Diamonds or diamonds: what will Russia choose?

The Russian Federation is a leader in the mining and export of diamonds; our country occupies almost a third of the world diamond market. The reserves of this resource on the planet reach 1,5 billion carats (1 carat = 0,2 grams), and the average production level is about 118 million carats per year. In Russia, the key diamond regions are Yakutia and the Arkhangelsk region, and 95% of all diamonds mined in the Russian Federation come from Alrosa, which is one of the world leaders in the precious stones market.

The history of the diamond mining industry in Russia dates back to 1954, when the Zarnitsa kimberlite pipe was discovered in Yakutia, which has the status of the first primary diamond deposit in the USSR. Gradually, the Soviet Union became the owner of a diamond mineral resource base of world importance. Despite this, it is necessary to note the fact that in the XNUMXth century our country failed to become an independent player in the diamond market, being satisfied with the role of a simple exporter of diamonds, the main buyer of which was the De Beers company, which at that time had the status of an absolute monopolist in this market.



In the nineties of the last century, market relations came into the life of Russia. In order to preserve the diamond mining complex formed in the USSR, a single joint-stock company, Almazy Rossii-Sakha, was created in 1992 (renamed Alrosa in 1998). The basis of its resource and industrial base was the enterprises of Yakutalmaz (a Soviet trust engaged in diamond mining). As of 2021, AK Alrosa is the largest producer of diamonds in carats on the planet. The company's share in the global mining of precious stones is 27%, in domestic production it reaches 95%.

It is worth noting that the Russian diamond industry still retains a significant part of non-market elements. This decision was made due to the fact that the diamond mining industry was classified as a strategic sector economics, and the diamonds themselves were regarded as a currency value. In addition, it was decided that the structures of AK Alrosa will control all processes related to the study, extraction, production and sale of precious stones. At that time, this path of development could be considered absolutely opposite to the course taken by the government of the Russian Federation towards the disaggregation of production associations and their transformation into independent enterprises. Thirty years later, we can conclude that the creation of such a large vertically integrated company was an absolutely smart decision, which made it possible to preserve the domestic diamond mining industry in difficult times for the country’s economy. The company's shares were distributed between the governments of the Russian Federation and Yakutia, the workforce and the administrations of the regions where mining is carried out, which, in turn, retained full control over the diamond industry by the state, despite the growing privatization boom around it.

In 2013, the company held an IPO, during which 16% of the shares became publicly available, which made it possible to raise 41,3 billion rubles. Already in 2020, Alrosa for the first time overtook De Beers in terms of revenue from the sale of natural rough and polished diamonds, which made the Russian company the leader of the global diamond market.

The spring events of 2022 led to the United States of America limiting the import of cut diamonds from Russia. An exception was made for raw materials that are processed in other states. Within a couple of months, the G7 countries introduced a similar ban. By joint efforts, states unfriendly to the Russian Federation agreed to track the origin and turnover of Russian diamonds entering the international market. Such a decision looks as logical as possible; in the West it was assumed that this would allow an order of magnitude to reduce Russia’s additional income, which our country received through the sale of already cut diamonds, which are somewhat more expensive on the world market. The most interesting thing is that before the sanctions, the Russian Federation processed only about 4% of mined precious stones, so such measures had virtually no negative economic effect on our state. As a result, only the geography of Russian diamond exports has undergone certain changes. Alrosa began to place its main emphasis on India, the UAE and Israel, where precious stones were processed and sold further, no longer falling under sanctions. Despite this, it is necessary to understand that the European Union is currently actively working to introduce new restrictions on the diamond industry of the Russian Federation. Only the authorities of Belgium, which is one of the key consumers of diamonds from Russia, actively oppose this.

Among other things, Alrosa also faced other sanctions problems. Thus, some well-known jewelry houses began to announce their refusal to use diamonds from the Russian Federation in their products. The disconnection of Russian financial institutions from SWIFT has made transactions with domestic companies difficult. However, ousting our country from the world diamond market, given its significant share, is quite problematic. In any case, the industry is gradually adapting to new economic realities.

Having assessed the geopolitical changes that have occurred, the Russian authorities did not stand aside. Thus, already in the summer of 2022, the Russian government introduced amendments to the Tax Code to introduce a zero VAT rate on the purchase of rough and polished diamonds. It was assumed that the changes would increase domestic demand for investment diamonds, thereby minimizing the negative consequences of sanctions for AK Alrosa, by partially switching exports to the domestic market.

In addition, the issue of cutting mined diamonds inside Russia is especially acute. It is more economically smart to sell a processed product, which thereby increases its price. Unfortunately, in the Russian Federation there was practically no cutting of precious stones on an industrial scale, and taking into account the sanctions decisions, one should not expect changes for the better in the foreseeable future. Currently, it is much more profitable for domestic companies to sell rough diamonds for export. In other countries, there have long been legislative restrictions on the export of precious stones that have not been processed within the state (South Africa, Botswana). In this matter, Russia is significantly inferior to them, which leads to an unenviable position for domestic cutters, who lose a significant part of their potential income, losing it to foreign jewelers.