While sitting down to write this memo, I was informed by phone that an Israeli citizen arriving at Moscow’s Sheremetyevo Airport from Tel Aviv earlier this week had been arrested after allegedly trying to smuggle a batch of jewelry and precious stones. The suspect was detained after Russian customs officials discovered 2,560 diamonds (and also some 19 emeralds, 13 rings and six pairs of earrings) hidden in his packed undergarments – all nicely wrapped in cellophane packages. Trying not to disclose the identity of the suspect, Moscow customs spokeswoman Yelena Kuvareva only said that it involved ‘our former compatriot’ and called him a ‘recognized expert in precious-stone cutting’, thus labeling the alleged smuggler as a Russian immigrant to Israel.

According to Moscow sources, the polished diamonds ‘might have been mined in Russia's North and sent to Israel for cutting.” A sad and disturbing news item like this wouldn’t warrant the homepage attention of IDEX Online if we didn’t believe that there are more fundamental issues involved.

When in the early and mid 1990s – in the so called Russian transitional years – the Russian authorities stimulated and encouraged the establishment of cutting factories joint ventures in order to attract foreign policy know-how, foreign capital and marketing skills, it was clear to all parties involved that a considerable part of the rough allocated to domestic factories could not be processed economically in Russia. Though it was never officially condoned, the practice was – de facto – tolerated. [Incidentally, in South Africa in those days a similar situation existed: rough diamonds allocated to local factories were smuggled to overseas cutting centers and the resulting polished was then smuggled back in. The players in the industry – and the relevant authorities – were always aware of these practices; often allowing them, without officially endorsing them.

The smuggler that was arrested this week was importing polished, not rough diamonds. Without being privy to the precise details, it is fair to assume that these polished diamonds were destined to reach a Yakutia or Moscow factory which would report (and declare) them as representing domestically processed diamonds. The import taxes on polished would make declaring “impossible”, as the taxes would neutralize any advantage gained by the very exercise.

Needless to say – and it may be useful to repeat it anyway – that these are all undesired practices which should belong to the past. In the post-Kimberley, post-September 11 diamond business, there is no room for the ‘schlepping’ of diamonds anymore. Transparency, accountability, auditable supply chains and visibility are all keywords that should – and eventually will – dominate and characterize the contemporary diamond industry and the business of tomorrow.

Each and every person smuggling diamonds into or from Russia is violating the law. Persons doing so are taking risks. In the past these risks were minor; today they have become more serious. In the past, those who smuggled rough diamonds from Russia always had the ‘comfort’ of knowing that the authorities in the cutting centers condoned the practice – the authorities were already happy that the goods were declared at the point of entry in the cutting centers. In Belgium the authorities were so accommodating that they allowed the Russian rough to be recorded as of Liberian origin. Indeed, the practice of cutting rough diamonds allocated to Russian domestic factories in cutting facilities overseas is no secret.

Former Alrosa president V.A. Shtyrov lamented in one of his company’s annual reports that “large contradictions have manifested themselves inside the Russian diamond complex due to the conflicting interests of the newly created diamond-cutting joint ventures and the Almazy Rossii-Sakha Joint Stock Company. In the past year, the company was losing a great deal because of the disparity between the world market prices and the prices of the transitional period in Russia. This seriously affected the world diamond market as well. At present [and this was written in 1996-1997] rough diamonds from Russia still find their way to the world market bypassing Almazy Rossii-Sakha.”

Though the marketing contracts with De Beers appointed the DTC as the “exclusive buyer” of Russian rough exports, Shtyrov acknowledged that there always were multiple sellers. He wrote in 1997: “The experience of the past three years has shown that the three-channel system for rough sales in Russia (the sales of rough diamonds are controlled by three bodies: Roskomdragmet, Almazy Rossii-Sakha and Sakha-Komdragmet), with artificially low prices, results in strained relationships with our main trade partner, De Beers.”

It has always been officially acknowledged by Alrosa officials and others that the price of rough supplied to the domestic industry was on ‘beneficial terms’, i.e. quite below the worldwide market price. It was the very access to cheaper rough that led foreign diamantaires to enter into domestic joint ventures – they had no other reason (At least, no other reason that we know of). The ‘smuggling’ became part of a rather institutionalized system. The risks were minimal. In cases when one was caught, it was usually swiftly settled through the payment of fines. 

Rewriting the Rules

Today, the rules are being rewritten. No Russian rough can enter the cutting centers without a Kimberley certificate. There is a bitter irony here: Kimberley has done far more to stop smuggling rough out of Russia than it ever accomplished in stemming the flow of illicit goods from Africa.

What alarms us is the fact that there are still diamantaires who are not properly reading the writing on the wall. In the past few weeks, one Israeli diamantaire jailed in Moscow received a 12 years jail sentence. The formal charges against him were made only after he had already been in custody for a few years. When he received his day in court, the smuggling charges were confounded by the addition of “crimes against the nation’s security.” That’s almost a formula for getting a life sentence. The son of a well-known Belgian diamantaire serving time in jail in Russia is believed to have suffered bodily injury in jail – perpetrated by other prisoners.

Another leading and respected diamantaire and industry leader, arrested in Hungary, is now fighting extradition procedures aimed at getting him to stand trial in Russia. Technically, one may call these people ‘criminals’. We see it differently. They are mostly diamantaires who failed to recognize that the times have changed. What were “standard operating procedures” yesterday have now become unacceptable illegal behavior. The business has changed – and it has changed for the better.

It is by far preferable to recognize that today and, when relevant, take any steps required. Disposing of otherwise uneconomic ventures or taking a financial beating is still preferable to spending many years in a Russian jail, wondering what went wrong. There is really no reason why the arrest made this week shouldn’t be the last.

There is, however, also a message to the Russian government. It is the government’s responsibility (even duty) to ensure a legal operating environment which will enable domestic factories to flourish, without requiring joint venture partners to violate laws just to maintain economic viability. A beginning has been made already by allowing domestic factories to officially export some of the locally bought rough diamonds. But more can be done – and this is also in the best self-interest of Russia.