1-1.5 carats or maximum 2.5 carats. Although, once again, larger stones are also offered at such auctions, including gems weighing 5 and 10 carats. But this is rare.

The vast number of stones offered at auctions are cut in Russia, mostly by small independent manufacturers. If some stones were purchased from Gokhran, we usually say so. If, for example, some stones were cut in Russia and offered for sale by the cutting and polishing company, we declare that these stones were manufactured in Russia. Since January of this year, Brillianty ALROSA started a tryout selling of a small amount of certified diamonds through our auction.

Could you loosely describe the lineup of buyers and sellers participating in auctions held by DGTS.RU?

The auctions for certified stones are mainly attended by two categories of sellers - manufacturers and individual owners. Buyers are primarily individuals. Accordingly, the auctions for non-certified stones are visited by sellers, which appear to be cutting and polishing companies, whereas buyers are jewelry manufacturers. At the current stage, the auction is only working with sellers and buyers, who are residents of the Russian Federation.

Is their number increasing or decreasing?

Increasing. Slowly, but increasing.

In what way customers become familiar with the lots to be put on auction?

All the information about the lots may be found on the website of DGTS.RU at http://www.dgts.ru/gia/diamond.

If prior to the auction buyers want to view the items, they must register as participants and provide documents personally. Then, in a consistent mode, buyers may inspect the items "alive." The anonymity of both the seller and the buyer is excluded.

Does your auction check in any way the reliability of sellers offering diamonds for sale?

As for individuals, we check them by their passports and record all the data. Accordingly, they personally sign an agreement with the auction, whereby they assume the obligations in terms of the origin of their stones and their legality. As for the merchants, which are legal entities, we get from them copies of all legal documents, including the Registration Certificate issued by the Assay Supervision Authority and check them, after which these merchants are allowed to take part in bidding if only their documents prove to be consistent with the law.

Do you publish the data about sellers and buyers?

No, we do not. We are acting in the tradition of auctions that do not publish data on sellers – like, say, Sotheby's or Christie's. All the responsibility for sales lies with the auction.

The weak spot in online transactions are payments and delivery of goods. How do you protect the interests of buyers and sellers in this regard?

From the point of view of protecting the interests of customers, we only sell the stones, the supply of which we can ensure, the stones, which physically exist. The basic tool to protect the seller’s interests is that the stones are transferred to the buyer only after full payment.

At the start of the auction, we required a deposit from the buyer. During the fine-tuning of technologies we found that buyers are not used to that system to such an extent that the requirement of collateral even made buyers fail to start the bidding. Therefore, we have abandoned the requirement of collateral, but at the same time this has led to real cases of rejecting the purchased goods. Everything that we do in such cases is to "cross out" such buyers preventing them from any further participation in the auction. Of course, we warn sellers in advance of such a possibility and since this is a start-up, they treat it understandingly.

Do you accept orders from customers for stones with characteristics they request?

Yes, this way of work is now being implemented. We started taking orders from customers and give requests to vendors and manufacturers. Of course, this approach is developing.

Since you have to keep diamonds put up for auction for a certain period of time, have you ever thought about issuing any securities based on such ”stocks”?

Generally, we believe that issuing of securities based on precious stones is an undeniable prospect and that in the future it will take on different forms. But now we are working with real-life items and do not think about the securities.

What do you think about exchange-traded funds, ITFs involving diamonds? Is this idea dead or alive?

Of course, the prospect of various equity instruments, financial instruments based on diamonds is there. However, this is an evolutionary process that will take shape with the development of a transparent fast-moving market for gems, including emerging indices that may become accurate benchmarks for investors. In particular, we, like many others in the world, are conducting research in the field of standardization of individual segments in the diamond market, which could eventually allow standard contracts required by the stock market. We believe that this idea is alive, but not necessarily in the form in which it is being discussed.

Your auction could be the first step towards creating a diamond exchange. What is your attitude towards such a prospect?

In Russia, there is an organization that has long been perceived by the international community of diamond bourses as the Moscow Diamond Bourse. We are in dialogue with its management. Our segment that we are building is no more (and no less) than a technology platform that could well serve as the infrastructural toolkit for self-organization of a professional community in the future.

What are the challenges facing DGTS.RU in the auction operations?

A key difficulty is the absence of consumer patterns, consumer preferences in the Russian market for the auction trade in the Internet, as well as for buying loose diamonds by the population. The reasons are clear: the diamond market in Russia is relatively young and it has not yet developed the traditions of consumption. We offer a lot of opportunities to improve the efficiency of diamond turnover in the secondary market, but this is understood very slowly - it takes time for both buyers and sellers to master these tools.

What are the goals your company would like to achieve in 2013?

During the tryout period of our project we focus our efforts not so much on the turnover, though, of course, we set such tasks, as on making the use of the tools and services offered by the DGTS.RU trading platform a usual thing for members of the diamond market in Russia. Our aim is to drive the process of integrating new technologies into the existing market to a "point of visibility." On the other hand, if we talk about our goals in relation to the genesis of the project, then by 2014 we are going to cater for the interaction between professionals in the investment market and professionals in the diamond market. Yes, this is how we see our prospects.

Vladimir Malakhov, Rough&Polished