Thursday, October 22, 2009

A Reluctant Tycoon Chapter 1

DECEMBER 4, 1978

If one man can be said to control the world's diamonds it is Harry Frederick Oppenheimer.

Sitting across the desk from Oppenheimer, however, it is hard to imagine that this small, shy man dominated a multi-billion-dollar empire. He spoke quietly, but with great precision. He had a distinct Oxford accent, and as he explained an issue he tended to punctuate his answers with a self-effacing, smile. He was far more candid in discussing his business than I would have expected someone in this position to be, and I assumed that this disarming openness proceeded from his confidence in his control over his immediate universe. His interlocking businesses did after all account for over half of the industrial exports of southern Africa. The heart of this complex is located at 44 Main Street in the heart of Johannesburg'. The block-long building, with its imposing neocolonial facade and marble entranceway, looked much more like a government institution than the headquarters of the mining company. As it turned out, it housed in its offices far more power than most government buildings. Indeed, Oppenheimer even had a private treaty with the Soviet Union, although the terms have never been publicly revealed.

Oppenheimer explained that it was no secret that De Beers acquired through subsidiaries all the uncut diamonds that the Soviet Union wanted to sell on the open market. "We have of course no reason for concealing this arrangement other than the Russians prefer not to receive any public attention for obvious reasons," he said almost apologetically. The "obvious reasons" for obscuring the arrangement with De Beers were that the Soviet Union had for some fifteen years called for a total boycott of South Africa and South African businesses, and its dealings with De Beers, if made public, might prove embarrassing.

But how long could such an unholy alliance last? The Soviet Union apparently had ambitions of its own in southern Africa, and at some point geopolitical considerations might take precedence over business considerations. I asked how he could be sure that the Soviets would renew the deal.

"We paid the Soviet Union more than half a billion dollars last year," he answered. "This is not a sum it can easily replace, and I can see no conceivable reason why it would want to abandon such a profitable arrangement." His logic was brutally direct: De Beers provided the Soviet Union with its single largest source of hard currency (only petroleum was a more important export for Soviet trade in 1977)If the Soviet Union withdrew its diamonds from De Beers, it would have to find other outlets to sell its uncut diamonds. And if it precariously dumped these diamonds on the market, the price would collapse, and the Soviet Union would lose an important source of foreign exchange. "What could the Russians possibly gain by competing with us?" he asked rhetorically.

He further pointed out that De Beers provided the Soviets with certain types of industrial diamonds that were important for drilling and producing electronic wiring. Its Siberian mines apparently did not produce these strategically important diamonds. By selling gem stones to De Beers, the Soviet Union received the credits for importing the industrial diamonds it needed.

The Soviet Union also had considerable influence in other diamond producing areas in Black Africa, such as Angola. I wondered if the logic of the arrangement between De Beers and the Soviets required the Soviets to use their power in those countries to help De Beers retain its control over diamond mines there. "You will have to address that question to the Africans concerned," he replied abruptly. The tone in his voice made ii clear that there were aspects to the Soviet arrangement that he decidedly did not want to discuss.

African revolutionary movements had also been perceived as a threat to the stability of the diamond cartel. T here had been particular concern expressed about the safety of De Beers mines in Namibia, which were the world's single largest source of gem diamonds. Technically, Namibia was then a United Nations trusteeship. In fact, however, South Africa administered this diamond-producing territory as if it were a province of that country. This had led to a potentially explosive situation. The United Nations had demanded that South Africa recognize SWAPO, the guerrillas group battling for independence, and hold elections under the auspices of the UN. If South Africa failed to comply with this ultimatum, the United Nations threatened to impose economic sanctions, including possibly an oil embargo. To buy time, South Africa decided to stage its own election in Namibia excluding SWAPO. Since this election would not lead to a change in the status of Namibia, or elect anyone to public office, it was being staged for the benefit of the world press. Condemned by SWAPO as a "charade," it was scheduled to begin later this week

"What the South African government hopes to accomplish by this exercise is beyond me," he commented. He suggested that even if the South African government turned out massive vote, it would only delay the movement toward independence in Namibia.

If independence was inevitable, De Beers might eventually find that its diamond mines there would be controlled not by a friendly government in South Africa but by a SWAPO revolutionary government. Would this pose a threat to De Beers' diamond monopoly?

"We are prepared to deal with any legitimate government that comes to power there," he replied unernotionally. The fact that SWAPO had announced that it planned to nationalize De Beers' diamond concessions in Namibia did not faze him. "We now pay about 8o million dollars a year in taxes on those diamonds, and that provides the territory with most of its revenues," he explained, and then added, "whatever government eventually comes to power they will need this revenue to survive." His point was clear: Namibia needed De Beers' money as much as De Beers needed Namibia's diamonds. He was confident that SWAPO, or any other group in Namibia, would accept this bargain.

Oppenheimer was concerned with the possibility of the United Nations imposing economic sanctions against South Africa, since his empire exported billions of dollars worth of South African commodities. He did not believe, however, that they could affect the diamond trade. "I can think of no commodity less susceptible to dangers from UN sanctions than diamonds," he said. He was stating the obvious: diamonds were after all one of the most convenient commodities to transport across borders. For example, an entire month of production of diamonds from the Namibian mines, worth $40 million, could be smuggled out of Namibia in an attache case.

Oppenheimer also gave little credence to the fear that De Beers might be running out of quality diamonds. He pointed out that De Beers was developing vast new mines in the Botswana desert, which he planned to visit the next day. These Botswana mines would provide the world with an ample supply of diamonds well into the I 99os.

I asked Oppenheimer whether this move into the independent country of Botswana was meant to make De Beers less dependent on South Africa for its diamonds.

According to the development plan that he had outlined, Botswana would soon be producing more diamonds than South Africa. He scoffed at the idea that the mining of diamonds in Botswana would have "any significant effect in divorcing De Beers policies from political and social problems in South Africa." He emphasized, "We are, and will remain, a a South African company.

It was clear, however, that in the 198os De Beers would come increasingly dependent for its diamonds on African countries. In light of the continuing and intensifying confrontation between South Africa and Black Africa, it seemed questionable how effectively De Beers could operate mines in these independent countries with hostile regimes. Oppenheimer insisted that the black-white confrontation in Africa would not present a problem for De Beers. He termed the arrangement between De Beers and Black African nations "Mutually advantageous." He further suggested that it might be useful for me to inspect at first hand some of De Beers' mining operations in independent nations to more fully understand how the "arrangement" works. He offered to provide me air transportation and access to the mines in Botswana, Lesotho and other independent nations.

I accepted his offer.

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