By John Helmer in Moscow
For weeks, Alrosa, Russia’s diamond mining challenger to De Beers, has been waiting for the appearance of a miracle to keep the mines producing at last year’s volumes, and avoid layoffs and financial damage to the fareastern region of Sakha, where Alrosa is the chief income generator.
That miracle is a secretive government agent called Gokhran. Legally a branch of the Ministry of Finance, it has a history going back three hundred years to the time when Tsar Peter the Great decided he needed something more formal than bodyguards and hobnailed chests in which to keep his treasure.
During the 1990s, Gokhran played a key role in releasing, as well as withholding Soviet-era stocks of rough diamonds, plus platinum and palladium. The result created several diamond fortunes in Tel Aviv and San Francisco; the speculative spikes in the price of the platinum group metals were the foundation on which several celebrated Johannesburg mansions and Eastern Cape beach villas were erected.
Today, much depleted in valuables, compared to fifteen years ago, Gokhran is rebuilding its strategic significance in the international diamond market. This is because it has the potential, with Russian state funding, to buy up Russian rough diamond production. Unlike the other global diamond miners, which are halting mine operations, slowing mills, and laying off miners and prospectors, the alliance between state-owned Alrosa and state-funded Gokhran has the potential to make an enormous Russian grab of global diamond market share — and keep it.
That is what Alrosa, with a 25% share of the market, is waiting for. But will Godot, I mean Gokhran arrive in time? On Thursday last [March 19], it seemed so. Russian government ministers agreed then to make a substantial increase in budget money for Gokhran to buy Alrosa’s mine output this year. It is far from clear, however, what proportion of the production will not be bought by Gokhran; and what cuts to the mine output plan Alrosa management may now be obliged to make, if any.
Alrosa sources confirm that at the cabinet session last week, the Finance Ministry proposal was approved to spend Rb45.4 billion ($1.3 billion) for Gokhran purchases. This compares with Rb11.45 billion allocated last year when the Gokhran budget for 2009 was first formulated and voted.
The only other disclosure for the new Gokhran budget is that the stockpile will sell gold, platinum and palladium to realize a target revenue of Rb47.4 billion ($1.4 billion).
It appears that the new budget for purchasing will be spent predominantly, if not entirely, on rough diamonds, while sales from the stockpile will be restricted to the precious metals. Depending on the market movement in gold and platinum group metal prices, some income from sales may be reserved to re-stock domestically produced precious metals.
If you knew what Gokhran will do exactly, you might be able to speculate cleverly, and help yourself to a share of the Kremlin’s cash hoard. Naturally, that is why I can’t tell you.
Alrosa sources say Gokhran transactions are covered by state secrecy, and they will not disclose what carat volume of diamonds the new budget is intended to acquire. Nor do they say what the per-carat pricing formula that will be applied. In its annual reports, Alrosa does not issue carat production figures in aggregate, or for individual mines, although these data are not subject to the current state secrecy regulations. Another reason for Alrosa’s reticence right now is that until Gokhran’s long-serving chief, Vladimir Rybkin shows up, the Alrosa management does not yet know for sure how much of its production it will able to dispose of.
Last September, the Alrosa board, which is chaired by the Minister of Finance, Alexei Kudrin, approved a production target for this year of rough diamonds valued at $2.36 billion. A company statement claimed at the time that “the approved tentative targets for 2009 provide for maintaining production at the 2008 level.”
On December 30, following another board meeting, Alrosa reported it was cutting its rough diamond sales target for this year to $2.44 billion, a cut of 12% on the reported sales level of 2008. Sales in 2008 were reported to have been $2.76 billion, a decline of 1.1% on the 2007 level. Since December, Alrosa has announced that it has halted all rough sales to the international markets.
Since the new Gokhran purchasing target is 45% of the September 2008 production target for 2009, it is possible that Alrosa and Gokhran have agreed, or may agree, to a cost pricing formula that will keep the mines working to their pre-crisis plan, without production cuts or worker layoffs, and deliver the same volume of rough at a heavy discount on last year’s average market price. It is also possible that Alrosa may have to implement production cuts at the mines.
A third option, which Alrosa is also considering, is to fill the gap between mine production and Gokhran deliveries by sales to the domestic Russian diamond manufacturers, and to strategic partners.
This is a highly sensitive political issue at the moment, as the economy of the Sakha region, where Alroa’s mines operate, is dependent on the jobs and revenues generated by Alrosa. In addition, the President of the regional republic, Vyacheslav Shtirov, is seeking to oust the Alrosa chief executive, Sergei Vybornov, from his post, and take it for himself. Vybornov has been confident that he could fight off Shtirov’s challenge. Sources close to him have been saying that if the Gokhran formula sustains full production at the mines, the outcome would demonstrate federal government backing for Vybornov to remain in place.
Shtirov met Prime Minister Vladimir Putin on February 25 to lobby for the job change, and also for federal budget support for Sakha’s economy. He reportedly told Putin the Sakha budget needs a $3 billion injection in additional federal funds this year.
Putin did not disclose his decision on the Alrosa job issue. A source close to Vybornov said he cannot go into the meaning of the federal budget numbers. “The only thing I can tell you,” the source told Minesite, “is that [Alrosa mine production and rough sales] plans for 2009 have not yet been reviewed, but they may be reviewed in April.” This appears to be a hint that the government must now decide on the headship question before the company board can modify either production or sales targets for the year.
Rybkin of Gokhran is quoted in a Moscow newspaper as saying that, now the budget revisions for his agency have been authorized, he will present a scheme of purchasing to the Finance Ministry within a week of State Duma action on the revised budget. But he hasn’t arrived there yet.
Ararat Evoyan, director of the Russian Association for Diamond Manufacturers, also believes that Alrosa is still waiting for Gokhran to arrive. “So far as I know, the assortment of what Gokhran will buy will be decided by a special governmental meeting and order, only after the approval of the revised budget.” He is not confident that Gokhran will be able to buy all of Alrosa’s production this year. “That also depends on the market itself, and what diamond prices will be. It is hard to give predictioons. The [international diamond] market is very unpredictable.”
The Russian diamond cutters believe that if Alrosa’s mines keep up last year’s production level, there will be a gap between what is produced and what Gokhran takes into stockpile. “The problem now”, according to Evoyan, “is that Alrosa is not keen to sell on the domestic market. They continue to sell very small volumes [to Russian diamond cutters]. But it seems they are not interested in these buyers now. They are waiting for a huge deal with Gokhran.”
How long must they wait? Until the end of the next quarter, according to Evoyan. “Everything will become clearer after the Las Vegas jewellery fair in the beginning of June. If there will be demand for diamonds there, if the US market will move off its dead point, this may force other markets to start recovery, and then, by Christmas time, the things may go well. Or not…I don’t know yet.”