Putin's Israel visit to accelerate diamond strategy

MOSCOW (Mineweb.com) -- President Vladimir Putin’s visit to Israel on Wednesday and Thursday this week is unlikely to lift the veil too publicly on a profound set of changes which federal officials in Moscow are now pursuing for Russia's domestic and international diamond strategy.

Nonetheless, the first-ever trip to the country by a Russian president, accompanied by the chief executive of the state-owned diamond miner, Alrosa, will leave behind in Tel Aviv unmistakeable signals that the Kremlin wants to change the way in which leading Israeli diamantaires have involved themselves in Russian, as well as African politics.

The impact is already beginning to be felt in Angola and the Democratic Republic of Congo, where the Russian diamond-miner Alrosa, alongside the Russian trade bank, Vneshtorgbank, are developing new lines of business, with new partners.

Alexander Nichiporuk, Alrosa's CEO, has already announced that his company wants to break out of the Angolan diamond marketing framework which has been dominated until recently by Lev Leviev. Instead, Alrosa has begun testing the open market price of the rough lifted from the Catoca mine, in northeastern Angola, by putting the goods up for auction in Antwerp; the first parcel for sale this month was estimated to be worth $22 million.

Alrosa has been a major investor in the Catoca mine, as well as in the new hydroelectric power plant which is expected to double the mine's annual production capacity to about 6 million carats, starting from July this year. Alrosa has always held the contractual right to market its equity share of the Catoca output; but until now it has delegated that to Leviev.

"The word in Angola is that Lev [Leviev] is more or less out of the buying game since March," a Luanda source told Mineweb. In his place, according to Russian sources, the new Angolan diamond marketing scheme for this year will allocate exports between three companies -- Yakson, Sunland, and Sodiam International.

Alrosa has told Mineweb it does not know who is involved in Yakson; industry sources believe it may be the American diamond-cutting group Lazare Kaplan International, controlled by Maurice and Leon Tempelsman. Sodiam International (Sodiam is the Portuguese acronym for Sociedade de Commercializaçåo de Diamantes de Angola SARL) is the export arm of the Sodiam group, which is controlled by Angolan interests. Sunland, according to Alrosa, is a partnership between it and Dan Gertler, one of the new Israeli diamond trading partners whom Alrosa has selected over Leviev. Gertler controls the DGI group of companies (DGI stands for Dan Gertler International) and EMAXON Finance International.

According to Alrosa, "our co-operation with the Government of Angola provides greater transparency for the local diamond market, increases the efficiency of rough diamond sales, and reflects in additional tax revenues to the Angolan budget. Alrosa also has undertaken an obligation to share its experience in sorting, valuation and sales of rough diamonds that leads to Angola’s independence on the market. In this regard we believe that Angola benefits from relationship with Alrosa and Russia that has been its long-time partner."

Gertler's companies already control more than 80-percent of the rough produced in the Democratic Republic of Congo (DRC) for sale by the government. Alrosa sources confirm their new partnership with Gertler in Angola may also extend to mining and marketing ventures in the DRC. Returning from a visit to Kinshasa, the DRC capital, in April, where Gertler introduced him to President Joseph Kabila, Nichiporuk said through a spokesman: “This was the first visit to Congo, and thus the value of possible investments is difficult to evaluate. As a producing company, Alrosa is interested in mining and prospecting, but also in marketing (we already have a good deal of experience of those activities in Angola).” It is too early, the spokesman added, to estimatewhat Alrosa may be ready to invest in the DRC.

Moscow industry sources believe that Alrosa views Gertler as a potential rival to Leviev in Israel, as well as worldwide. “Leviev has positioned himself in Russia,” said a source close to the Alrosa supervisory board, “as the main spokesman of the interests of Israeli business. Simultaneously, in Israel he promotes his ostensible connections to the Kremlin. Separately, he is trying to make himself an intermediary, not only in bilateral business, but also in bilateral politics. However, the Kremlin does not require intermediaries, and in Moscow Leviev’s activities appear excessive, and are causing irritation.”

Federal government sources began warning last December, ahead of a showdown meeting between Putin and Sakha President Vyacheslav Shtirov at the Kremlin, that Alrosa intended to shut off channels for supplying domestically mined rough to Leviev at what were said to be especially favourable terms. Putin told Shtirov that if he tried stalling the federal moves, he risked his own job Yury Ionov, a KGB officer, was put in charge many months ago of the company’s legal affairs and cashflow security. Then Nichiporuk, a federal government appointee without diamond sector background, was introduced to management, first as deputy CEO; in November, he was officially promoted to be the chief executive.

Through these two officials, as well as with external auditors and inspectors, the federal authorities have also begun a crackdown on Alrosa's trading practices and marketing channels. Among the targets, they have aimed at the system of exports through the Sakha regional Committee for Precious Metals and Gemstones; Alrosa's mining affiliates; and near-bankrupt diamond cutting establishments in Sakha and elsewhere, which Alrosa has kept supplied with diamonds. Preferential allocations of rough diamonds to favoured diamond-buyers, discounts, unrepaid credits, unusual service fees, and offshore banking schemes have all been exposed to federal inspection. If not for the first time, these schemes have been identified as multi-million dollar lossmakers, or worse.

In the most recent federal government action, a scheme to exploit a loophole in the Alrosa charter to allow private buying of the company’s shares was halted. Then on April 6, the Federal Anti-Monopoly Service confirmed that it had completed a lengthy investigation of domestic diamond sales by Alrosa, and had issued new regulations. These set out a new scheme of domestic pricing and allocation of rough which, according to FAS, is aimed at the “creation of equal conditions for all participants of the market.” On May 5 there will be an agency hearing in public to review allegations of antitrust practices which have allowed Alrosa executives to discriminate in the market in favour of some, or against other, diamond buyers and diamond cutters.

An industry source claimed that favouritism for the Yakut cutting firms was notorious in the industry, and should stop. “Everybody knows that most of the diamonds are not polished at all or polished so badly, they are hard to sell,” he said.

In press leaks, Israeli diamantaires say they are hoping that Nichiporuk will announce an open sales policy for Israeli buyers. Dependent on the political links which Leviev built with members of ex-President Boris Yeltsin's entourage, the Israeli government has been negotiating for years for direct access to Russian diamond supplies. To date, this effort has been unavailing.