The Globalization of Alrosa Rough Marketing

Alrosa President Alexander Nichiporuk has decided that out of his conglomerate’s total diamond production of some $2 billion a year, about 30% is destined for the domestic market. The balance, some $1.4 billion worth of rough, will be exported. And while, on the one hand Nichiporuk views the grossly revised Alrosa-De Beers agreement that has been submitted for EC Competition approval as a great personal achievement and expresses the hope that the agreement will indeed be approved at every opportunity, he is, on the other hand, actively engaged in setting up and exploring alternative global marketing opportunities.

I don’t remember any visit of his two immediate predecessors to Israel during their terms in office, while Nichiporuk – who only assumed the Alrosa presidency last November – has made two visits within a few months. The fact that he is part of the small delegation accompanying Russian President Vladimir Putin on his state visit to Israel underscores, probably deliberately, the closeness between Nichiporuk and Putin. Let there be no misunderstanding: Nichiporuk is Putin’s diamond man – and Putin’s only diamond man. Insiders who are following with amazement some of the recent repositioning of coalitions in the diamond market have concluded that Nichiporuk will do what he believes is best for Alrosa and for Putin – and he will know how to deal with anything that may intervene with these objectives.

Nichiporuk is a realist. He knows very well that Alrosa has grown to be almost totally dependent on De Beers for the distribution of its diamonds outside the Commonwealth of Independent States. Until early 2003 – prior to the early market liberalization measures - Alrosa exported all its rough in accordance with an export license that required all export sales to be made through De Beers, subject to certain limited exceptions and except for exports to countries within the Commonwealth of Independent states to meet those countries’ internal requirements for rough diamonds.

Thus traditionally Alrosa exported its rough diamonds in accordance with agreements with De Beers, which obligated De Beers to make minimum annual purchases of rough diamonds in amounts specified in those agreements, the equivalent to 26% of the DTC’s global sales. Exports via De Beers accounted for 34.4% of Alrosa’s total diamond sales in 2003 and an estimated 25 percent of its diamond sales in the first six months of 2004. Nichiporuk will have to change a system that has basically been in effect since 1959 - a tradition of over 45 years! And if he doesn’t get the green light from the EC, he will need systems for immediate implementation.

This is something that one should not overlook. The current so-called “willing-seller and willing-buyer” relationship between Alrosa and De Beers has already been declared to be illegal. It is just a “different way” of implementing the not-yet approved agreement. While waiting for the approval, the parties can continue to act in this manner. But when the agreement application is rejected, if we take that hypothetical scenario, Nichiporuk must be ready with alternatives immediately. It is not likely that there will be a “honeymoon” or additional transition periods.

Where do we stand legally in Brussels? Alrosa and De Beers have presented two different versions of a trade agreement. The first one was rejected; the second one is pending. In the meantime, however, the EC has changed its rules and streamlined the approval process. The current proposal needs to be published in the EC’s Official Journal and thereafter the public has 30 days to comment. It is puzzling that the proposal hasn’t yet been officially published. It is surmised that it is related to the appointment of the new Competition Commissioner, Nellie Kroes, and because of the changes of senior staff members in the team that deals with De Beers and Alrosa.

The rejection of the first agreement was almost “total”. In early 2003, the EC competition authorities expressed the view that:

§       The De Beers Trade Agreement breaches the European Union prohibition on restrictive agreements by preventing Alrosa from competing with De Beers in the European market;

§       De Beers’ performance under the De Beers Trade Agreement constitutes an abuse by De Beers of its dominant position in the diamond market;

§       And Alrosa’s ad hoc sales to De Beers pursuant to per-shipment, willing-buyer/willing-seller arrangements, which have, to date, approximated the sales levels of the De Beers Trade Agreement, amount to a constructive implementation of the De Beers Trade Agreement by the parties and should, therefore, be viewed in the same way as the De Beers Trade Agreement under EC competition law.

Understanding that there is no option to renew the old model of agreements, Nichiporuk reached an agreement over phasing out the sales over a number of years, to a minimal level of $275 million. Some parties have already filed opposition to that agreement.

Nichiporuk seems to act as if he wants to be ready for a “negative” reply. In Israel he indicated that he has already decided to market rough through Dan Gertler’s DGI, but he also said that he is looking for additional partners with whom he wants to establish long-term relationships. The announcement that the entire Catoca production (the Alrosa mine in Angola) will be marketed through DGI may well be indicative of the model of arrangements preferred by Nichiporuk.

He is clearly trying to identify the prospective “big players” of tomorrow. Maybe Nichiporuk doesn’t need the De Beers – Alrosa agreement after all. According to the currently proposed agreement, De Beers will eventually get about 10% of the Alrosa production. That kind of share doesn’t really make much difference to the giants – and if this doesn’t materialize, it doesn’t matter too much. In any event, whatever happens, it will find Alexander Nichiporuk quite ready – and not taken by surprise.

Have a nice weekend.