Russian Polishing Plant Expansion Program More Feasible Than In The Past

Is Russia set to head on the same path that several African producer countries have already traveled when it comes to trying to create a local cutting and polishing infrastructure? Russia already has manufacturing plants, of course, but this week, Russia's Deputy Finance Minister Alexey Moiseev said in an interview that the Russian government wants ALROSA to work more closely with the country’s top diamond cutters so the industry can better compete in global markets.

As part of a plan to boost the competitiveness of Russian diamonds, the government specifically wants ALROSA to offer more favorable terms to cutters including Kristall Production Corp., Russia’s largest. “Cooperation currently is rather limited and it has to expand,” Moiseev said in an interview with Bloomberg.

Kristall and other Russian cutters currently buy stones from ALROSA at similar terms to overseas companies, and are struggling to compete with much larger polishing centers, such as India. Consequently, the plan may see ALROSA selling around 10 percent of its gems at home, Moiseev said.

Although ALROSA would sell diamonds to Russian polishers at market prices, it would be able to offer them certain benefits, such as allowing them not to buy the whole contracted volume or only choosing certain stones and returning the rest back to the miner, Moiseev said. The government is also considering more cooperation between Kristall and ALROSA’s own small, but unprofitable, polishing unit.

The plan could, however, run into the same issues faced by African diamond producing countries Botswana, Namibia and South Africa who have found that diamonds can be manufactured more cheaply in India which processes close to 90 percent of the world’s diamonds.

Of course, most major diamond-mining countries would like to beneficiate their diamonds and export them as polished stones or, even better, set in jewelry. Artificially creating preferential conditions is not the way to go, however.

Diamond manufacturers who want to receive diamonds from Botswana and Namibia have had to establish plants in those countries to create jobs for locals. That is perfectly understandable and desirable, but the fact remains that manufacturing stones is still financially viable mostly in India which has a huge manufacturing infrastructure and relatively low labor costs.

Russia, also, would like to compete with India in cutting and polishing diamonds, and maybe it's not such a far-fetched idea since labor costs are rising in India and increased use of technology makes manufacturing closer to home more feasible. The Israel Diamond Exchange, in the last couple of years, for example, has created two manufacturing plants for the use of its members – one for polishing small stones and the other for larger gems.

Having local control over the cutting and polishing process, especially for larger and more expensive diamonds, is an advantage. And reducing the turnaround time from rough purchase to polished sales is also a benefit. And with larger diamonds, the labor cost element is, of course, less relevant.

Could we see a larger and more prominent Russian cutting and polishing sector? It's clearly several years away, but does not necessarily seem unfeasible.