Russia's Big U-Turn

What's happened to Alrosa and its "colossal safety margin"?

Russia's state-controlled diamond miner was fighting fit and ready for whatever the G7 nations could throw at it, the finance ministry boasted in January.

There would be no need to for the government to intervene and buy the rough that nobody else wanted, despite it being sanctioned by 70 per cent of the diamond-buying world (G7, including 27 EU nations).

That was in January. In March that same finance ministry confirmed that it had bought up Alrosa's entire production for the month. That's an estimated $300m, based on what it sold during 2023 ($3.55bn). And that it would be making regular purchases.

So what prompted such a spectacular U-turn? I messaged my contact at the Alrosa press office, who is always courteous and prompt to reply. And who never tells me anything. 

"Hi John," she replied. "We do not comment," accompanied by a WhatsApp icon of a woman holding up her hands in a comic helpless pose.

I was left to trawl the facts we have for clues. Interfax, the Moscow-based news agency, reported on 9 January that the finance ministry was "not currently considering the option of supporting Alrosa by increasing funding for Russian State Precious Metals and Gemstones Repository (Gokhran) purchases".

That's a curious way to start a story - by saying an organization is NOT going to do something - unless somebody has already suggested, to the contrary, that it is.

There was no mention in the story of such a suggestion. Yet the denial comes from the Russian Deputy Finance Minister, no less.  Alexei Moiseyev told the agency in an interview (a much bigger deal than a press release) that "there is no indication yet that it will be required. The company has a colossal safety margin, it has negative net debt, and with a large margin."

Alrosa was, he said, preparing for the sanctions. "There was no secret about it, our opponents have been talking about it for a long time," he said.

Gokhran has long functioned as a safety valve for Alrosa, stockpiling diamonds in times of trouble and selling them back when the market recovers.

During the financial crisis of 2009 it bought up $1bn of Alrosa's diamonds. And it sold back millions of carats in 2022, when a surge in post-lockdown demand outstripped the miner's production capacities.

There have been attempts to sanction Russia diamonds since shortly after its invasion of Ukraine in February, notably the US restrictions. They had barely any impact, excluding diamonds cut and polished overseas, namely the overwhelming majority.

But 1 March 2024 was the turning point, when G7 sanctions really began to bite, outlawing diamonds (1.0-ct+) mined Russia, regardless of where they were subsequently polished.

It was at the end of March that the finance ministry confirmed that the Gokhran had already bought diamonds from Alrosa, and would be doing so regularly throughout the year.

"Specific amounts and volumes will not be announced due to the sanctions restrictions imposed on Alrosa. Purchases will be made on a regular basis," the ministry said, adding that it would sell the diamonds bought by Gokhran depending on market conditions.

All of which prompts the rather obvious question: What about the "colossal safety margin"? The negative net debt? The large margin?

An unnamed source told Interfax that sales to the Gokhran "will allow ALROSA to partially compensate for the loss of revenue due to the current chaos in the industry caused by the ban on Russian stones".

But that adds nothing to what we already know. That was always going to be the case and doesn't explain the sudden change of heart. Maybe I'll have to ask my contact in the Alrosa press office.

Have a fabulous weekend.