There is much speculation as to why Alrosa is refusing to accept the previously discussed joint decision by the EC and De Beers. Even in the best of circumstances, Alrosa would not be able to sell more than $275 million a year (about 10 percent of its production); there is no imperative for DTC marketing. (Assuming a 5 percent net margin, the income generated for De Beers may not be worth legal vulnerabilities associated with a continued cartel image, in which De Beers would market the production of other producers. Without Russia, De Beers would solely sell its own mining output.)

 

The reason that Alrosa wants an agreement with De Beers is to avoid the loss of investor confidence in a series of bonds the company issued – and still plans to issue – to raise money on the international financial markets. Taking it a step further, Alrosa’s urgency to maintain access to financial markets (by remaining under the De Beers ‘umbrella’) is related to the billions of dollars needed to finance the shift from open-pit to underground mining.

 

Alrosa has begun implementing alternative arrangements for the sale of diamonds. The company is also considering other strategies, including the establishment of a sales outlet outside Russia. Alrosa privately admits that “such alternative arrangements are, however, not yet sufficiently well-established nor comprehensive enough to accommodate the full range and volume of rough diamonds sold to De Beers. The implementation of comprehensive alternative arrangements will require significant time and expense. Depending on the timing and the volume of reductions in sales to De Beers required by the European Commission, we may have difficulty maintaining the current sales level, until adequate arrangements have been made.”

 

If anything, Alrosa’s appeal to the courts reflects a confused Russian diamond industry at a crossroads. It knows where it came from, but it does not really know where to go. Much of this identity crisis has to do with pending changes to shareholder control of Alrosa. Sometime in 2007, the federal government (which in resource management terms means President Putin) will assume 50 percent plus one share in Alrosa, up from the 37 percent it now holds. The government of Yakutia, where the mines are located, will continue to hold 40 percent.

 

The Kremlin has not clearly outlined its vision for the future. The Supervisory Council and former Alrosa President Alexander Nichiporuk were busy setting their own agenda and investing heavily overseas, something that is contentious in Russia. Whenever he assumes control, President Putin will not be able to go back to the ‘good old days’, as the EC has effectively closed that option. (This assumes that the appeal will not be successful.)

 

While working with De Beers, Alrosa often pursued its own interests in total disregard of its partner’s needs. It will be interesting to see how Russia will act when the country owes no allegiance to the company to which it has sold its rough output for over 50 years.

 

Challenges to Stability

The policies of Alrosa’s management and the Russian Federal and Yakutian governments have been quite stable. However, this changed in 2005-2006 when President Putin made it clear that he wanted to secure (for the federal government) a majority shareholding of 50 percent plus one share in Alrosa. 

 

This set off a complex exercise in establishing the total value of Alrosa and its subsidiaries, a process that is still continuing. The Russian Property Agency owns 37 percent of Alrosa, the Yakutian Property Ministry holds 32 percent, eight districts in Yakutia own 8 percent, and company employees hold 23 percent. Various minority parties have attempted to sell their shares to foreign investors, something that has led to prolonged court cases.

 

The battle for control of Alrosa became serious in early 2007. Since mid-2006, Vneshtorgbank (VTB) has consolidated 10.5 percent of the shares it had bought back from minority shareholders. These shares would eventually end up in the federal government’s hands, so Moscow may – at the end of the process – control well over 50 percent, maybe closer to 60 percent of the company. The negotiations over the value of Alrosa seemed to have come to a close, with a total of $8.7 billion. Having an agreed upon value is a prerequisite to the redistribution of shares and the issue of additional paper.

 

As alluded to earlier, the future of Alrosa seems uncertain. Yakutia President Vyacheslav Shtyrov, who previously served as president of Alrosa, was engaged in a bitter struggle to retain some measure of autonomy over his republic’s vast diamond resources, but he seems to have reached a compromise. President Putin has agreed to support him for re-election as President of Sakha. In return, he is understood to have allowed the central government a free hand in Alrosa’s reorganization.

 

The republic is greatly dependent on Alrosa’s revenues, so surrendering company control to the federal government requires prior agreements on budget relations between Moscow and Yakutsk, ‘rental’ agreements involving Yakutia properties to Alrosa, defining the income to be accrued from mineral rights, and a range of related points.

 

In the past few years, the Kremlin has not enunciated a clear strategy (on issues like domestic manufacturing, international diversification, and investments), while Alrosa management (including the supervisory board) has been crafting its own policies, which sometimes seem inconsistent with the Kremlin.

 

Compared with most other producing countries, the Russian diamond industry has, by and large, a record of stability, of orderly mine development, and of following reliable and predictable policies that have supported growth of international diamond markets.