According to the Russian Christmas Day tradition, Dyed Moroz (“Father Frost”, aka St. Nicholas, Santa Claus) makes his annual visit to children to question them, before he distributes the presents. He is assisted by Snegourochka (“Snow Girl”).
It can happen that she is late. Then Dyed Moroz is obliged to ask the children to call out aloud to summon her. Those who can shout the loudest are motivated by the idea of catching the old man’s attention, and if they are lucky, first pick at his rewards. Once Snegourochka arrives, Dyed Moroz reviews who has been on his best behaviour for the past year. Asked who has been naughty, the children naturally scream their noes, and again, those who cry loudest hope to be rewarded first and best.
In Russia, it’s always been tough to deserve a reward. That’s possibly why Vyacheslav Shtirov, President of the Sakha republic and godfather of Alrosa, Russia’s dominant diamond miner — the second largest producer of diamonds in the world — is not looking forward to his interview with President Vladimir Putin. Shtirov has been summoned to the Kremlin meeting on January 28.
The last time Shtirov was summoned, Shtirov took Putin a large bouquet of red roses. The discussion was a sanguine one. Shtirov was told that he was 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.
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. However, the federal authorities have been unable to capture control of the system of exports which together, Nikolaev and Shtirov had elaborated through the regional Committee for Precious Metals and Gemstones; Alrosa mining affiliates; and near-bankrupt diamond cutting establishments in Sakha and elsewhere, which Alrosa kept on a short leash.
Knowing the Finance Minister, Alexei Kudrin, to be an obliging man, Shtirov was confident that he could control both the republic, and its principal cashcow Alrosa, much as he had done during his term as the company’s chief executive. And indeed, Kudrin has proved to be almost as obliging to his Sakha diamond constituents as he learned to be, when he was the factotum of Anatoly Chubais, Yeltsin’s Finance Minister, chief of staff, and dispenser of favours.
Putin and his Kremlin aides have proved to be tougher. They, rather than Kudrin, have been giving the orders to the mineral extraction business, starting with oil and gas, moving on to nickel, platinum, aluminium, and gold. Slowly but surely, they have been taking charge of Alrosa for the federal government. Colonel Yury Ionov was put in charge of the company’s legal affairs and cashflow security. Alexander Nichiporuk was placed as deputy CEO, and last month, he was officially promoted to be the chief executive.
Now that Putin has the new legal authority to appoint the regional governors, the interview with Shtirov is bound to focus on Putin’s intention for the future of Sakha; and for the way in which roughly $2 billion of Russia’s annual diamond production is traded and exported. There is local speculation that the Kremlin may replace Shtirov with a man whose loyalty to Moscow is judged to be greater than to the so-called Yakut clan. There is speculation in the international diamond market that the marketing of Russian diamonds will be reorganized to eliminate the price-rigging monopoly that Russian diamond-cutters have long charged against Alrosa in the domestic market, as well as the diversion of cash that has been alleged for its exports abroad. There is speculation in the mining community that Putin’s advisor on mineral resource reform, Professor Vladimir Litvinenko of St. Petersburg, intends to push through new legislation limiting single companies to mining rights of no more than 65-percent of the mineral reerves in a single region. At the moment, Alrosa holds a 100-percent monopoly in Sakha, the principal diamond province of the east, and 75-percent in Arkhangelsk, the new diamond province in the northwest.
Talk is cheap, but noone can afford to underestimate what Putin will tell Shtirov. Least of all, Lev Leviev, the Israeli diamantaire whose political access through Putin’s first chief of staff, Alexander Voioshin, and through Rabbi Berl Lazar, has given him a privileged position in the diamond supply chain. Leviev has accused Alrosa of shorting Ruis, his diamond cutting works in Moscow, of the supplies of rough his factory has the capacity to cut and polish. On the other hand, Leviev is accused of submarining rough through the Alrosa subsidiary Diamonds of Anabar on preferential terms arranged by Matvei Yevseyev, the subsidiary’s chairman. Leviev’s critics hope to persuade Putin that Leviev’s tactics are in embarrassing contradiction to the transparency which Russia’s diamond policymakers want to adopt, as they take over the chairmanship of the Kimberley Process on January 1; this is the international network of diamond producers committed to cleaning up the export trade.
If and when Alrosa is reorganized as an open shareholding company and the state proceeds with privatization, Leviev is a contender to buy a control stake. And because Alrosa is the largest unprivatized diamond mining company in the world, every major international diamond enterprise is a contender too, including De Beers – the world’s largest diamond miner – BHP Billiton, several Indian diamantaires, and Beny Steinmetz, Leviev’s Israeli rival.
Much needs to be done before that contest can get under way in earnest. The first step has been the removal of the state secrecy provisions covering Alrosa’s physical diamond production, sales, exports, and diamond reserves. After postponing the declassification for most of this year, the Kremlin allowed the Finance Ministry to release the first instalment of data last week. In 2003, the official release indicates, Russia produced 33.02 million carats of rough diamonds, which were sold for $1.7 billion, for an average of $51 per carat. In the first half of 2004, the corresponding data were 17.8 million carats produced, worth $948 million, for an average of $53 per carat. For the time being, key data on mine reserves have not been released.
The export data for 2003 issued by the Finance Ministry show that physical volume was 37.8 million carats, at a total recorded value of $883.4 million. In the first nine months of this year, exports totaled 23.6 million carats for $826.4 million in value. The average carat value of these exports was $23 in 2003, and $35 for this year.
Some Russian diamond industry leaders say they have been surprised at how high the production caratage has turned out to be, and correspondingly, how low the average carat value has fallen below expectation, Until now, Alrosa’s average carat value has been estimated in the international diamond market to be at least 30 percent higher.
Even more of a surprise is the discrepancy between the carat value of the diamonds at the minehead, and their value in export sales. The declassified data now indicate that exported diamonds fetched 53 percent less per carat on average in 2003, while this year the exports have been running 34 percent below the production value. This discrepancy is going to be hotly argued, both by those in the federal government who are urging Putin to clean up Alrosa’s export schemes; and also by the domestic diamond cutters who have long accused Alrosa of charging higher domestic prices than De Beers has been paying for the Russian goods. Alrosa has acknowledged that it charges a premium over export prices to domestic diamond manufacturers. But in 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.
When Shtirov sits down with Putin in a few days’ time, he could deliver a speech about how arbitrariness in Russian government policy has been hurting the international investment climate, and threatens to damage Alrosa’s return to the Eurobond market for refinancing of its sizeable debts. But Putin isn’t Father Frost. The louder Shtirov shouts, the less convinced Putin is likely to be that he deserves a fresh New Year reward, and the more certain Putin’s advisors are that Shtirov must be brought under strict control.