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Sustainability of the International Diamond Trade
Journey from War & Sanctions to Lab Grown & KP
By: Diamond World News Service
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May 4 2022 5:03PM
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Two months into the violent decree that Russia has wrought against Ukraine and still there is no sign of remission! Almost 21% - 30% percent of the total diamonds in the world are sourced from Russia; Alrosa has been the single most influential corporate supplier of rough raw material to the diamond world.

US, UK, Europe have banned trade with Russia while UAE, India and China are closely waiting and watching. The war has disrupted global peace as well as divided the international gems and jewellery industry for and against the aggressor. War has strong implications on supply chain, logistics, processes

that are sustainability related, aligned to standardization processes like KP and penalties laid by countries contribute heavily to a historic market selloff situation. Kamakshi VF takes us through the Russia-Ukraine face-off and sketches the implications of war on diamond sustainability.

Russia’s insecurity at not being able to feel “safe, develop and exist” apparently got Russian President Vladimir Putin to attack its culturally modern and westleaning-neighbour, Ukraine to create a greatly violent war – the biggest after the Second World War. With almost 30% of the world’s diamonds originating from Russian mines, the country is the world’s number one source of diamonds where the vast global supply chain sources its basic raw material. Since the time the unprecedented attacks started the global market comprising buyers, traders, diamond companies, industry associations, regulatory bodies, jewellers, all of these and many more were unsure of taking a stand about buying and selling diamonds of Russian origin. There was a deafening silence from every state, country, sector, as this was an unwanted and unpleasant situation not only for Ukraine but also for the business. No one took a stand against the violence nor Russia, as massive business was at stake with many businesses dependent upon the state-controlled diamond sector for sizable supply of raw material. The global diamond industry was blamed for keeping silent.

US, UK & Europe Diamond Industry Reacts to the War

The international diamond sector took a stand on the issue of the war with two sets of prohibitive actions. US Secretary of State, Anthony Blinken, identified Russian miner Alrosa as a State-owned Enterprise and “the world’s largest diamond mining company, which supplies 90% of Russia’s rough diamonds,” thus revenue earned by this company would ultimately go to the state which funds the military. This was the first executive order issued on the first day of the Russian invasion in Ukraine. Sergei Sergeevich Ivanov, CEO of Alsora too was heavily sanctioned by the US Treasury department, as his father Sergey B Ivanov is one of the closest officials of President Putin. All properties belonging to Alrosa were frozen and to be reported to the Office of Foreign Assets Control of the Treasury Department. Organizations owned, directly or indirectly, by 50% or more, by one or more blocked persons were also banned. Every transaction by a citizen of the United States or within the States, transiting included, that involve any property or interests in property of the designate or blocked persons too were prohibited. Many countries in the west have described Russian supplies as ‘conflict diamonds,’ due to the companies’ supposed association with highly ranking government officials. In the second official set of sanctions by the US on Russia, imposed about a fortnight after the first set, import of “nonindustrial diamonds” was prohibited

United Kingdom’s sanctions on Russia are elaborate and encompass sanctions on whole sectors of the Russian economy, like trade and transport, railways, strategic banks and business elites included. In all 65 sanctions have been announced by Liz Truss, Foreign Secretary, UK with restrictions targeting over 1000 individuals, especially those aiding the war against Ukraine like the Wagner group and imposed asset bans, travel restrictions, transport sanctions and the like. Sanctions have been imposed on Alrosa and six other banks. Intending to stop the funding machine for fuelling the war, the Foreign Secretary, Truss has said, “These oligarchs, businesses and hired thugs are complicit in the murder of innocent civilians and it is right that they pay the price. Putin should be under no illusions – we are united with our allies and will keep tightening the screw on the Russian economy to help ensure he fails in Ukraine. There will be no letup.” Infact, the country with its allies is working towards excluding Russia from the SWIFT financial system.

ANTON SILUANOV Finance Minister of Russia “We have part of our gold and foreign exchange reserves in the Chinese currency, in Yuan. And we see what pressure is being exerted by Western countries on China in order to limit mutual trade with China. Of course, there is pressure to limit access to those reserves, but I think that our partnership with China will still allow us to maintain the cooperation that we have achieved, and not only maintain, but also increase it in an environment where Western markets are closing. The sanctions have deprived Moscow of access to $300bn of its $640bn in gold and foreign exchange reserves and there is pressure on Beijing to shut off more.”Europe on the other hand has limited its sanctions to exports of diamonds, jewellery and luxury goods. The unprovoked war by Russia has pushed the European Union to prohibit the “sale, supply, transfer or export” of a range of goods to any individual in Russia or for use in Russia. This policy of prohibiting only exports and not imports has raised a few eyebrows as imports of Russian diamonds to the EU is of more consequence than exports. According to the Antwerp World Diamond Centre, 25% of Antwerp’s rough diamonds are imported from Russia and were valued at EUR 1.8 billion last year. According to a report by IPIS, “Alrosa puts around one third of its production on the market through Antwerp, where it has an important sales office and where around 20 of Alrosa’s 58 long-term clients are based.” Most of these sanctions were executed March 15 onwards.

Asian Countries like China, India and UAE’s Responses to War
According to the Chinese Customs Agency, Russian exports to China were worth $79.3bn in 2021 where oil and gas accounted for 56% of that which makes China Russia’s top export market after the European Union, reported News Agencies. Though both China and Moscow deny it, but the latter had asked China for aid in its war against Ukraine, reports say. Anton Siluanov, the Finance Minister of Russia said “We have part of our gold and foreign exchange reserves in the Chinese currency, in Yuan. And we see what pressure is being exerted by Western countries on China in order to limit mutual trade with China. Of Russia launched an offensive on Ukraine on February 24, 2022. This battle has led to loss of civilian lives, infrastructure damage, loss of human lives, cause of human suffering, razing of important structures like schools, hospitals, homes for old and many governmental and charitable organizations. One hundred and forty one member states of the United Nations condemned these atrocious actions in a General Assembly Resolution early this March. Due to this war, the world is going through economic and financial upheavals due to the imposing of sanctions designed to curb Russia’s economy and drain th e resources of the Russian regime.

course, there is pressure to limit access to those reserves, but I think that our partnership with China will still allow us to maintain the cooperation that we have achieved, and not only maintain, but also increase it in an environment where Western markets are closing.” He further said the sanctions had “deprived Moscow of access to $300bn of its $640bn in gold and foreign exchange reserves” adding that there was pressure on Beijing to shut off more. Jake Sullivan, National Security Adviser to the President of the United States was quick to alert Beijing of the "consequences" if the People’s Republic of China would try to aid Russia compensating for their losses from the imposed sanctions. China reportedly would not involve in a financial conflict between Russia and the entire world. Foreign Minister of China, Wang Yi was explicit when he stated that China wanted to avoid bearing repercussions by U.S. sanctions over Russia’s war. Beijing retorted and called this and effort by the US to spread misinformation and “distort and smear”China’s stand on the Russia-Ukraine issue. Jens Stoltenberg, Secretary General of the NATO called upon China to “clearly condemn” Russia for its unwarranted attacks on Ukraine while denying any assistance to them. He said, “China should join the rest of the world in condemning, strongly, the brutal invasion of Ukraine by Russia. China has an obligation as a member of the UN Security Council to actually support and uphold international law, and the Russian invasion of Ukraine is a blatant violation of international law.” Currently, the US has asked for support from G7 to ensure that Russia does not evade sanctions through China or any other country for their unprovoked war crimes. The Moscow times dated April 13, 2022 has reported that trade between Russia and China has increased by 28% in the time spanning January - March this year as compared to last year cited by state-run news agency RIA Novosti as reported by the Chinese customs.

“On the back of robust demand for rough diamonds in 2021 and jewellery sales in the first quarter of 2022, and reflecting continued year-on-year growth in consumer demand for diamond jewellery, demand for De Beers Group rough diamonds remained strong in the third sales cycle of 2022.”-BRUCE CLEAVER CEO, De Beers GroupUnited Arab Emirates and India are two of the major diamonds trading hubs other than China who have not takenany steps to ban imports of Russian diamonds. The gems and jewellery sector in India employs almost 6.5million people out of which many are engaged in the diamond cutting, polishing and trade. Nine out of every 10 rough diamonds in the world, it is said, are cut and polished in India, thus a major portion of trade is heavily dependent upon diamond imports. Trade restrictions and sanctions on Russian miner, Alrosa would spell doom for diamond traders and assume serious implications for India’s gems and jewellery sector and looking at implementing a payment methodology that would go around sanctions. Aljazeera reports Veteran diamantaire Nanubhai Vekariya, president of the Surat Diamond Association, as being positive that Western restrictions will not hurt his business. The concern among analysts and experts is that India’s non compliance to trade sanctions on Russia

could in the bargain fund Russian instruments of violence. Russia in the meanwhile has resumed shipments of diamonds to India; Colin Shah, Chairman of India's Gem & Jewellery Export Council elaborated, "Orders for these diamonds were placed in early March, according to the sightholding schedule of Alrosa. They are coming now." A report in Economic Times, by Sutanuka Ghosal dated April 11, reveals the synopsis of the situation in India. The reporter informs that workers at “Gujarat's diamond processing centres have been hit by the sanctions on Russia which has led to a drop in work for cutting and polishing units in Surat, Saurashtra and Bhavnagar due to a supply crunch. Working hours have been reduced to 8 hours from 12 hours and units have declared 2 days off each weekly, which is having a bearing on the wages of the 800,000 - 1 million workers engaged in cutting and polishing rough. Diamantaires have cut production as the supply of roughs from Russia has fallen.”

Ambiguity in Sanctions Open Doors for Trad
Loopholes in the statements that government officials have made have annulations of the so called strict sanctions. First of all, there is no process to identify if a diamond has been mined in Russia. Who said Russian diamonds were easily detectible? The origin of a diamond is debatable as it is not always traceable. Brands have made positive marketing campaigns about credible origin of diamonds so as to sell the product with higher credibility. Sanctions by US are specifically on imports of rough diamonds from Russia. However most of the rough stock goes to centres like India, Antwerp, Dubai and a few other countries where it is cut and polished and commonly traded as jewellery or polished stones with origin from the same countries, but not Russia. So when a Russian diamond is cut and polished in India, it becomes a made in India product. US generally imports cut and polished diamonds or diamond jewellery from various countries and since brand, they cannot be identified. Today diamonds of Russian origin are being bought and sold freely in the US itself. Since diamonds originating from Russia do not carry any identification, their traceability can be ambiguous. Rough stones could be banned, but cut and polished diamonds that are already in the stores and as part of jewellery are already for sale. For the sanctions to trickle down to the level of the retailer will take time and till then a lot of diamonds without origin could have entered the market through various means. The sanctions laid down by US would specifically apply only to immediate rough trade and those diamonds cut and polished in Russia, not the diamonds that are already in the pipeline or the supply chain. Thus, could one safely assume that Russian origin diamonds that are cut and polished outside of Russia are not under sanction? This ambiguity is a clear loophole in the sanctions laid down by the so called super powers against Russia. Almost 50% of demand for diamonds in retail originates in the US making it one of the largest consumer of diamonds and diamond jewellery in the world. The sanctions laid down by the US against Russia prohibit only the purchase and trade of rough stones from the warring nation and do not mention the significant cut and polished diamonds or diamond jewellery. International diamond cutting and polishing hubs are located in India, UAE, Belgium and a few other nations where some of those diamonds are converted into jewellery or exported to other centres to manufacture jewellery before entering US, UK or European markets. The origin of rough diamonds thus becomes ambiguous and that is how the pertinence of the Kimberley Process has entered the scenario

Diamonds Originating from Blood & Conflict
The Kimberley Process is a nonpolitical peace initiative that focuses solely on ‘conflict diamonds’ and is chaired by Botswana this year. There are almost 82 member countries and NGO’s participating. KP defines conflict diamonds as rough diamonds used by rebel movements to finance wars against legitimate governments and the Central African Republic supposedly, the only country where conflict diamonds originate. Russia’s offensive on Ukraine is not peaceful and thus all trade profits sustaining on rough sourced from the Kremlin would fuel conflict or war. With this logic and proposition and the loopholes of the sanctions the diamonds are already on the shelves of US, UK and European retailers, the consumer nor the retailer is aware of its origin and with booming diamond sales across the globe, we are already funding the Russian government and subsequently its military forces. Ukraine is a member of the Kimberley Process yet there is no apparent advantage to the country. Russian diamonds which are “sustainably transformed” away from its origin, are already on the sales counters of many. None of the important KP members including the Kimberley Process Civil Society Coalition, the alliance of human rights organizations, US nor the EU have solicited a blanket ban on Russian diamonds.

KPCSC’s statement released on March 14, simply states to maintain “diamonds produced in Russia or by Russia’s stateowned diamond miner, Alrosa do not contribute to financing conflict.” Michel Yoboue who is currently Chairing the KPCSC’s and also heads GRPIE, a Côte d’Ivoire–based NGO has clearly denied a ban. “The situation between Russia and Ukraine is a political situation. We work on conflict diamonds. What we want is for the KP to have a position about Ukraine. We would instead support a monitoring mechanism” like the one running in the Central African Republic. Averse to the term “conflict diamonds” referring to those of Russian origin, he said “My view is we should put on the table a monitoring mechanism of Russian diamonds to make sure they are not financing conflict.”

Changing Dynamics of the Industry
Alrosa has till now been acquitted from the World Diamond Council, Responsible Jewelry Council and other major associations that it was a member of The Moscow Bourse has suspended its membership from World Federation of Diamond Bourses; Australian Miner Rio Tinto imposed trade restrictions over its fuel and aluminium trade with Russia on March 10; Canadian miner Kinross Gold was reportedly in talks to divest Russian assets that include Kupol gold mine and the Udinsk development project. One’s loss is another’s gain. Diamond sales have not plunged, settled or shown any signs of rebate and banning Alrosa’s rough has opened the doors for other players in the field. At advantage are competitive suppliers of diamonds and the lab-grown diamonds sector. At the recent De Beers sighting, Bruce Cleaver, CEO, De Beers Group was optimistic about diamond sales when he said, “On the back of robust demand for rough diamonds in 2021 and jewellery sales in the first quarter of 2022, and reflecting continued year-on-year growth in consumer demand for diamond jewellery, demand for De Beers Group rough diamonds remained strong in the third sales cycle of 2022.” Management consultants Bain & Company headquartered in Boston reported a growth in rough and polished demand higher than the prepandemic period in 2022 and a return to historic growth pace by 2023–24. It noted “Industry players must continue to pursue operational excellence programs, invest in digital technologies, and advance marketing concepts and the diamond jewellery value proposition to prepare for potential changes in market conditions.” Bain reported Lab-grown diamonds would diverge into a separate, more affordable jewellery category. “The segment saw continued demand growth and price decreases relative to naturalmined diamonds as lab-grown diamond supply increased and technologies advanced; the average polished lab-grown retail price declined to 30% and the average wholesale price to 14% of natural prices, down from 35% and 20% in 2020, respectively,.” Noting that affordability of Lab-grown diamonds was driving sales. Ditching Diamonds-Au-Naturel!
Disruption in the supply chain due to war sanctions and increasing demand for diamond and diamond jewellery has created a perfect scenario for consumers across the globe to move swiftly towards the cheaper and easily available option of Lab-grown diamonds. Retailers and manufacturers who have stopped buying rough from the sanctioned Russian miners to avoid sponsoring terrorism, are helpless as the Alrosa is still able to collect revenue due to the lack of a comprehensive banding together of consumers,businesses, and governments against the trade of its diamond supply. Advantage that Lab-grown diamonds have over natural ones is firstly, affordability and importantly, they are reckoned for being ethically sourced without the complications associated with naturally sourced blood or conflict diamonds. International market value of the lab grown sector in 2020 was US$19.3 billion and estimates increase to US$49.9 billion by 2030. Though industry experts have disregarded this trend towards buying lab-grown diamonds, stating that the long-term effects of war would not last long; one cannot deny an apparent shift in consumer behaviour. Presuming a massive shift in consumer preferences towards lab-grown diamonds simply to avoid Alrosa diamonds, a remarkable change could be unsuspectingly projected. Ultimately, consumers would prefer what suits their budget and their conscience!

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