Alrosa Suspected Of Violating Competition Laws
April 08, 05Federal investigators charge that Alrosa may have supplied affiliated diamond factories with rough diamonds at concessionary prices and thus possibly gave these factories an illegal advantage over other diamond factories. Russia’s Federal Anti-Monopoly Service (FAS) is accusing both the Yakutian government and Alrosa of illegal conduct favoring Yakutian factories over other Russian factories.
Russia seems like an unlikely place for a diamond monopoly investigation as it has only one producer. But Alrosa’s selling practices seem to have upset quite a number of officials and organizations. The Federal Anti-Monopoly Service, in its present form, was created less than a year ago. It is a ministerial level authority that “pursues the state policy aimed at promoting the development of commodity markets and competition. It exercises state control over the observance of anti-monopoly laws, prevents and terminates monopolistic activities, unfair competition and other actions restricting competition.”
The Federal authorities are questioning the validity of Yakutian rules and, in particular, seem to believe that various agreements between Yakutia and Alrosa are violating Russian anti-monopoly laws .
A special commission, to be headed by FAS deputy chairman Andrei Tsyganov, will be convened in May to review the case. According to the Interfax news service, “there is suspicion that the government of Yakutia and the legislative assembly of Yakutia violated article 7 of the law governing competition and restrictions on monopolistic activities in commodity markets, and that the Yakutian government and Alrosa violated article 8 of this law”.
It is claimed that Alrosa charges a premium over rough export prices to domestic diamond manufacturers. However, when selling to its own diamond-cutting subsidiary, Brillianty Alrosa, and the Sakha-based diamond-cutting group Tuimaada, the company has apparently offered discounts and preferential credit arrangements. President Vladimir Putin has been under considerable pressure to “clean up this mess” and now he seems to be doing just that. But there is much more to it.
My Moscow sources suggest that Russia’s diamond manufacturers are exerting pressure on investigators to also compare rough diamond sales prices made by Alrosa in its sales to De Beers. An investigation by officials of the Russian Federal Depository [Gokhran] showed that in recent years Alrosa has supplied diamonds to De Beers at a price substantially lower than those to domestic enterprises. For example, in 2004 the price list for Russian diamond cutters was on average eight percent higher than for De Beers. Taking into account the customs duties on exporting rough diamonds, Alrosa could have received from sales of its product to the domestic market 15 percent more than from sales of the same product to De Beers. Why, it is asked in Moscow, should De Beers receive preferential treatment in purchasing rough diamonds over domestic producers?
Russian cutters have complained to the Kremlin that manufacturers suffer unfair discrimination compared to the preferential treatment afforded to De Beers:
- Manufacturers pay more for the same rough diamonds.
- Even at the higher price, manufacturers don't receive a sufficient quantity of material, stalling production lines and causing unutilized capacity at many factories to have.
- When manufacturers want to export those diamonds not suitable for diamond cutters, they have to pay another 6.5% in customs duty, while for De Beers this duty is paid by Alrosa.
Thus, at a time when most diamond producing countries are following policies supporting domestic manufacturers, the policy of Alrosa goes against the trend, displacing the interests domestic producers to the benefit of raw material export. The domestic diamond cutting factories have repeatedly declared that they are ready to buy all rough diamonds that today go to export, at the same price.
The analysis done by the Gokhran (a copy of which has been secured by this author) confirms further that there are enormous price differentials between sales to De Beers and those made in the open market. This difference in 2004 reached more than 18%, while in several recent years it reached up to 30%.
These figures were arrived at by comparing the results of sales in the free market through Almazjuvelirexport (the Government owned company for salesof diamonds and precious metals), which is currently marketing a 5% cut (a ’window to the market”) out of rough diamonds sold to De Beers, for the purposes of price monitoring.
Some Moscow officials have calculated that, as a result, yearly revenues from diamonds in Russia are $100-$150 million less than they could have been. In the last five years alone, Russia may have been underpaid to the scale of $500 million! “Instead of Russia, De Beers and its sightholders received this money,” said one source, who ignored that Alrosa gets many other benefits (such as immediate payments, market stability) from its trade agreement with De Beers.
It is puzzling, however, why the Kremlin chooses to launch the abuse of monopolist position power within the Russian Federation at this particular time. The European Commission’s Competition Authorities have not yet published the proposed Alrosa-De Beers trade agreement in its Official Journal, which then provides for another month of consultations with the public. Though it is assumed that the agreement, calling for a gradual reduction of annual sales from a $700 million level in 2005 to a $275 million level within a sixyear period. Alrosa will not sell more to De Beers – not directly or indirectly.
According to the notification to the EC, Alrosa may sell rough diamonds to parties other than De Beers provided that it is not doing so in order to circumvent the commitments. It must, in good faith, take all reasonable steps to ensure that diamonds supplied to third parties are not then supplied directly or indirectly to De Beers. De Beers accepts a reciprocal commitment in relation to its purchases. Bruxelles sources say that the official notice in the Official Journal can come any day now.
To anyone who has been watching or monitoring the deterioration of relations between the Russian federal government and that of the Republic of Sakha (Yakutia) this investigation itself will not come as a surprise. Though Alrosa’s Russian diamond mines are all in Yakutia, the federal government wants to secure greater control over diamonds. There have been reports indicating that relations between President Vladimir Putin and Yakutia president (and ex-Alrosa president) Vyacheslav Shtirov have almost become hostile – with the latter committed to safeguarding Yakutia’s control over Alrosa’s destiny.
Though it would be too dramatic to talk about “a fall-out”, the cool relations are in marked contrast to only a few years ago, when Putin allegedly ensured the election of Shtirov as President of the Republic of Sakha. According to a Mineweb description of events, it was Putin who simply told Shtirov to vacate the presidency of Alrosa, and become the President of the regional republic, replacing the two-term incumbent, Mikhail Nikolaev who was threatening to defy the electoral law, as well as the Kremlin, and offer himself for a third term. Nikolaev had been the boss of the republic since the Soviet Union had been demolished, and he had run it as a personal fiefdom by arrangement with President Boris Yeltsin in Moscow. The quid pro quo for Nikolaev was that he rigged the local vote for Yeltsin whenever that was required, and provided diamonds on demand too.”
According to Mineweb, “Putin offered Nikolaev immunity from prosecution with a senatorial seat on the Federation Council. Shtirov was told the fiefdom would be his on condition he shared the running with the federal authorities, led by the Finance Ministry, which is the federal agency responsible for the diamond industry; it sits on the board of directors of Alrosa, supervising the state’s 37-percent shareholding; and it runs the Gokhran, the agency in charge of the state’s stockpiles of diamonds and precious metals.”
The scheme worked. Shtirov became president and tried to be his ‘own man’ and not giving in too much to the Kremlin, almost ignoring the fact that it was Vladimir Putin who got him elected to begin with. In contemporary Russia nobody gets away with challenging or defying the Kremlin. Vladimir Putin therefore put in his own President’s Men in Alrosa, namely Colonel Yury Ionov, in charge of the company’s legal affairs and cash-flow security, and Alexander Nichiporuk, who after a short stint as vice-president, became Alrosa’s president last November.
Nichiporuk (on whose corporate strategies we wrote an Idex column a few weeks ago) aggressively seeks international expansion of Alrosa – away from only Yakutia. He is determined – and he has said so – to optimize Alrosa revenues and that means that no diamonds will be sold to the local factories at below market prices. Nichiporuk sees the trade agreement with De Beers as one of his early successes as President and he is working very diligently to get EC approval. This may imply that the Kremlin has ignored the complaints by local industry, but this doesn’t guarantee that FAS will not look into these charges.
Meanwhile, the pressure by the Kremlin on Yakutia is increasing daily. Only a few days ago, a court “seized” 3%-4% of Alrosa’s shares which was claimed to have been sold illegally. The brokerage firm involved, Renaissance Capital, finds itself under investigation by the Russian securities regulator known as the Federal Service for the Financial Markets (FSFM). This comes after an earlier attempt to sell 5% to an outside party was also prevented.
The Federal government – the Kremlin – controls 37% of Alrosa, Yakutia’s government holds 32%, local districts in Yakutia 8% and the remaining 23% is held by employee pension funds. Though the market keeps buzzing about the pending privatization of Alrosa (giving a chance to major international diamond players to acquire a stake), it seems that President Putin’s first priority is to increase the share held by the federal government. There is talk about diluting the Yakutian stake in some way. Putin wants to control Alrosa – and the betting is that he will. This story isn’t over yet.
Have an enjoyable weekend.