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By John Helmer, Moscow

Negotiations between Surat Rough Diamond Sourcing Ltd (SRDSIL), one of the largest cutters and polishers of diamonds in the world, are under way with Alrosa and the Russian state stockpile agency Gokhran. And just a few days after they began in Moscow, the Indian move has triggered an unusual domestic protest. In a statement issued publicly, the Russian diamond manufacturers have announced their concern that SRDSIL may cut into the domestic supplies which the Russians are counting on from the state stockpile.

Unstated publicly, but intensely felt, the Russian diamond cutters believe that their Indian counterparts are already getting a discount on the current market price of diamonds from Alrosa, and may be aiming at a similar discount from Gokhran which the locals say they are denied. The locals are also worried that Gokhran may be pressured into breaking its promise not to sell from its newly enlarged stockpile for the benefit of the Indian competition.

SRDSIL announced late last month that it has signed a memorandum of understanding with the Zimbabwe government to provide $1.2 billion worth of rough diamonds annually. SRDSIL then went on to visit Moscow last week to discuss buying another $1 billion worth of goods.

Through 2009, the Gokhran bought more than $1 billion worth of Alrosa stones when they could not be exported or sold to domestic cutters. While Gokhran officials have said they will not be selling this stock for at least one more year, the Indians appear to believe they may be able to negotiate a long-term purchasing contract. Ashit Mehta, SRDSIL chairman, had told an Indian newspaper after the Zimbabwe signing: “There is huge demand for rough diamonds in Surat. We plan to visit Russia and Angola during this year-end to ink a similar deal.”

In reaction, the Association of Diamond Manufacturers of Russia (ADMR) issued a statement in Moscow last week saying it is “”concerned at the aggressive interest that Indian companies seem to have in tapping into the stockpile of rough diamonds held by the Russian government.” ADMR said that the Gokhran stock should be reserved for support of domestic manufacturers. The association claimed its cutters are “lacking rough goods at the moment.”

A source from ADMR told PolishedPrices.com there has been a “positive reaction” in Moscow to the Surat offer, and this has stimulated “deep concern about the possible outcome.”

Ararat Evoyan, a veteran spokesman for the Russian manufacturers, told Polishedprices.com: “The Indian companies have been holding negotiations with Russia for years — that’s no news. I believe there is nothing to worry about, because both Gokhran and Alrosa primarily supply rough to Russian companies, and export the rest only when the home market is satisfied. Gokhran is not the authority to make decisions on exports; it is the government. On the other hand, if Alrosa and Gokhran have enough resources, they can sell some rough abroad, too.”

In its recent Eurobond prospectus, Alrosa reported that it is attempting to boost its exports by long-term sales agreements. “Between the second half of 2009 and the first half of 2010,” the prospectus says, “ALROSA entered into 24 long-term agreements for supply of rough diamonds, comprising 19 agreements with major foreign diamond traders and producers based in Belgium, Israel and India and five agreements with Russian diamond producers and resellers. The proportion of the Group’s diamond sales revenue accounted for by these long-term framework agreements increased from 36.5 per cent. in 2009 to 47.6 per cent. in the first half of 2010.”

The long-term agreements with the Indians were announced in Mumbai in March, and reported in detail here.

Since then Alrosa has made clear (in the bond prospectus) that its marketing objective is “to increase the percentage of sales of rough diamonds under long-term framework agreements to 61 per cent. and 70 per cent. in 2010 and 2011, respectively.”

In this tabulation of value of export sales by long-term agreements, Alrosa reports that in 2009 it sold Rb2.5 billion ($82 million) worth of rough to Russian buyers, making 10% of the total long-term sales; in the same period Indians bought Rb1.7 billion (($56 million), or 6% of the aggregate. In the first six months of this year, domestic sales have reached 20% of the total of Alrosa’s sales, while Indian purchases amounted to 7%.

The table also shows that by far the biggest volume of Alrosa’s diamond sales, two-thirds by value, goes to the Belgian diamond trading centre of Antwerp; many Indian groups also buy Russian diamonds there, and send them on to Surat for cutting and polishing.

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