Russians confound De Beers

Moscow diamond glut is hard to control, writes Paul Rodgers

A TOP-LEVEL meeting in Moscow last week between De Beers, the world's largest diamond producer, and Russia, its rival, has failed to calm fears about the sector's future. Although the two sides have agreed to start negotiating again after talks stalled in March, they are no closer to resolving the production issues that are pushing prices down and costing the worldwide price-fixing cartel hundreds of millions of pounds a year

Gary Ralfe, managing director of the Central Selling Organisation (CSO), the 64-year- old co-operative founded by De Beers, joined Nicholas Oppenheimer, the company's deputy chairman, to meet Russian Prime Minister Viktor Chernomyrdin and his deputy Oleg Davydov.

Official reports of the hour-long meeting were positive, but there are fears it could re-ignite the political squabbling within Russia that has made agreement difficult. The last time De Beers went over the head of Yvgeny Bychkov, chairman of the Komdragmet committee for precious metals and gems, it was rebuffed by the finance minister. "It was ham-fisted," said one observer. "All it did was antagonise Mr Bychkov."

Insiders admit that the company is finding it harder to deal with a democratic Russia than the old Soviet Union, where one man had authority over the entire sector. By going to Mr Chernomyrdin, the company hoped to regain that certainty. It wants to sign a new five-year agreement on rough diamonds before the current one expires in December.

But diamond industry analysts say the talks may result in an increase in official exports from Russia but no cut in unofficial "leakage" of gems. The CSO would have to spend more soaking up excess supply on the open market, while De Beers and other cartel members could face cuts to their quotas - currently only 85 per cent of production.

The quotas have created a mine-head "hidden stockpile" estimated to be worth $26bn (pounds 16bn). The CSO lowered prices of some diamond grades by more than 10 per cent recently.

"The Russians won't shoot themselves in the foot, but they're going to increase output over the next five years. The only questions is how much," said James Picton, a Cape Town based diamond consultant for Johannesburg brokerage house Anderson Wilson & Partners. Mr Bychkov's deputy, Leonid Gurevich, has talked about increasing the value of official production five-fold to $5bn in five years.

Russia has almost 800 kimberlite pipes, geological formations where diamonds are found, of which a dozen are economically viable and eight are being developed. It also has a stockpile that could be worth up to $7bn. Another $1bn of stones is on deposit in London as collateral for a loan due to be repaid at the end of this year.

Under the existing agreement, Russia is supposed to sell 95 per cent of its diamonds through the CSO, the rest going to its own polishing industry. But for several years it has been bypassing the system. De Beers estimates Russia sold an extra $1bn of jewels last year. Some were smuggled out, while others were sent abroad under joint venture contracts with polishing houses that were supposed to return finished gems. Another method was to polish one tiny facet of each diamond so that it no longer qualified as rough.

De Beers appears willing to let the Russians polish more diamonds, but is eager to keep the total number it produces under control. Its main fear is that demand for diamonds would collapse if the public lost faith in their value. Mr Picton argues that demand is elastic: if the price fell, people would spend the same amount, but on bigger jewels. If agreement cannot be reached, his theory may be put to the test.