Russia gem shakeup spells end for reform
By John Helmer

MOSCOW - The forced departure this week of German Kuznetsov, senior vice president at Russian diamond miner Almazy Rossii-Sakha (Alrosa), is a victory for the Sakha regional government group that has controlled the company since its inception, and appears to be a defeat for federal government attempts to end corruption in Russia's diamond sector.

It is also a victory for De Beers, the world's dominant diamond producer and marketer, and a mixed blessing for the Asian gem markets, which depend for a major share of their rough diamonds on De Beers, but which are also seeking direct supply sources in Russia. Kuznetsov and others wanted to divert more of Alrosa's production to local cutters and polishers, and to international manufacturers outside the De Beers network.

Asian diamond cutting centers like Mumbai and Bangkok secure supplies of Russian diamonds through De Beers, or through Antwerp and Israeli intermediaries. Since Russia liberalized the rules for exports late last year, the Indians especially are now looking for fresh sources of direct supply in Russia.

China's diamond cutters, whose business has been reviving, have also sought direct Russian diamond supplies without success. A new venture between Smolensk Kristall, Russia's largest polisher, and an unnamed Chinese partner was announced this week. Though the first Sino-Russian diamond supply venture of its kind, its production is likely to be very small.

India's diamond-polishing industry is now the largest in the world, employing 800,000 people, mostly in the Mumbai region; it imports 100 million carats valued at US$4.8 billion in 2002. India exported 29.9 million carats, valued at $ 6.2 billion, a tenfold increase over the last 20 years. Indian polishers, who used to specialize in cheap stones, now are climbing the value-added scale and using the latest state-of-the-art technology. Global rough diamond production is estimated to total US$7.9 billion annually. That total grows
to US$28 billion at the wholesale level and US$65 billon at retail.

One of the sharpest critics of Alrosa's trading agreement with De Beers, which purchases half of Russia's mining output, Kuznetsov found himself with almost no allies when Russian Finance Minister Alexei Kudrin stopped supporting him early in the year. His departure, after a bitter fight for control that included a host of charges and countercharges of corruption on both sides, also thus reinforces the links between Alrosa and De Beers.

Alrosa sells the other half of Russia's mining output to the local cutting industry. The shakeup is disappointing to Russia's diamond cutters and polishers, who believe that their profitability is hurt by Alrosa's export pricing. Profitability in the traditionally narrow-margin business recently drove Smolensk Kristall, Russia's largest diamond manufacturer, to establish its own small diamond-cutting facility in China.

Kuznetsov was the first figure inside Alrosa openly to back diversification in Alrosa's marketing. An Alrosa spokesman told Asia Times Online that on Wednesday Alrosa chief executive officer Vladimir Kalitin agreed to accept his resignation. The source claimed "this was a voluntary resignation by Mr Kuznetsov", adding that he would not comment "on suppositions about the possible reasons for the resignation". He also declined to comment on whether other changes in the senior management of Alrosa are now likely.

Kuznetsov originally came into the Russian government in the early 1990s as a protege of then-prime minister Victor Chernomyrdin. He took over management of the state diamond and precious-metals stockpile agency Gokhran in 1996 after its former head, Yevgeny Bychkov, was sacked amid charges of massive corruption. Bychkov was subsequently amnestied.

Kuznetsov, however, was forced out of Gokhran in 1999 amid fresh allegations, which did not result in official action. His successor, Valery Rudakov, began the first serious anti-corruption drive in the diamond and precious-metals sector. But he too was forced out of office and into retirement in June 2002 after Kudrin abandoned him.

Rudakov had been planning a shakeup of the management of Alrosa, ending the power of the Sakha regional government, headed by Vyacheslav Shtirov, to control its cash flow, and limiting Alrosa's forays into cash-draining ventures in cutting and polishing diamonds. Rudakov also proposed reforming the way in which Alrosa allocated its rough stones between De Beers' Diamond Trading Co (DTC) and Russian diamond manufacturers. His ouster cut short this effort.

With Kremlin approval, Kudrin named Kuznetsov as a senior executive of Alrosa with the mandate to clean up the company and bring it under closer federal government control. The federal government retrieved a 5 percent shareholding and, with 37 percent compared with the Sakha government's 32 percent, briefly attempted to redirect management strategy.

Kuznetsov's first move was to call publicly for cutting Alrosa's commitment, under the current export agreement with DTC, to deliver between $800 million and $1 billion worth of rough each year to De Beers. His rivals in the company repudiated the move and press leaks subsequently implicated Kuznetsov in a controversial deal to sell hundreds of millions of dollars' worth of rough to a Lebanese company connected to Lebanon's ruling clique.

Kuznetsov retaliated with a press campaign of his own. Moscow newspaper leaks followed, implicating Sergei Uhlin and other Alrosa executives close to the Sakha government in an alleged cash-diversion scheme through a London-based company called Arcos. Further press disclosures followed, suggesting that Alrosa was planning costly, high-risk diamond-cutting and jewelry ventures. Most recently, a document, alleged to represent a secret Alrosa plot to cut diamond deliveries to De Beers, appeared in the press.

CEO Kalitin then told a press interviewer that "the practical actions [of Kuznetsov] do not always lie in the direction of the corporate interests". A diamond-industry source in Moscow told Asia Times Online that "Kuznetsov's resignation is due to the fact that he was appointed to this position originally as the representative of the federal government, and started to clean up the Augean stables in Alrosa. This resulted in attacks on him from the Sakha/Alrosa clan. He was not a saint, and probably had some personal interests of his own. But the extent of these was not great. As a clever man, Kuznetsov understood that without solving some fundamental political questions, he would not be able to do anything in the company."

Kuznetsov's departure from Alrosa has been accompanied by press leaks suggesting that at least one of his rivals, and possibly others, may also be axed shortly. Uhlin, according to the press leaks and the industry source, may step down from his post as vice president in charge of foreign relations at Alrosa to become CEO of Alrosa's new diamond-polishing venture in Moscow, Almazny Mir. Valery Novikov, Alrosa's spokesman, told ATol that when the shareholders of the venture meet next month, Uhlin "may be proposed as a candidate for the position of general director".

Russian diamond manufacturers see Alrosa's involvement in polishing as a way of increasing Alrosa management's share of the industry's revenues. They also believe that Alrosa will favor the venture with supplies of rough on terms that are anti-competitive. Said one Russian diamond manufacturer, "It doesn't make economic sense for Alrosa to get involved into polishing, and thus develop Almazny Mir as a polishing company. This is because the economic results of Alrosa's polishing operations, which are being discussed within the company, but have not been made public, are not so good."

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