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Maxim Shkadov: "We need to create our own sales channel providing maximum penetration to the market"

06 october 2014

maxim_shkadov_fullsizel_08112013.jpgTaking into account the ongoing discussion about the future of the Russian diamond industry, Rough&Polished asked Maxim Shkadov, CEO of Kristall (Smolensk), the largest diamond manufacturer in Russia and Europe to answer our questions. In his interview, he expressed his views on the problems currently facing the industry.

Obviously, the Russian diamond industry is on the verge of major transformations, both organizational and personnel. Being an export-oriented industry, the effectiveness of future decisions depends on a correct understanding of new challenges existing in the global diamond market. What are they, in your opinion?

At present, sales patterns practiced by major diamond miners - ALROSA and De Beers - are arranged in such a way, that they create an illusion of incessantly high demand for diamonds fr om numerous customers. However, in fact there is only one buyer, which is India. Sightholders may have registered offices in Belgium or any other place, but 90% of rough actually goes to India. And the purpose of Indian colleagues is to control the market and they do not conceal it. The Indian diamond business today is logistically well built and propped up by strong government support, operating a turnover of around $ 15 billion. Given there are only about $ 18 billion of global credit resources to fund rough purchasing and diamond manufacturing, it should be recognized that the diamond market becomes a "buyer's market". This means that buyers start to control prices: currently, rough diamonds which are -7 in size and lower are bought and processed by Indian manufacturers only and judging by price movement it can be said that prices for these diamond categories will never be possible to raise because they are dictated by a monopolistic buyer. Keep it in mind that there is a lot of such rough in diamond miners’ product range. Simply put, ALROSA’s sales are already fatally dependent on the state of the Indian economy and banking system. De Beers is facing the same problem.

But "Indian goods" are not all the rough there is...

The notion of "Indian goods" is being quickly eroded. India is already processing all categories of rough diamonds. There is a huge inflow of all kind of state-of-the-art equipment, the latest laser and computer systems and microscopic examination devices coming to India. This country has a calculated and well-tried strategy to capture the market. Wh ere is Israel as a diamond center nowadays? It is almost absent in the market, it is completely suppressed by Indian competitors. Now the Antwerp Diamond Bank is going out of the diamond business, and this is about $ 1.6 billion in credit lines. If it will be replaced by Indian banks, Antwerp may cease to exist as a diamond center. The diamond market has been historically created as a "seller's market," but today it is turning into a "buyer's market," which poses a serious threat that diamond miners prefer to ignore.

What should be done to counter this threat?

We need to create our own sales channel providing maximum penetration to the market. Russian rough, Russian processing, a Russian world-class jewelry brand and our own distribution network. This is the only way to ensure safe development of the Russian diamond industry.

There is diamond mining and diamond manufacturing in Russia, but there has been no world-class jewelry brand since the days of Faberge in this country. How much time and money will be needed to create it?

We shall need an advertising budget of about $ 15 million per year. With this funding, it is absolutely realistic to advance a world-class brand to the market in the course of 5 years. It should be a specifically Russian, nationally colored brand. It would be a good idea to turn back to Faberge.

Who can serve as a source of such funds?

In the first place, ALROSA should be interested in implementing this strategy. For this company, it means getting its own safe and sustainable distribution channel. Otherwise, it risks becoming an appendage of the Indian diamond business in the very near future. In addition, there is Almazyuvelirexport having a very good financial strength, which is absolutely not involved in the domestic diamond and jewelry business. This company is engaged in selling “monitoring lots” from the current production of ALROSA, which appears to be an obvious anachronism in modern conditions. What do they try to monitor in this way? They also sell some remaining stocks from the State Fund, but the State Fund can cope quite independently with such a task, it does not need an intermediary. A reorganized Almazyuvelirexport could become a basis for a team creating and promoting a Russian world-class jewelry brand.

Right now, the industry is discussing a number of innovations, from creating a Territory of Priority Social and Economic Development (TOPSED) in Yakutia to attracting some of the world’s top jewelry brands as strategic partners. None of these schemes implies the creation of a national jewelry brand. Do you think such decisions can have any prospects?

In order to produce competitive goods at manufacturing costs existing in Yakutia they will have to make top-quality products for which they will need specialists they haven’t got. Therefore, Yakutia’s TOPSED may just turn into an intermediary dealing with rough exports. As soon as there will be a customs terminal and diamond exchange there, a flow of rough will start going to India and China. Of course, this will bring no positive aspects for the industry. Strategic partnership with the world's top jewelry brands is fraught with conflicts of interest. The diamond market is under tremendous pressure and competition there is extremely high - Rapaport alone has currently $ 7 billion worth of freely offered diamonds. In such an environment, a brand partner can always dictate the terms of cooperation, which are the best for him, imposing prices and assortments. However, if you have the entire chain in your hands - from the mining field to the diamond ring in a boutique under your brand, you are able to get the maximum possible from the market. Unfortunately, there are almost no goods produced in Russia, which are worthy of global branding. The diamond industry appears to be a happy exception. Here we have a chance, which cannot be missed.

Sergey Goryainov, Rough&Polished