More than 60 years ago, following World War II, Stalin, the infamous Soviet dictator, ordered the construction of the Mirny diamond mine, in the harsh frozen landscape of East Siberia, in Russia, to satisfy the country’s need for industrial grade diamonds. Stalin did not live to see the completion of the Mirny mine, an open pit mine, more than half a kilometre deep (1722 feet) and 1.25 kilometres (3900 feet) across. At the zenith of its operations, this tireless mine went on to produce over 10 million carats of diamonds annually, with a large percentage being gem quality diamonds. Some of the world’s largest diamonds are mined in Russia and it could possibly be sitting on a treasure trove of diamonds, still underground.

Straddling Europe and Asia, lies Russia, the largest country in the world, where diamond mining continues to be big business, with Alrosa its largest government owned diamond company in the exploration, mining, manufacture and sale of diamonds, accounting for 17 per cent of the world’s diamond production from mines, in some of the most hostile places on earth.

Fifty years ago, at the height of communism, in an acknowledgement of its natural wealth, and to build on its advantage, the government moved to make the former Soviet Union the only country where there would exist both rough diamond production and polished diamond manufacture.

Start-Ups

“The creation of the cutting and polishing industry was an extremely complicated and difficult task,” writes Vyacheslav Shtyrov, Deputy Chairman of the Federation Council of the Federal Assembly of Russia, in his contribution in the book, “Setting Light to Diamonds.” The book was published on the occasion of the 50th anniversary of Russia’s largest diamond cutting and polishing plant, the Kristall Production Company of Smolensk. In the book, a long string of past and present industry captains recount their experiences with surprising candidness, and mete out advice for future, vertical development and growth of the Russian diamond and jewelry industry and trade.

The government constructed seven big diamond manufacturing plants. Starting with Smolensk, additional factories were established in Moscow; in Barnaul, a city south of Russia, on the western Siberian plane; in Gomel in White Russia, in Vinnitsa, in Ukraine; in Yerevan in Armenia; and in Chardzhoum in Turkmenistan. “These factories had no equals in the world in terms of production scale and they became a model for polished diamond manufacturing operations,” states Shtyrov.

But today most of these cutting and polishing factories, established in the erstwhile Soviet Union, do not exist anymore. “Some of them found themselves beyond the borders of Russia, others, for subjective reasons, sank into degradation. Whereas we rank with the world's leading rough diamond producers, we occupy a regrettably modest place in the field of diamond cutting and polishing,” informs Shtyrov.

Survivor

However, a single large plant survived. Kristall Production Company (KPC), in Smolensk, Russia, some 350 kilometers west of Moscow, is a thriving diamond cutting and polishing plant, which has been churning out millions of carats of polished diamonds, for the past five decades.

At a time when all manufacturing has moved out to the low wage countries of Asia, to India, China and some of the smaller Asian ‘tiger’ economies, this government owned diamond manufacturing facility, which survived, recently celebrated its 50th anniversary. Every year Kristall polishes over 600,000 carats of rough diamonds.

All the technological development beyond the traditional cutting and polishing tools and the improvements and high tech solutions are local, or Russian. Kristall runs its own cutting school, technological development department, tools shop and equipment repair department. Speaking to workers in the factory, the floor operators and department managers at each level of the corporate hierarchy, what comes through is their pride and love for their jobs, and the factory as an organization.

The company is credited with having created the famous "Russian make" polished diamonds of top quality, desired by well known international diamond jewellery brands.

Government Controls

However, considering the government controls, it is incredible that Kristall has become a model for polished diamond manufacturing operations, on its own steam.

“From being a company that basically produced what it was told to produce by government officials who had no clue about what the market needed, it has made the transition to a firm that operates and competes in the free market,” states Yuri Rebrik, who worked at KPC from 1976 to 2005, and served as Kristall’s Director General during the years 1998 to 2005.

With his appointment to the top position at KPC, Rebrik saw his main mission to protect the interests of the company from encroachments by the officialdom. At the time, all diamonds that were cut by KPC were handed over to the Gokhran, the State Repository, which in turn marketed the stones through "a state foreign trade agency called Almazjuvelirexport, which alone handled, in a centralized fashion, the selling of Russian precious stones and metals abroad. We came to understand the issues of competitiveness, pricing practice, demand-consistent production practice depending on marketing situations, rather than orders from above. We began taking into account the reality of market cyclicality," states Rubrik.

Looking back. Rebrik expresses carefully crafted criticism on the decision made by the same ”officialdom” to require KPC to purchase rough abroad – in particular from De Beers – instead of allocating KPC more rough from the Gokhran, that is Alrosa.

"To me a very puzzling issue has always been the way the Russian rough mined in Yakutia was distributed. We had to buy the same kind of Russian-mined rough from De Beers, at prices higher than at home. I failed to understand why Kristal had to purchase certain volumes of rough diamonds abroad, instead of spending the money within Russia. The company could have been substantially expanded, its production could have been increased. Yet because of the shortage of the rough, the task was almost impracticable. As far as I know, a similar situation prevails to a certain extent even today,” adds Rebrik.

Considering that Alrosa, the government owned diamond mining company, accounts for nearly one fifth of the world diamond production, it could be presumed that Alrosa would meet the entire local demand for roughs, especially for another government company. But that is not so: rough diamonds are still imported into Russia.

Importing Roughs

The governments of a number of African countries, possessing significant reserves of rough diamonds, process a large proportion of rough diamonds locally, and this, in the long term, is much more profitable than direct exports of rough. In Russia, these advantages have not yet been looked into and estimated to the full extent. In actual fact Kristall is pressed, year by year, to buy more and more rough diamonds abroad.

KPC’s CEO, Maxim Shkadov, who is also the incumbent president of the Association of Russian Diamond Manufacturers and of the International Diamond Manufacturers Association (IDMA), clarifies the sourcing of its rough stones but holds back on the prices paid by KPC for the roughs. “Some 65 percent of our rough purchases come to us through Alrosa. We're also a sightholder of De Beers' Diamond Trading Company and in addition, we go and bid on and buy tenders, in the open market, in Antwerp, in Africa and elsewhere in the world. Also, beyond our representative offices in New York, Dubai, Hong Kong and Antwerp, we are active in Botswana, South Africa, Lesotho and other African countries,” informs Shkadov.

He was enigmatic about governmental support for the local diamond industry including Kristall or even any preferential treatment for rough supplies. Giving away some of his military training, Kristall's CEO indicated that he had built up his rough buying teams according to the model of military intelligence units that can move fast and act swiftly and with precision. "I have a few, what I call, mobile elite troopers at my disposal for this particular purpose," Shkadov smiled.

Polished Exports

Russians, as it turns out, often refrain form making blunt, straightforward statements but will package their opinions in carefully, and often in elaborately constructed sentences. Although statistics were not available, what came out was that polished stones are largely exported out of Russia instead of being used in jewellery manufacturing to boost local industry, even though Russian retail is growing, and importing jewellery made from its own diamonds.

“There is no mass production of jewellery in Russia. It is not an organised industry like it is for example in India, China and some other countries,” states Alex Popov, President of Moscow Diamond Bourse. “Global jewellery brands like Cartier, have established local distribution centres, that import diamond jewellery for sale within the country at global retail prices, making substantial profits,” he adds. On the other hand, the Russian retail industry is growing, with its annual turnover estimated around US $15 billion.

Agrees Abel Aganbeghian, chairman, Russian academy of the National Economy and Public Administration. “While Russia has the best polished diamonds in the world, we do not use them domestically to the full extent in the process of adding value during the manufacturing process so as to increase the consumption of the finished product. So far, we have been exporting most of the polished diamonds.”

For example, international market statistics show that in 2008 Russia's share in the global rough diamond production approximated 17 per cent, whereas the share of polished diamond manufacture was merely 4.8 per cent. The country's polished manufacturing share could be substantially higher - up to ten per cent.

“The legislation of some other countries stipulates that rough diamonds should first be offered to domestic manufacturers and may not be diverted to other marketing channels until they are rejected locally. Strangely enough, in this country you often have to persuade many people that it is necessary to develop our own cutting and polishing industry,” Aganbeghian critiques.

Develop Local Industry

However, Reason seems to be returning to her throne. Says Valery Bogomolov, chairman of the Association of Russian Diamond Manufacturers (ARDM), “Some short-sighted economists and politicians are giving Russia a purely raw-exports role, wrongly assuming that our country could indefinitely confine itself to exporting raw materials and purchasing whatever it needs from other countries. The development of domestic production and consumption should become our strategic priority for the years ahead.”

Today, the bulk of the Russian Make diamonds are used in the jewellery produced by celebrated jewellery houses abroad. This must change.

“The problem is while we have the best polished diamonds in the world, we do not use them domestically to the full extent in the process of adding value during the manufacturing process, so as to increase the consumption of the finished product. So far, we have been exporting most of the polished diamonds,” says Bogomolov.

Disapproving the trade dynamics, President Vladimir Putin recently commented critically on the exports of mineral resources, stating, “To boost exports of raw materials, we are likely to begin selling rough diamonds to other countries, in order to import polished diamonds from abroad.”

Development of local industry is the key. Aganbeghian offers a comprehensive 'roadmap’ for the Russian rough and polished production as well as jewelry manufacturing and marketing.

“There are excellent prerequisites for the development of a local jewellery industry ensuring a recognizable style of the product, including the names, traditions, schools and experience of the great jewellers of the past, like Faberge and other famous Russian artists and designers,” states Aganbeghian.

There is a need to create added value for the Russian diamond industry and this can be achieved through downstream integration of jewellery manufacturing. These operations would then compete successfully with foreign jewellery firms that currently make use of Russian polished diamonds, adding enormous value to their products, which in part, are often purchased overseas by none other than Russian consumers.

Discourage Imports

The government has also moved to discourage the import of diamond jewellery by an increase in the rate of import duty. “Custom duties for diamonds and diamond jewellery are a flat 20 percent on invoice value. In addition, importers pay 1.2 per cent inspection levy and 18 percent VAT. This has raised the value of the imported jewellery to the retailer by almost 42 percent,” informs Popov.

Anticipating these developments, Kristall moved into jewellery manufacture. “The company has master jewelers at work, who also teach and we are establishing more jewellery schools throughout Russia and in Smolenks. The idea is to develop local skills,” said Shkadov.

Although its high end jewellery is often destined for export, the company is also producing a line for the domestic market. “Our domestic market is still developing, but it is coming back relatively fast,” said Shkadov.

The industry needs to be classified as a high-tech one, innovational, and possessing a definite niche in the international market, which needs to be developed. The issues of rough supply, simplification of gemstone circulation regulations, and VAT exemption for rough diamond transactions, enjoyed by cutting centres internationally, also needs to be dealt with.

“In order to increase the competitive edge of Russian enterprises, the government also needs to create a beneficial environment for business, especially with regard to national producers and manufacturers, that would ensure continued rough supply, decision making flexibility and promptness, elaboration of appropriate legislative acts and their implementation by the ministries and agencies concerned,” Aganbeghian analyses.

“I am certain that it is feasible, within the next three years, to double polished diamond manufacturing in Russia and to increase it fourfold within the next five to six years,” he predicts.