The Day That Changed Everything

"Record prices", "very strong market", "positive sentiment", "soaring consumer demand". Remember those phrases? That's the way the world looked the last time we welcomed a New Year. How things have changed. One word that had barely appeared in the diamond press suddenly dominated. That word was, and still is "Ukraine". Russia's invasion of its neighbour on 24 February changed everything. So as we say farewell to 2022, let's look back on the chain of events that shaped a year many would rather forget.

Russian tanks had been massing on the border with Ukraine during February, but Russia issued repeated denials that there would be war. Even as the tanks rolled in, insisted there was no war, it was a "special military operation". The special military operation has so far cost tens of thousands of lives on both sides (reliable figures are not available) and forced almost eight million people (close to a fifth of the total Ukraine population) to seek safety in another country.

The US reacted to the invasion within hours by sanctioning Russian banks, oligarchs and the Nord Stream 2 gas pipeline project between Russia and Germany. Days later it targeted Alrosa directly, together with its CEO Sergei Sergeevich Ivanov and in mid-March it stepped things up by imposing sanctions. But they came with a gaping loophole, namely that goods polished or "substantially transformed" in foreign countries (ie the vast majority) became foreign diamonds and could still be imported into the US. A group of Democrat and Republican congressmen later tried and failed to close that loophole. In April the US expanded its restrictions by outlawing entities more than 50 per cent owned by Alrosa.

The 27-nation European Union made somewhat of a token gesture by banning higher-value exports of diamonds and other luxury goods to Russia, but did not outlaw the import of Russian diamonds. Antwerp said then, as it says now, that it would not oppose sanctions, although it has always maintained they would harm its own diamond trade more than they would harm Russia.
A whole raft of luxury brands including LVMH - owner of Christian Dior, Tiffany & Co, Givenchy, Kenzo, TAG Heuer and Bulgari -  and Richemont - which owns Dunhill, Jaeger-LeCoultre, Montblanc, Piaget, and Van Cleef & Arpels - closed their Russian operations. The governments of India, the US and the EU countries hadn't imposed effective sanctions, so jewelers and consumers introduced their own unofficial boycotts of Russian diamonds.

At the end of March, the Responsible Jewellery Council (RJC) - the London-based watchdog that monitors human rights, labor rights, environmental impact, mining practices and more - lost its executive director Iris Van der Veken. She stepped down, frustrated that the group had not take a tougher stand against Alrosa. The miner itself also quit as RJC vice chair, Moscow suspended its membership of the World Federation of Diamond Bourses and Alrosa had its membership of the World Diamond Council (WDC) terminated. In June it said no dividend would be paid to shareholders.

Surat, which relies on Russia for 40 per cent of its rough supplies, came to a virtual standstill overnight with the invasion of Ukraine. It sought instead to revive its rupee-rouble trade arrangement with Russia to bypass banking restrictions.  Within a month India's Gem & Jewellery Export Council (GJEPC), said Alrosa diamonds were beginning to flow again, but big-name Western jewelers were by now demanding guarantees that the diamonds they bought were not Russian. Surat found itself topping up critically low inventories with lab growns, especially among smaller goods, where Alrosa had dominated the market.

Despite everything, Alrosa said in June that it would not lower its forecast production of up to 35m carats for 2022. By September reports suggested it was selling $250m of rough gems a month (compared with its $347m average in pre-war 2021). It was, reportedly, selling diamonds to the Gokhran - Russia's state-run repository of precious stones and metals. It also turned its attention to wealthy domestic investors, selling them some of its clearest fancy color stones, as well as large colorless gems as part of its Diamond Exclusive program.

It wasn't long before the Kimberley Process began facing criticism over its "too narrow" definition of blood diamonds, which covered only rough diamonds used to finance civil war. The KP Civil Society Coalition (KPCSC), the umbrella organization that oversees KP activities, said it must "stop turning blind eye to Russia's invasion of Ukraine and take fight against conflict diamonds seriously".
Edward Asscher, president of the World Diamond Council (WDC) said: "We believe more work is required to reform the KP and have been candid about what we consider to be shortcomings of the KP. Most critical is the narrow definition of 'conflict diamonds'."
In June, Russia's Finance Ministry condemned "far-fetched" accusations that diamonds are funding its invasion of Ukraine. In November, KP finally resolved to address the issue. With no overriding sense of urgency, it agreed to establish an ad hoc committee to oversee the five-yearly review and reform cycle that starts in 2023 and which will discuss, among other agenda items, a possible update of the way it defines conflict diamonds.

That's the three-minute version of the single biggest event that wiped "record prices", "very strong market", "positive sentiment", "soaring consumer demand" from our everyday vocabulary during 2022. Two other major factors are also in play. One is the Covid catastrophe unfolding in China as lockdowns are finally lifted. The second is inflation, in the US and beyond, and a global financial crisis. Which brings us back to Russia's invasion of Ukraine.

Have a fabulous weekend, and a fabulous 2023.

This is the last Memo of 2022. Please note the IDEX Newsletter is taking a break next week and will be back on 5 January.