By John Helmer, Moscow
The German invasion of the Netherlands in 1940 wiped out Amsterdam as the centre of the global diamond trade at the time. When the war ended, Antwerp, across the border in Belgium, was preferred by the diamantaires, and so it has remained. Until last week, perhaps.
That’s when the Belgian courts accepted an application from a group of Yukos shareholders to seek out and arrest bank accounts and other assets of identifiable Russian state entities. Alrosa, the state-owned diamond mining company, is considering whether it should continue to do business in Antwerp. Alrosa accounts for 28% of the world’s diamond supply, and 56% of Russian diamonds are exported to Belgium. As the Kremlin orders Russian trade in strategic commodities like oil and gas to move eastward and southward, away from Europe, will Alrosa redirect its diamonds?
The compensation claims by a group of former Yukos executives and lawyers, suing under different names, have been under way in the Dutch courts since 2008. The start of one of those stories involving Yukos Finance and Promneftstroy (PNS) can be read here. The end of another, unrelated story was a confidential settlement announced on April 1 of this year. “All litigation between YUKOS and Rosneft in all jurisdictions will cease”, the announcement said. That referred to just one set of claims, between the Yukos Foundation’s Armenian entity and Rosneft. The PNS litigation continues.
The version of the story from the point of view of Yukos International can be followed here. The legal proceedings which have not been concluded include a separate judgement by the Permanent Court of Arbitration in The Hague in July 2014, which awarded more than $50 billion to Group Menatep Ltd (GML), plus costs; and in the following month, the award of the European Court of Human Rights (ECHR) for $2.5 billion against the Russian state. Both cases turned on Russian political history, and the interpretation by the courts of evidence on the political motivation of the Yukos takeover by Rosneft, and of the crimes of the controlling shareholder, Mikhail Khodorkovsky. The terms of jurisdiction for the Dutch tribunal to rule on internal Russian affairs, based on the unratified energy charter treaty between Russia and the European Union, have also been disputed.
The ECHR award is still being appealed. Because the GML award was final and cannot be appealed in the Netherlands, GML’s lawyers have moved for enforcement by the courts of Belgium, France, the UK and US. According to British lawyer Tim Osborne (below, left), a director of GML, “we still have to convince a legal court [in these countries] that our arbitration award should be recognised as the equivalent of a judgment in their court, so they can enforce it.” Khodorkovsky is not a direct beneficiary of the award, but he’s an indirect stakeholder behind the GML shareholders. They are Leonid Nevzlin (centre), with about 70%, and four others holding 7.5% each — Platon Lebedev, Mikhail Brudno (right), Vladimir Dubov and Vasily Shakhnovsky. What they think they owe Khodorkovsky, and what Khodorkovsky thinks they owe him of the 60% of Yukos which GML used to own, isn’t public.
When the arbitration award was announced, the Russian Foreign Minister Sergei Lavrov said: “Russia will use all available legal means to defend its position.” When enforcement action started in Belgium on June 17, and bank accounts of the Russian diplomatic missions in the country were frozen, the Russian foreign ministry called in the Belgian ambassador to charge the action was an “openly hostile act” and a “gross violation of universally recognized norms of international law.” In Moscow the Belgian embassy’s Facebook page announced it is looking to hire a new chauffeur; it has omitted to say what the ambassador and Lavrov discussed. The Belgian government has since conceded that the court injunctions and actions by court marshals had been premature, and called them off.
Russian reports indicate that the Belgian marshals pursued 47 Russian entities registered in the country with asset disclosure orders. They appear to have included the Russian state banks, non-governmental organizations, mass media, and the Russian Orthodox Church.
President Vladimir Putin responded with an attack on the Dutch for exceeding their jurisdiction, and the Belgians for attacking Russian assets without a Belgian court adjudication. “With regard to these proceedings, our position is well known. It lies in the fact that on the issues and matters of this kind the Hague Arbitration Court has jurisdiction only with respect to those countries which have signed and ratified the European Energy Charter. Russia has not ratified the charter, so we do not recognize the jurisdiction of this court.”
“The fact that Yukos shareholders are trying to get additional funds from Russia — there is no novelty there. We are faced with similar signs in the past – on the part of this company, and by the other partners, including on the part of foreign partners from international companies.”
Official business: Putin visits the then-King Albert II of Belgium and Queen Paola, Brussels, October 3, 2005
In April of 2014, as US sanctions threats mentioned Russian diamonds as a possible target, the Antwerp World Diamond Centre (AWDC) issued a statement to the industry media saying “it is still premature to speak of economic sanctions. Sanctions tend to be of a temporary nature. The reality, however, is that their potential consequences would not be temporary… [T]he change in trade flows to other competing diamond centers would be irreversible.”
In July Alrosa reacted to the commencement of sanctions by halting diamond sales in New York. That immediately hurt New York-based diamond cutters and jewellery maunfacturers. US diamond industry media reported the State Department was warning American diamond traders that they should not being doing business with Alrosa, and might be penalized by the US Treasury if they did.
Antwerp diamond dealers announced they had been told by the government in Brussels that there would be no EU sanctions on the trade with Alrosa, but that sanctions did curtail financing for the trade through letters of credit and commercial loans between Russian state banks and European banks.
A statement from AWDC on August 28, 2014, said: “The current sanctions are not targeting the trade in diamonds. Importing diamonds from Russia or exporting diamonds to Russia, as well as the financing of this trade is still permitted. The Antwerp World Diamond Centre (AWDC) does not expect any future sanctions that will affect trade in diamonds.” There has been no bulletin from the organization since the court-ordered asset actions began.
Moscow sources don’t doubt the Kremlin has ordered all major Russian exporters to take protective measures against hostile action from the NATO states and the European Union (EU), as well as the US. The redirection of crude oil flows away from Rotterdam was reported here yesterday. There is more from Moscow today.
Alrosa, with De Beers, dominates the worldwide production of diamonds.
Moscow sources do not believe the Belgian marshals included Alrosa or its associated companies or bank accounts in their injunction warnings last week. Asked to comment on the Belgian actions, Alrosa replied: “The activities of Alrosa are not under the direct impact of sanctions or of any other measures of impact — what you call the Belgian freeze. Alrosa is carrying out the trade in rough diamonds in normal mode. With regard to access to international markets for financing, in recent years Alrosa has not resorted to borrowing abroad.”
Alrosa appointed its new chief executive, Andrei Zharkov, in April. He succeeds Fyodor Andreyev, who resigned last September because of illness, and died on January 30. Zharkov, has been promoted from the Gokhran, the state diamond stockpile agency; before that he worked for Oleg Deripaska’s companies, for Norilsk Nickel, and for the Prioksky precious metals refinery.
Zharkov made his international debut with a speech in Tel Aviv to the annual meeting of World Federation of Diamond Bourses and the International Diamond Manufacturers Association. It was on June 16 – the day before the Belgian marshals moved. “Major diamond trading centers,” Kharkov said, without mentioning names, “also have their important part to play. And ALROSA will continue to foster close relations with all of them not only within the DPA [Diamond Producers Association] project but also on a bilateral basis to find common ground for mutually beneficial cooperation.”
The DPA is a group of mining companies – Russians yes, no Belgians.
According to a veteran diamond industry analyst in London, “the consequences of Russia targeting the Belgian diamond trade with sanctions would be twofold: firstly, damage to Antwerp’s status and reputation as a global diamond centre, with an impact on local employment and the local economy; and secondly, damage to Russian diamond exports, with Russian exporters having to find alternative centres and markets. Russian sanctions [against Antwerp] would add to costs for everyone, which would be most unwelcome in a low-margin environment. Dubai would probably be a major beneficiary. For many diamond merchants and retailers, however, Dubai is not an ideal travel destination or time zone. Switzerland has participated in Western sanctions against Russia but the country might not complain if Russia elected to transfer its considerable diamond business to Zurich or Geneva. The UK might be open for business too, having lost De Beers to Southern Africa. After all, London remains a major mining and trading finance centre. Trade sanctions on Russian diamonds, whether imposed by the EU or Russia, would harm both parties. It is hard to see why either party would wish to sacrifice a mutually beneficial arrangement.”
Another international diamantaire with close ties to the Russian trade says the Russian export percentage for Belgium doesn’t reflect the limited extent of Alrosa’s business in Belgium, and thus its exposure to attack. “Alrosa sends some rough to its subsidiaries in Antwerp, Israel, Dubai and Hong Kong for local sales. The amount for Antwerp is not much. This doesn’t take into account where the goods might end up being processed – that would be about 90% in India. The Belgian figure would include what Alrosa sells to Arcos Belgium, their local subsidiary.”
Alrosa’s network of Arcos subsidiaries is similar to the Diamdel network employed by De Beers, but the Arcos network handles much less trade than Alrosa’s long-term contract buyers. These are estimated to take two-thirds of Alrosa’s total sales. Another 21% of Alrosa’s diamonds are sold on spot, and 15% by tender bidding.
Sources estimate Alrosa’s sales to Arcos in Belgium are a small fraction of the value of Russian diamond exports to Belgium – less than 5%. According to the last annual report released by Alrosa (for 2013), Alrosa diamond sales for that year totalled $4.7 billion; 49% of that value went to Belgium, or $2.3 billion. At most, the Belgian sales of Arcos might total $115 million, according to this source – probably less. “It would be no problem not to send those goods to Antwerp for sale.”
Since most of the current exports to Antwerp buyers are then shipped for cutting and polishing to India, Israel, and elsewhere, the source believes it would be relatively easy for Alrosa to halt its shipments to Belgium, and redirect them. “That would affect Antwerp, but not destroy it. Most African goods go to Antwerp, and some De Beers goods. The impact would not be as powerful as the German impact on Amsterdam. Then diamond cutting moved to Cuba, and to the US. If Russia embargoes diamonds for Antwerp, the goods will go to India, Israel, China.”
Charles Wyndham (right), publisher of PolishedPrices.com and a former De Beers executive, suggests that Alrosa may cut costs by redirecting its sales out of Europe. He recalls that “at De Beers I looked at moving all sales to Zurich. Even 30 years ago it was very doable — nowadays it would be much easier. So I do not see it as a problem if [a Russian embargo on Antwerp were] decided upon, though a bit of chaos would result for a few months. The most expensive costs would be moving and paying staff, but such a relocation might force a more efficient methodology. In short, however inconvenient, it should not be difficult to move out of Antwerp, it is not as if the other centres would not be falling over backwards to get the business. Alrosa has all the sorting capacity in Moscow and Grib’s [LUKoil’s diamond mining company] diamonds are sorted by the Gokhran prior to export. Grib sells by tender, so obviously moving the computer systems is easy. All in all, there would be disruption but no more than a hiccup.”
Sergei Goryainov, analyst for the Russian diamond industry bible, Rough & Polished, says he doesn’t anticipate a major move by Alrosa. “Alrosa has a serious and influential clientele in the West. Since sanctions would affect the interests of the clientele, it will make efforts to see that such sanctions do not take place. In relation to its turnover, the property of Alrosa [in Belgium] is a minor amount. But if the EU will impose sanctions against Alrosa, the trading platform can move from Antwerp to India, China, the Middle East. This will be easy. Of course, there will be some damage to the market, but on the whole there would be relatively low losses. I think that in Belgium this is very well understood, and no effort will be undertaken to cause reputational, financial or organizational damage to the diamond trade in Antwerp.”