Western officials are expected to head to India this week to discuss the technical aspects of a coming G7 ban on Russian diamonds as they come closer to finalising a sanctions package that may kick in as early as January 1.
But sanctions experts have warned that negotiations may drag on past the expected deadline due to the complexity of enforcing a widely accepted mechanism to trace the origin of diamonds.
“If this mechanism is understandable and transparent enough from the beginning, then there are high chances that all G7 countries will sign off on it,” Yuliia Pavytska, who heads the sanctions team at the KSE Institute, a Kyiv School of Economics-affiliated think tank, told The National.
“If there is no agreement in the coming weeks, it will likely take a few more months to make it happen.”
The impact of a ban on the Russian economy would be relatively small but not insignificant.
Russia’s diamond exports account for about $4 billion – or about 1 per cent – of the country’s total exports, according to Ms Pavytska.
But with half of Russia’s exports comprising oil and gas, diamonds are one of the largest trade groups that have yet to be sanctioned.
“There’s been talk for months about a diamonds ban, and now we finally see that the G7 is ready to discuss it and adopt it,” she said.
Belgium has long resisted a ban on Russian diamonds due to their importance for its second-largest city, Antwerp, the largest diamond hub in the world.
But it has recently put forward a proposal that is garnering support among the G7, which may finalise its proposal in the coming weeks. This would be followed by an implementation of the ban at the EU level next year.
As discussions intensify, western officials are expected to travel later this week to India, the world’s diamond-polishing hub, for what EU authorities have described as a fact-finding mission organised by the Indian Gem and Jewellery Export Promotion Council.
Speaking to Reuters last week, US officials said that he delegation would travel to Mumbai and Surat, a city where about 80 per cent of the world’s diamonds are polished.
Belgian officials will reportedly be part of the delegation.
Belgium’s proposal Belgium is not a member of the G7 but is part of the EU, which is represented in the forum that also includes the US, the UK, Canada, France, Germany, Japan and Italy.
The US, the UK and Canada have already banned Russian diamond imports in various ways.
Belgium argues that an outright G7 ban would encourage circumvention, pointing to the fact that while imports of Russian diamonds to the EU have decreased by 95 per cent from pre-war levels, the number of diamonds being traded in Antwerp has not significantly changed.
These figures have fuelled suspicion that Russian diamonds are changing identity before entering western markets.
Experts such as Agiya Zagrebelska, who heads the sanctions direction at the Ukrainian National Agency on Corruption Prevention, said that there has been an increase in purchases of Russian diamonds from companies based in major trade hubs including India and the UAE.
“What is being sold on western markets are Russian diamonds because it’s impossible that the diamonds traded by these companies come out of nowhere,” Ms Zagrebelska told The National.
The Belgian diamond industry has called for the creation of an improved system to track diamonds – a notoriously difficult process.
Rough diamonds are split before they are polished and then possibly mixed with other diamonds.
The proposal focuses on reinforcing traditional customs inspections with blockchain technology to create a ledger that is impossible to forge.
The aim is to cut Russian diamonds off from the G7 market, which represents more than 75 per cent of the diamond consumer market, and forcibly drive their price down.
“The ban on Russian diamonds will not only reduce the revenue Russia is extracting from the export of diamonds but will simultaneously increase the traceability of diamonds at a global level, which has been a long-standing EU policy ask,” an EU official said.
There are other proposals reportedly under discussion, but the diamond lobby has remained tight-lipped about them.
“We understand that it all depends on what trace and track system the G7 countries will choose,” said Ms Zagrebelska.
The Antwerp World Diamond Centre declined to comment when contacted by The National.
The US-based World Diamond Council did not answer a request for comment.
G7 countries could oblige companies to affirm that their imported polished diamonds are not of Russian provenance, according to the US’s top sanctions official.
Leaders of the bloc will meet at a summit in mid-May and are looking to have a plan in place by then, according to a member alert the Jewelers Vigilance Committee (JVC) released Tuesday summarizing remarks by Ambassador James O’Brien, who heads the US’s Office of Sanctions Coordination.
“There could be a required declaration that finished diamonds imported to the US and other G7 markets were not originally mined in Russia or other kinds of restrictions that apply to polished diamonds,” O’Brien said, according to the note. “The aim is to ensure this is phased in at a time and flow that will accommodate the work of the industry.”
O’Brien made his comments at last week’s annual JVC luncheon, where he was the guest speaker. The summary contained a mix of direct and paraphrased quotes, wrote JVC president and general counsel Tiffany Stevens.
The G7 includes the US, as well as Canada, France, Germany, Italy, Japan and the UK. The European Union is known as its “eighth member.”
Alrosa, in which the Kremlin holds a stake, “is deeply rooted to the power structure within Russia, and our government wants to make sure its revenue is not available for them to raid,” O’Brien explained. The state is seeking sources of funds to keep the war in Ukraine going, he added.
Important issues to tackle include how long to wait for Russian diamonds that are currently in the market to exit the system, the sizes of stones to which sanctions would apply, and how enforcement will work, the ambassador pointed out. “Having thoughts on these questions that can contribute to a framework in time for the mid-May meeting is a goal of the US government,” he said.
He also said that the US wanted to make sure Burma — also known as Myanmar — didn’t help Russia. The Asian country has been subject to various US sanctions since a military takeover in 2021.
“Russia is going to its allies and asking them to give back military equipment,” the official said, according to the JVC summary. “Burma supports Russia, so the government also wants to make sure Burma is restricted in its sources of revenue, so it doesn’t help Russia as well. This includes ensuring the regime does not earn money from the sale of rubies and other gemstones.”
Russia’s invasion of Ukraine is another defining moment for the diamond industry.
On March 11, the US government banned imports of Russian diamonds. The sanctions extend to rough from Russia and stones cut and polished in the country. They do not include goods that were mined in Russia and polished elsewhere, which accounts for most of Russian supply.
The more extreme scenario would have been a ban on all Russian-origin diamonds, regardless of where they are manufactured. Such a move may still happen, the Jewelers Vigilance Committee (JVC) warned, which would cut off an estimated 28% of global resources. That polished from Russian rough can still legally be imported to the US presents the industry with a lifeline — or loophole — preventing that consequence.
Many have understandably been calling for a blanket boycott of all Russian diamonds, or to label them as conflict or blood diamonds. After all, Alrosa — the world’s largest rough producer by volume, which accounts for most of Russian production — is 33% owned by the Russian government, which initiated the war.
However, according to the classic definition, these goods cannot be labeled as conflict diamonds as they are not funding a rebel movement engaged in civil war. They’re also not stained by torture or human-rights violations carried out at a mine site.
For now, the diamonds are simply sanctioned in the US. But the crisis certainly constitutes an ethical dilemma for the industry.
It therefore highlights the industry’s traceability efforts over the past few years, and the importance of being able to track a diamond through all stages of its journey from mine to market. The programs try to begin with the mine or country where the rough is recovered, whereas the sanctions account for “substantial transformation,” meaning that the source becomes the location at which the diamond changes its form from rough to polished.
Traceability challenges
While blockchain technology has enabled an easier tracking of transactions between various stages of the pipeline, no system is foolproof.
De Beers, the Gemological Institute of America (GIA), and Sarine Technologies are among the major players that have developed programs — as is Alrosa. Last year, the Russian miner introduced its provenance program to trace its production using nanotechnology. To its credit, Alrosa has arguably been most open to the idea of advanced diamond-tracking, providing rough for both the GIA and Sarine programs, and joining De Beers’ Tracr platform in its initial stages.
The fragmented nature of the industry effort is arguably necessary as it allows for better branding opportunities, at least in De Beers’ case. A centralized traceability platform, which was Tracr’s original goal, would also create logistical and trust issues regarding who has access to data, among other obstacles.
But the existing programs are in their beginning stages and have their own shortcomings.
The most famous challenge comes from De Beers since the company aggregates, or mixes, production from its various mines in Botswana, Canada, Namibia and South Africa. So, when sightholders want to disclose the provenance of their De Beers diamond, they must reference DTC, the miner’s program that assures those diamonds were responsibly sourced in one of its four host countries. Notably, one cannot market that production as De Beers diamonds due to complications related to the company’s retail brand. De Beers also has its Code of Origin program, launched last year, in which it inscribes diamonds of participating sightholders with a code that identifies it as ethically mined by De Beers.
Aggregation therefore presents a stumbling block for a retailer that wants to give specifics about the mine or country in which the diamond was recovered.
The GIA faces a similar challenge with its Diamond Origin Reports. Its program receives data from the lab’s own analysis of rough before it is polished. The owner of the rough — be it a participating miner, manufacturer, dealer or tender house — sends the stones to the institute, which relies on the supplier’s disclosure of origin. The GIA’s analysis then allows the resulting polished to be matched with its source when it is graded.
That’s fine if a miner directly sends the goods to the GIA. But what happens when the diamonds have multiple sources? For example, a sightholder or tender house might buy De Beers goods and mix them with supply from other miners, and then send the parcel for analysis. In that case, the stones have multiple sources. As a result, the GIA report has been known to list up to seven possible origins of a polished stone in its report.
Sarine claims to have solved the problem by working only with miners willing to scan the diamond into its system at the mine site, thus enabling it to trace its journey from the start.
Demand driven
Sarine also asserts that it is approaching the challenge from a demand angle rather than a supply one, arguably in contrast to the other programs. It is working with retailers to build their sustainability programs from the bottom up. So, if a jeweler such as Boucheron, which announced its partnership with Sarine in January, requires a certain amount of traceable inventory for a collection, Sarine can point to its channels that extend back to the mine.
Of course, each traceability provider has different considerations, and offers different added value. De Beers and the GIA are relying on their powerful brands to provide assurances on supply.
But it does raise the question of what is driving the market for responsibly sourced goods. If it is demand, as Sarine claims it should be, the market is still in its infancy, growing at a gradual pace. The Russia crisis may have given demand for traceable goods an unexpected boost.
After all, the US sanctions are limited, leaving jewelers and dealers to decide whether they’re willing to buy polished diamonds that came from Russian rough but were cut elsewhere. It is up to the trade to empower them to make confident choices with robust and clear traceability programs.
Some US jewelers have already made their positions clear. Immediately after the invasion, Brilliant Earth announced on Twitter it had removed all diamonds of Russian origin from its site. If more follow suit, as one might expect the longer the war continues, retail demand for origin disclosure will increase. The supply-chain dynamic will also shift.
Sales continue
The sanctions do not prevent Alrosa from selling its diamonds. The bigger concern for its rough buyers relates to paying for the goods, since the Russian banking system was taken off the international transfer system, Swift. But an Alrosa auction took place last week, and goods were paid for via banks in Italy and the United Arab Emirates, market sources confirmed.
The result, therefore, is not cutting off nearly 30% of global supply, as many feared. That would create shortages in the market and drive rough prices up even further. Rather, if more US jewelers refuse Russian-origin goods, manufacturers will need to change their operations accordingly. They would need to divert those goods to centers and clients willing to buy them and keep the remaining diamonds for those implementing their own ethical ban. It would bifurcate the market, but the net effect on supply would probably be zero in the long run.
The retail quandary
The bigger test falls on retail jewelers whose programs rely on the high volume of diamonds that Alrosa provides.
Signet Jewelers, for example, is said to be the largest buyer of piqué (I2- to I3-clarity) diamonds in the market, requiring consistent stock for collections that go in display cabinets across its approximately 2,800 stores. It is unlikely to fill its requirements without Russian goods.
While Signet said it had suspended business interactions with Russian-owned entities since the start of the invasion — including Alrosa, of which it is a contracted client — the jeweler did not clarify whether it still sources polished from manufacturers whose rough comes from Russia.
A Signet spokesperson instead referred to the company’s Responsible Sourcing Protocol, which points to direct supply of rough, urging buyers to insist on disclosures further along the distribution chain. It seems the protocols would consider the source of the polished diamond to be Russian, regardless of where it was polished — as all industry traceability programs do.
Signet also encourages its suppliers only to do business with members of the Responsible Jewellery Council (RJC), to which Alrosa still belongs, even though the miner resigned from the board. A revocation of Alrosa’s RJC membership, as some are calling for, would add another layer to its considerations, along with the rest of the industry’s.
Tiffany & Co. also has a decision to make. In 2019, it started disclosing the region of origin for all its engagement rings. It still lists on its website that most of its rough diamonds come from five countries — Botswana, Canada, Namibia, Russia and South Africa; in other words, De Beers and Alrosa, from whom its manufacturing unit buys. The jeweler faces the same dilemma as Signet for goods that are not polished in-house. Tiffany did not respond to this column’s request for clarification on its policy. Parent company LVMH has reportedly closed all of its retail operations in Russia.
The brands are left in a quandary. They need the supply, but cannot risk being called out on their environmental, social and governance (ESG) credentials. The potential backlash of being found out to be sourcing Russian-origin diamonds increases with the intensity of the fighting in Ukraine — especially if they remain cagey about their polished sourcing.
Inflection point
Of course, there are many more factors to consider: not least that Russian diamonds enable hundreds of thousands of jobs in India and elsewhere. That presents an ethical question to those calling for a blanket ban. Russian diamonds are part of an ecosystem upon which diamantaires and jewelers rely for their livelihood around the world — including in the US. Less supply to Signet could easily translate to lower sales, which affects all of its stakeholders, including employees. Then again, so would a consumer backlash.
The current crisis is an inflection point for the industry’s responsible-sourcing drive. It may even push the industry to stress the source of transformation over origin — as the US government has done. Maybe that needs to be debated.
Furthermore, it may push the industry to be more nuanced in its approach. For all the excellent work that has been done to bring the industry up to par on sustainability and responsible sourcing, perhaps it gets too bogged down in the technicalities of its due-diligence standards. As Brad Brooks-Rubin, the outspoken US adviser to the RJC and a former US State Department representative at the Kimberley Process, wrote in a blog post on LinkedIn, consumers will understand the dilemma if business leaders are honest.
It is indeed better to be forthright about one’s decision-making. It’s OK to disclose the dilemma. Consumers even appreciate the option to make their own choice, as Brooks-Rubin asserts. Transparency is good. The lack of clarity that is clouding the industry’s approach to Russian-origin goods will only create further uncertainty within the trade that will spill over to consumer confidence. That’s a crisis the industry can ill afford.
State Department and European Commission Engage Diamond Industry to Discuss Next Steps on Russian Diamonds
Today, Ambassador James O’Brien joined Deputy Director General and Chief Trade Enforcement Officer Denis Redonnet of the European Commission to discuss with the U.S. and European offices of leading diamond retailers, manufacturers, laboratories, and industry trade associations the importance of the diamond industry’s engagement on future Russia-related import measures, including on polished diamonds, as noted in the recent G7 Leaders’ Statement.
Russia continues to earn billions of dollars from the diamond trade, and the discussion centered on the most effective and impactful ways to disrupt that revenue stream.
The United States and European Union remain committed to imposing economic consequences on Russia for its unprovoked war in Ukraine.
Group of Seven nations and the European Union are discussing ways to track Russian diamonds across borders, a move that could pave the way for restrictions on their trade in future, according to people familiar with the matter.
Previous EU attempts to sanction Russian gems have run into resistance from importer nations such as Belgium who argue that the effort would be futile because transactions will simply shift elsewhere without a mechanism to trace precious stones.
A diamond’s origin is clear at the start of the supply chain when it is issued a certificate under the Kimberley Process, which was designed to end the sale of so-called blood diamonds that financed wars. But after that they can become difficult to track.
Cut and polished stones are often intermingled at trading houses and the original certificate will be replaced with “mixed origin” documentation, making it near-impossible to keep track of where Russian diamonds are eventually sold.
The US has sanctioned the Russian mining giant, Alrosa PJSC, which accounts for about a third of the $80 billion global trade in rough diamonds. But the measures have had limited impact as much of the trade flows through other markets such as India.
The people with knowledge of the G-7 and EU discussions said a solution is not imminent, because tracing polished diamonds in a global market is extremely complicated. Still, two of the people said the G-7 could issue a statement on the matter as early as next week as part of the effort to maintain pressure on Russia as its war in Ukraine approaches the one-year mark.
De Beers’ revenue rose 24% in the first half of 2022, but the miner gave a more somber outlook for the rest of the year.
“We can only have strong rough sales if that’s also coupled by what’s going on on the polished side,” De Beers chief financial officer Sarah Kuijlaars told Rapaport News on Thursday. “The polished position was very strong in the beginning of the year, but it has leveled off. We have much more caution about the next six months than we’ve had for the previous six months.”
Revenue jumped to $3.6 billion in the first half as strong consumer spending during the 2021 holiday season led to intense restocking in early 2022, parent company Anglo American reported the same day. Underlying earnings gained 84% to $491 million.
Rough sales grew 27% to $3.3 billion from five sights during the period. The remaining revenue relates to other businesses such as the company’s consumer brands and industrial-diamond business.
The miner’s rough-price index, which measures like-for-like prices, rose 28% compared with the same period of 2021. The average selling price for rough surged 58% to $213 per carat, reflecting the market upturn and a shift in the product mix to higher-value goods. Sales volume fell 20% to 15.3 million carats.
The higher average price resulted from the introduction of the new Benguela Gem mining vessel off the Namibian coast, which enabled the extraction of more lucrative stones, Kuijlaars explained. In addition, production at the Venetia deposit in South Africa was focused on the final cut of the open-pit mine, which has a relatively high grade — the number of carats per tonne of ore — and high quality, the executive added.
De Beers’ results painted a complex picture of the market. Last week, the company raised its production plan for the full year in response to strong demand, predicting output of 32 million to 34 million carats. It also noted that the sanctions and boycotts targeting Russian diamonds, as well as growing interest in provenance initiatives, would “underpin” demand for its goods. The sixth sales cycle of the year, which took place earlier this month, brought in proceeds of $630 million — 23% higher than for the equivalent period a year ago.
However, inflation in the US and lockdowns in China have created concerns across the industry.
“This time last year, our operation was coming out of Covid-19 [during which output slumped],” Kuijlaars pointed out. “To stabilize our production has been really important, and that strong production gives us confidence for the full year. That’s our part in delivering reliable supply. As we sell that through, we are very alert to signs of any slowdown in the remaining four sights of the year.”
ussia condemned what it called a push to “politicise” its diamonds over the conflict in Ukraine and said attempts to question its compliance with the international diamond certification scheme were “totally unfounded” and “far-fetched”.
The Kimberley Process, a coalition of governments, the diamond industry and civil society responsible for certifying diamonds as conflict-free, is split over a push by Ukraine and others to expand its definition of conflict diamonds to include those funding aggression by states.
The KP Civil Society Coalition (CSC) and some member states sought to discuss whether Russia’s diamonds were helping to fund the war in Ukraine during a KP meeting in Botswana last week.
“The Russian Federation absolutely condemns the orchestrated attempts of CSC, backed by absolute minority of some Western participants, to politicize the work of the Kimberley Process by deliberately distorting or even openly replacing its basic principles,” Russia’s finance ministry said in an emailed statement. It did not specify which principles it felt were being distorted or replaced.
The CSC did not immediately respond to an emailed request for comment.
The KP defines conflict diamonds as those that fund rebel movements seeking to overthrow legitimate governments, a narrow definition that many have sought to widen since the KP was founded in 2003.
Russia, which was KP chair last year, has “championed” work on revising the definition of conflict diamonds for the past five years, the finance ministry said, and it is committed to continuing talks on the definition.
“We therefore call on our opponents to refrain from further speculative accusations, abstain from political demagoguery and concentrate on the substantive work of the KP,” the finance ministry said.
The KP makes all decisions by consensus and the rift over Russia and Ukraine could jeopardise its effectiveness.
China has joined Russia in opposing an effort to redefine conflict diamonds to include those sold by individual nations, as a rift between Western and pro-Russia nations jeopardizes the process for certifying rough diamonds as conflict-free.
Ukraine, Australia, Britain, Canada, the European Union, the United States and civil society groups were pushing to place Russia on the agenda at this week’s Kimberley Process (KP) meeting in Botswana and to broaden the KP’s definition, under which only gems funding rebel movements are “conflict diamonds”.
Russia, the world’s biggest producer of diamonds, has said the situation in Ukraine has “no implications” for the Kimberley Process.
China agrees that the Ukraine issue falls outside the scope of the KP, the country representative told the meeting, according to three sources. China joins Belarus, Central African Republic, Kyrgyzstan and Mali in backing Russia’s stance within the body, which seems unlikely to come to any agreement.
“It’s clear that this is posing really an existential crisis for the Kimberley Process,” said Hans Merket, a researcher at Belgian non-governmental organisation IPIS, who is a member of the civil society group.
“It has become impossible to even discuss the KP’s problems and shortcomings, let alone that there would be any room for convergence on how they can be addressed.”
China’s KP representatives did not respond to an emailed request for comment.
The KP certification scheme, designed to eliminate the trade in so-called “blood diamonds”, was set up in 2003 after devastating civil wars in Angola, Sierra Leone, and Liberia, which were largely financed by the illicit diamond trade.
The Kimberley Process Civil Society Coalition and some member states have been arguing to broaden that definition for years, but it is difficult to do as the KP makes decisions by consensus.
Jacob Thamage of Botswana, the current KP chair, said that more participants now believe reform is needed.
Botswana, Africa’s top diamond producer, sees a prolonged ban on Russian diamonds opening the way for synthetic gems to expand market share, the country’s minister told a mining conference on Monday.
The United States, the world’s largest market for natural diamonds, imposed sanctions on Russia’s state-controlled Alrosa in April, aiming to cut off a source of revenue for Moscow after its February invasion of Ukraine.
Alrosa, the world’s largest producer of rough diamonds, accounted for about 30% of global output in 2021.
Botswana’s Minister of Minerals and Energy Lefoko Moagi said the ban on Russia diamonds might push prices up to the benefit of rival producers but he also said the gap would be hard to fill.
“We see the 30% gap that will be left by the ban being plugged by something else that is not natural. And for us that will be a challenge,” he said.
Jacob Thamage, head of Botswana’s Diamond Hub, said uncertainty over the Ukraine conflict makes it difficult for Botswana and other natural diamond miners to fill the supply gap as ramping up operations requires significant investment.
“You don’t want to invest a lot of money to up-scale and then the war ends the next day,” Thamage said. “We also see the higher prices pushing consumers to substitutes such as the synthetics and this can cause problems for us if we cede the market to unnatural stones.”
Sales at Debswana, a joint venture between Anglo American unit De Beers and Botswana’s government, accounts for almost all of Botswana diamonds exports. These stood at $3.466 billion in 2021 compared with $2.120 billion in 2020.
Thamage also fears that consumers might start to shun natural diamonds due to traceability issues.
“There is an increased fear that buyers of diamonds will begin to treat all natural diamonds as conflict diamonds and therefore shift to unnatural diamonds,” he said.
Alrosa canceled its last sale in April and is unlikely to sell any large volumes again this month
Prices are surging in some corners of the rough-diamond market, as sanctions on one of the world’s two giant miners ripple through the supply chain. In the past, the industry could turn to behemoth De Beers to crank out extra gems when supply ran tight — but not this time.
The price of a small rough diamond, the type that would end up clustered around the solitaire stone in a ring, has jumped about 20% since the start of March, according to people familiar with the matter. The reason: Diamond cutters, polishers and traders are struggling to source stones after the US levied sanctions on De Beers’s Russian rival, Alrosa PJSC, which accounts for about a third of global production.
For most of the modern history of diamonds, this is the sort of situation where De Beers could have tapped its vast stockpiles or simply fired up latent mining capacity. Little more than 20 years ago, its safes in London held stocks of diamonds worth perhaps as much as $5 billion.
Those days are now long gone. The company only carries working inventory stocks and its mines are running at full tilt. There is little chance of material increases in supply before 2024, when an expansion at its flagship South African mine will be completed.
“It’s very difficult to see us bringing on any new production,” Chief Executive Officer Bruce Cleaver said in an interview in Cape Town. “Thirty percent of supply being removed isn’t sustainable.”
De Beers also produces relatively few of the type of diamonds Alrosa specializes in: the small and cheap gems that surround a larger center-point stone or are used in lower-end jewelry sold in places like Walmart or Costco.
For many in the sector, that means growing shortages unless Alrosa and its trade buyers can find a work around.
Alrosa canceled its last sale in April and is unlikely to sell any large volumes again this month, the people said. It’s uncertain when the company will be able to sell normally again, they said, even as the company, banks and buyers look for solutions.
