Process of liberalizing the diamond market

One of the significant trends in the development of the global diamond market is the creation of lapidary production in diamond-mining countries: Botswana, Angola, Namibia, South Africa, Canada. The pioneer of this process was, undoubtedly, Russia, which is one of the largest producers of rough diamonds and where the developed national lapidary industry has existed in market conditions for more than fifteen years. (The formation and development of the lapidary industry in the USSR in 1963-1991 is of historical interest today, since the economic and political conditions peculiar to that period are obviously incomparable with the current ones). The study of some of the conflicts and contradictions that accompanied and continue to accompany the work of the Russian lapidary industry today, can serve as a good example for countries,

 An extremely negative consequence, accompanying the rapid growth of the number of lapidary enterprises in Russia, since 1992, has been the serious criminalization of the industry. A significant part of the new granular enterprises acted as a tool to ensure the illicit export of rough diamonds through "gray" and "black" schemes. And although the peak of this process occurred in 1995-1997, he continues to cause serious concern today. In December 2005, the State Duma held a "round table" on "Legislative support for the effective development of the diamond-lapidary industry of the Russian Federation". Speaking at this representative forum, Deputy Director of the Administrative Department of the Ministry of Finance of the Russian Federation L. Tolpezhnikov said that despite the growth in the number of granular enterprises, The volume of raw materials actually cut in Russia is about 3.8 to 4.5 million carats, and this figure has been stable for several years. At the same time, "sales of diamonds in the domestic market increased and almost double the volume of goods that our enterprises cut." And further: "Increasing the volume of supplies to the domestic market does not lead to an increase in the actual amount of cut." As a source of information that allows such a conclusion to be drawn, L. Tolpezhnikov referred to the official reporting of the Ministry of Finance, indicating that the information is classified "top secret." This performance, undeservedly ignored by the press, was the actual recognition that up to 50% of the rough diamonds sold in the domestic market of Russia are in the shadow turnover. Of course, A similar level of criminalization is not specific to the cutting industry, but is inherent in the whole for countries with a transitional type of economy and, accordingly, a high level of corruption and a weak and imperfect law enforcement system. Obviously, Angola, Namibia, Botvana, a number of other African countries that are ardently advocating the creation of national lapidary industries will inevitably face the same problems and will fairly add to the headache for the remaining participants in the Kimberley Process.

Another block of conflict situations, in which Russia's lapidary enterprises have permanently fallen and, alas, continues to fall, is connected with the imperfection of the tax system, fiscal procedures and administrative regulation. Some aspects of the problem, for example, excessive interest in quotas or paranoid love for the label "secret" on any information related to diamonds, were the legacy of a totalitarian past. Others, such as the reluctance of the Ministry of Finance to agree to the organization of a specialized customs post in Yakutsk, were the result of a well-founded bureaucratic shock caused by the criminal tsunami. Some were caused by tactical contradictions in the interests of extractive companies and lapidary enterprises and the corresponding efforts of their lobbyists. How else can we explain the fact, That the export of rough diamonds and the sale to the domestic market are taxed differently by the value-added tax, when exporting the diamond-mining company returns from the VAT budget, and when selling to the domestic market - no? It took more than 10 years of efforts known as the "process of liberalizing the diamond market" in order to remove some of this kind of contradictions and create conditions for the industry that are illusory approaching the norms by which the main competitors work: the lapidary enterprises of Israel, Belgium, India and China. Still, problems of this type had a largely subjective nature, and the hope of their solution through negotiations and compromises remained always. And when selling to the domestic market - no? It took more than 10 years of efforts known as the "process of liberalizing the diamond market" in order to remove some of this kind of contradictions and create conditions for the industry that are illusory approaching the norms by which the main competitors work: the lapidary enterprises of Israel, Belgium, India and China. Still, problems of this type had a largely subjective nature, and the hope of their solution through negotiations and compromises remained always. And when selling to the domestic market - no? It took more than 10 years of efforts known as the "process of liberalizing the diamond market" in order to remove some of this kind of contradictions and create conditions for the industry that are illusory approaching the norms by which the main competitors work: the lapidary enterprises of Israel, Belgium, India and China. Still, problems of this type had a largely subjective nature, and the hope of their solution through negotiations and compromises remained always.

But in principle the Russian stakeholders were unable to solve the following problem. For the successful operation of the cutting plant, modern technologies and equipment are needed, well-trained personnel, tax preferences and loyal administration are desirable. But the main thing is that we need working capital. Traditionally, this business is arranged in such a way that the diamond cutter pays for rough diamonds at once, and the finished diamond gives the jeweler (or dealer) a consignment. Consequently - loans are needed, and given the fact that the cost of rough diamonds can reach up to 90% of the cost of a diamond, credit policy is the main factor of business success. In Israel, India, Belgium, there are specialized banks such as Antwerp Diamond Bank, ABN-AMRO Bank, State Bank of India, etc. The rate of loans for cutters fluctuates about LIBOR + 2%. Such conditions for Russia were and remain impossible for reasons, from diamantaires not depending. What kind of loans could be seriously talked about, if the refinancing rate in the mid-90s exceeded 200%!? Today, the domestic interest rate is 10.0%. In the European Union - 4.0%, in China - 3.6%, in Israel - 4.5%, in India - 7.75%. Accordingly, the cost of loans varies. These simple arguments make it possible to draw a rather unhappy conclusion: a Russian lapidary enterprise that operates on loans from Russian banks was, and probably will not be, competitive for a long time compared to Israeli, Belgian, Indian, and Chinese counterparts. In Russia there are still no cheap loans and there are no banks specializing in investment in the lapidary industry. Therefore, if the Russian granulator "plays by the rules" he is initially doomed to failure in the market. It seems that this situation will be typical for the majority of African diamond-mining countries that are striving to enter the "club of cutters".

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