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Embattled Alrosa Looks Toward African Diamond Deposits

Alrosa, the fifty-year-old Russian diamond monopoly, has a lot on its plate these days. Not only does the Russia government want to gain control of it — apparently so they can break it up and rearrange the pieces into a state-run minerals consortium — but in February 2006, the European Trade Commission ordered De Beers Group, the world’s biggest diamond company, to stop buying Alrosa’s diamonds. The idea was to open up the Russian diamond market to competition, but the practical effect was to deprive Alrosa of its largest trading partner. That issue is expected to come to a head within six months, whenever Alrosa’s appeal of the Commission’s ruling works its way through the European Court of Justice.

Alrosa remains confident that the Trade Commission ruling will be overturned, allowing them to continue their profitable relationship with De Beers — or at least that’s the party line. Meanwhile, they’ve begun looking elsewhere for diamond trading partners. On September 20, 2006 Alrosa’s president, Alexander Nichiporuk, announced that his firm was poised to begin exploiting diamond fields in Guinea, and possibly the Democratic Republic of Congo — assuming the political situation in that nation stabilizes soon. With this move, Alrosa accomplishes two things: it recoups losses due to declining diamond sales to De Beers, which ordinarily purchases about 27% of Alrosa’s yearly production; and it expands its stake in the worldwide diamond market. It’s expected that if the negotiations to develop the African diamond deposits go through, Alrosa will end up controlling about 25% of the world’s rough diamond market.

Alrosa, which is partly owned by the regional Russian government of Sakha, already has a virtual monopoly on diamonds in Russia, controlling 97% of the supply. Although laymen don’t often think of Russia as one of diamond-rich areas of the world, in fact about 20% of all rough diamonds originate there. In 2005, before the EU Trade Commission ruling went into effect, Alrosa sold between $3 billion and $3.5 billion worth of diamonds, clearing about $55 million in profit. In the first half of 2006, sales totaled $1.71 billion, about a third of that to Russian buyers.

In addition to sidestepping the EU problem, the move into Africa appears to be a part of a strategy to diversity Alrosa’s holdings so that the company doesn’t depend entirely on diamonds for its bread and butter. The company recently acquired a controlling share in the petroleum holding company Sakhaneftegaz, and has announced a collaborative effort with Russia’s state-run oil company, Zarubezhneft, to develop oil and gas fields in Angola (which borders the DRC). This diversification will also help them hedge their bets against currency losses, as the ruble steadily appreciates in value. The ruble’s appreciation is a good thing for Russia, but a bad thing for a company that depends on exports to make its profits.

Alrosa seems to be managing its problems well. It’s has already thumbed its nose at the Russian government’s declaration, earlier this year, that the diamond monopoly would be broken up by July 2006; and the EU ruling, while troublesome, has yet to cripple it. Though it remains monopoly in its homeland, it has proven itself nimble enough to duck international problems and continue to survive and even expand, which is the ultimate proof of success in any business. Whether that’s good for the diamond trade, and for the billions around the world who love diamonds, remains to be seen.



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