Although most people think of Africa and DeBeers first when they think of diamonds, Russia, the world’s largest country, is also a major diamond producer. Its mines yield about 20% of all the world’s diamonds, and every one is owned by a single company: Almazy Rossii-Sakha, better known as Alrosa. The Alrosa diamond monopoly extracts about $2.89 billion worth of diamonds a year from Russian mines, clearing a cool $500 million in the process. According to Alrosa estimates, there are enough diamonds in Russia to keep them in business at that level for another fifty years.

That is, if the Russian government allows Alrosa to stay in business. Diamonds are a precious commodity, and Vladimir Putin’s administration has shown no hesitancy in taking on powerful Russian companies — and taking them over. The state has owned a significant share of Alrosa and its diamonds since the breakup of the Soviet Union in the late 1980s and early 1990s, and since 2001 has expressed interest in increasing that share.

This interest in diamonds has itself increased since Alrosa’s recent acquisition of a controlling share in Sakhaneftegaz, a holding company divested by Yukos, an oil company that has also been a target of Kremlin manipulation. Sakhaneftegaz owns controlling interests in several large oil and gas exploration firms all over Russia. Its acquisition by the diamond monopoly centralizes two profitable if unrelated sectors of minerals production in Russia, diamonds and petroleum. Indications are that the Kremlin is interested in taking over Alrosa not just to have a bigger say how Russian diamonds are handled, but also as a core around which to build a larger state-owned minerals company. Some observers believe that the Putin government intends to merge Alrosa with another large state-run company, Norilsk Nickel. This would give Moscow direct control of diamonds, oil, and several strategic metals.

At the moment, the Russian state owns 37 percent of Alrosa, so it directly controls about 7.4% of the global diamond market. The regional government of Sakha in eastern Russia controls 32 percent of Alrosa stock, with the rest in the hands of company employees. If the state can acquire as little as 13 percent, plus one share, it will have controlling interest of a full 20% of the world’s diamonds. The government tentatively estimates Alrosa’s value at about $6.4 billion, which means that each of the diamond monopoly’s shares is worth about $30,000 to them — five times the market price. This could make the shares easy to acquire from smaller shareholders, but Sakha may be unwilling to part with the $500 million a year it gets from Alrosa diamonds.

Although the move to acquire majority interest in Alrosa suggests, on the surface, a centralization of government control in the mineral industry, according to Finance Minister Alexey Krudin the real intention is to liberalize the market for Russian diamonds. If the government controls diamond production, it can dictate prices and put an end to the existing monopoly. Krudin expects the diamond monopoly to de broken up by no later than July 1, 2006 — possibly sooner.