Politically Incorrect

Something axiomatic in our industry: you don’t publicly talk about matters that might affect consumer confidence. It is politically incorrect to even remotely disturb what De Beers’ Gareth Penny likes to call “The Diamond Dream.”  It is also politically incorrect to talk about kickbacks, bribes and corruption related to diamonds traded in producer countries and elsewhere.

This attitude has stifled the debate within the industry on vital issues that impact our daily lives. The Kimberley Process is one of those issues. The KP has become a club of foreign ministry officials of some 74 countries holding plenary meetings, committee meetings, peer reviews, etc., and they probably make a significant contribution to airline and tourist industries.

With all the discussions, it is politically incorrect to question the integrity of the government bodies that are issuing the KP certificates, unless blatant violations are reported by an NGO. The KP is foremost a political arrangement and, in various instances, driven by political considerations. Actually, a Belgian academic earned a doctorate by doing a dissertation on the politics within the KP.

From an industry perspective, what we have today is a very inflexible system, which arguably has outlived its time and is something that ought to be discussed by industry. The KP’s official “raison d’etre” is the avoidance of future conflict. This has become a questionable argument.

Surat Sustained by Zimbabwe Goods

The effectiveness of the KP is gradually being eroded. Millions of carats from Zimbabwe find their way to Surat in India, partly through intermediate centers where for 3 percent a KP certificate can be obtained. The smuggled goods -in the $6-$10 range- are so cheap that it has actually caused a decline of the market price of the brown colored and cape goods. Lebanese traders, operating along the Mozambique borders, will “house deliver” rough anywhere – without ever meeting a KP official. There are many more stories like this. But the KP management is occupied by “more serious” issues.

When a London rough distributor sends rough to Hungary, there is no need for a KP certificate; but when the same supplier sends a similar parcel to Israel, a certificate is needed. And when the world is busy issuing some 60,000 certificates every year, mistakes happen. Wow! London has sent a $150,000 parcel to Tel Aviv and simply forgot to add the certificate. This has already become the subject of endless meetings, discussions, debates, e-mails and what not.  

In the meantime, the goods have been confiscated in Tel Aviv because Tel Aviv cannot send them back to London without a certificate. And if Tel Aviv would send the parcel to London, the KP authority there would confiscate it because it has no certificate. This is ridiculous, and there are quite a few examples of such mistakes that occupy time and attention of all those traveling KP representatives. There is no solution in sight. The Israeli customs also cannot “sell” the confiscated goods because, by definition, these are now conflict diamonds.

The KP’s inflexibility of dealing with human error problems has led to what I would call an “underground problem-solving system” in which the diamond players themselves make the necessary arrangements to solve accidents. When the KP cannot provide remedies, the market will. This costs money and undermines the integrity of the system, but the diamantaires won’t lose their diamonds. Sometimes we tend to forget what this is all about. There is no way in the world that a parcel from England would, in any way, shape or form, be considered conflict diamonds. The parcel becomes “conflict” just because of an administrative oversight.

The reason I’m writing this is because I’ve been wondering for quite a while how a country like Venezuela, which produces a small but fair amount of diamonds and which also has a porous border absorbing smuggled goods from Brazil and Guyana, has voluntarily withdrawn from the KP. How does Venezuela market its rough diamonds?

I don’t have the answer yet, but by trying to look at the options open to a country like Venezuela I came across huge arms purchases from the Russian state-controlled arms-trading monopoly Rosoboronexport to Venezuela. The country’s president, Hugo Chavez, has in recent years purchased dozens of Sukhoi fighter jets, military helicopters, Kalashnikov assault rifles and other weaponry for an estimated cost of $3 billion. Last year, Rosoboronexport traded worldwide arms in excess of $20 billion. It is an interesting company – with a link to diamonds. It’s that link that should bother us a lot.

Weapons for Diamonds

Rosoboronexport is the sole intermediary agency for the export and import of all military products, technologies and services in Russia. The company accounts for more than 90 percent of Russia’s annual arms sales and has been cooperating with more than 60 countries during its 50-year history, most of it as an instrument of the Soviet Union. The company appeared in the news this week because its director general, Anatoliy Isaykin, had told BBC that it is “offering potential clients from countries on the African continent alternative schemes of settlement (barter) for the supply of military equipment.”

There is nothing new about this. The company has always had a policy of accepting products such as rough diamonds in payment for arms.  It is also willing to accept mineral rights and to get involved in mining. What is amazing about it is that Rosoboronexport actually promotes itself in Africa as providing a flexible payment solution to governments. The arms supplier says:

“The corporation is ready to embrace alternative and flexible approaches to settlements. For instance, one of the options may consist in payments by counter deliveries of traditional African export products, such as diamonds, timber, cotton, palm oil, and coffee. Another option may envision quotas on developing natural resources and seafood: establishment of joint ventures in fishing, mineral resource and oil industries; mine-clearing operations.”

Who are its main clients?

“Rosoboronexport has significantly stepped up cooperation with such traditional importers of Russian weapons as Algeria, Libya, Angola, Ethiopia and Uganda. Certain progress has been made in relations with Morocco, Botswana, Zimbabwe, Namibia, Mozambique and Burkina Faso. We offer competitive Russian arms and material delivery, repair, overhaul, and modernization projects to our African partners,” says Sergei Svechinikov, the head of a delegation currently exhibiting at an international arms show in Cape Town.

Company on the U.S. Sanctions List

Aside from Rosoboronexport’s involvement with African countries, including the main diamond producers, the company also appears on the United States sanctions list because of its violation of the Iran Nonproliferation Act of 2000, a U.S. law aimed at preventing the spread of weapons of mass destruction to Tehran. 

This company is offering weapons for diamonds and presumably these diamonds will end up somewhere in Russia. Maybe in the Gokhran, we don’t know. We have no evidence that the company is doing it right at this moment and we want to make that very clear. However, we have plenty of evidence that such transactions have taken place in the past - Courier companies remember that, in the pre-KP days, rough from Africa was occasionally shipped via Moscow to Antwerp. What should concern us is that a country that only last year was heading the KP would officially promote weapons-for-diamonds deals involving a Russian state monopoly that is also on the U.S. sanctions list. So much for the earlier mentioned argument that we still need the KP because it will prevent tomorrow’s conflicts.

Even if, theoretically, one could follow the trail of “bartered diamonds,” something that is probably unlikely, one still might advance that there is nothing illegal per se about this. But I really had thought that the whole concept of “weapons for diamonds” would by now not be condoned by the industry, even for no other reasons than preserving consumer confidence. Retailers, such as Wal-Mart, want to show the “value pipeline” of their jewelry. Rosoboronexport may not fill the desired profile. But this goes far beyond Kimberley. Dealing with a diamond supplier that is on the U.S. sanctions list is also an anti-money laundering offense prohibited in all the diamond centers.

What I’m trying to say is rather than having endless discussions about a missing certificate on a $150,000 shipment from London to Tel Aviv, it would be far more productive if the politicians running the KP would devote some of their enormous energy to explore weapons-for-diamonds deals by their main participants. Even if there is no concrete deal to point at, the very fact that the company is publicly promoting such deals should be enough to convey to Rosoboronexport that their bartered diamonds might be tainted. This suggestion may not be “politically correct”– so don’t hold your breath. The KP tries to reach political consensus on the issues they raise. However, if the KP fails to do so, we, as an industry, should consider what we can do ourselves. 

Have a nice weekend.