Russia's response to the fall in global diamond prices has been to continue production--but to stockpile, rather than sell. This behavior has prompted speculation that the authorities are planning to manipulate international market prices.
In May, it was estimated that the world wholesale market for polished diamonds would fall from $21.5 billion in 2008 to around $12 billion this year.
Most diamond-mining companies responded to the weakness in the market by halting production, in most cases for several months. De Beers, which in recent years has supplied around 40% of the world market, cut its output earlier this year by 91%. The Argyle mine in western Australia, the country's largest, stopped production, resuming only very recently. Botswana's major mines were closed for three months, putting 4,500 people out of work.
Russian response. The Russian response has been different. From January-May, diamond production was officially reported to have been down only 1.9% compared with the year-earlier period. The new Russian arrangement has been that the dominant producer, Alrosa (which accounts for 97% of Russian output), has been selling a large part of its output to the State Repository of Precious Metals and Precious Stones (Gokhran)--and selling very little onto the world market.
Role of Alrosa. Before other producers closed their mines, Alrosa accounted for about 25% of world output, against De Beers' 40%. In recent months, it has become by default the world's largest producer. Alrosa controls some production in Angola and western Russia, but the bulk of its output comes from the Republic of Sakha (Yakutia) in eastern Siberia. The regional government of Yakutia used to have a great deal of control over the industry, but under Prime Minister Vladimir Putin, the center has--in this as in other affairs--asserted itself. This is reflected in the present ownership structure of Alrosa:
--The company is state-owned and is therefore subject to direct state supervision. The main direct link is with the Ministry of Finance (MinFin): Finance Minister Aleksei Kudrin chairs Alrosa's supervisory board.
--Regional politics also loom large. Yakutia republican President Vyacheslav Shtirov has for some time been at odds with the CEO of Alrosa, Sergei Vybornov. Shtirov lobbied Putin about Alrosa, seeking to take over the company himself. Vybornov was still in place after the shareholders' annual general meeting on June 20, and shortly thereafter was part of the delegation that traveled with President Dmitry Medvedev to Africa. However, he was dropped from the Alrosa supervisory board, on which Shtirov sits.
--These local conflicts probably added to Moscow's worries about keeping Yakutia and Alrosa satisfied. However, the federal authorities' main concern was to minimize unemployment in Yakutia's diamond-mining settlements. This is likely behind the plan to keep production going, even if it means hoarding diamonds.
Stockpiling strategy. So far as stockpiling is concerned, Gokhran--which originated in the era of Peter the Great--was the obvious candidate, particularly because of its connections to MinFin. In effect, production by a MinFin-supervised business (Alrosa) is now being sustained by selling output to an entity that is also controlled by MinFin (Gokhran). However, exactly how the Alrosa-Gokhran-MinFin arrangement will work out remains unclear.
Outlook. Faced with falling demand, all diamond producers have cut back supply to the world market. Russia has been unusual in doing this by stockpiling production rather than cutting output, but its motivations lie more in domestic politics than in market rationale. However, the consequences for the international diamond market do not look to be substantial. Russia is not likely to become a 'swing producer' of diamonds, with built-in, long-run market influence.
Oxford Analytica 07.06.09, 6:00 AM ET
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