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New deal gives Russians a say in diamond pricing

October 1997

The agreement between the Russian company Almaazi Rossi Sakha (ARS) and De Beers signed
in Moscow on October 21 is different from the original memorandum of understanding signed
between the parties 18 months ago.

The new agreement gives De Beers access to diamonds worth $550 million from the current
mine production and from the state stockpile but only those stones which cannot be cut
profitably or economically in Russia. The Russian stockpile is already depleted to a mere
$2-2.5 billion – mostly in less desirable goods.

The agreement gives a needed psychological boost to De Beers – reaffirming its power as
the main channel for marketing the world’s diamonds. The deal will bring much needed cash
to ARS which has experienced difficulty meeting its payroll demands. Most important, the
contract will bring stability to the diamond market.

New provisions

However, because of the federal Russian government and Yeltsin’s decree, the memorandum
is amended to tilt toward the Russian side – with only $550 million in diamonds alotted
to
De Beers as contrasted with the $1.2 billion stipulated in the previous contract. The new
deal also gives the

Russian cutters first choice over the creme of the merchandise – which is, of course,
also the most profitable.

Moscow’s Almazjuvelirexport now has the right to export some rough diamonds –
especially those over 10 carats – as per the decree of Boris Yeltsin.

A weak point of the agreement is its short term nature; the agreement is valid for only
one year with the possibility of an extension of an additional two years. This will allow
the parties just enough time to negotiate a contract for the 21st century.

Equal partnership

Russia’s Finance Minister Kuznetsov called the agreement “a document of equal
partnership.” This alludes to Russia’s two main grievances with the former
memorandum. One was the poorly defined process of evaluation for De Beers’ purchase of the
stones. The second was the Russians’ lack of control over CSO sales. These issues were
resolved by establishing a joint observation committee which will permit both sides
to monitor the market, and will allow Russian cutters to attend sight sales. This
is a first in the history of the De Beers cartel.

Until now, the most a producer could expect was a window to the world markets. But with
this agreement, the producer has an open door to the prices at which their goods are sold
– not only on the open market, but at De Beers’ own sales.

This could set a precedent for other large producers, such as Canada, which is expected
to produce about 15 million carats at the start of the next century.

This groundbreaking “equal partnership” will help stabilize the market, by
minimizing leakage and bringing more producers into the CSO fold. But it may put a profit
squeeze on De Beers itself.

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