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By John Helmer in Moscow

Alrosa is retrieving its diamond market positions after initial misstatements by new CEO

Alrosa, the Russian diamond miner with the largest share of the global rough diamonds market after De Beers, is reconsidering its international market strategy, and correcting several misstatements by its newly appointed chief executive, Sergei Vybornov.

Veteran international representative for Alrosa, Sergei Uhlin, announced in Amsterdam last week that the company has no intention of withdrawing its European Court of Justice case against a ruling by the European Commission to cancel Alrosa’s diamond trade with De Beers at the end of next year. Uhlin added that, not only is Alrosa confident of winning its appeal; but that if it wins, and the EC trade order is revoked, Alrosa will not necessarily decide to renew its trade with De Beers. “We are challenging our rights in principle, regardless of what we’re going to do,” Uhlin is quoted as saying. A spokesman for the company told Mineweb that Uhlin’s remarks have been correctly reported, and reflect company strategy.

Uhlin has been head of Alrosa’s international relations department for more than a decade, and he has survived several reshuffles of leadership at the top of the company. A few weeks ago, newly appointed chief executive Vybornov had told a Russian wire agency he was thinking of withdrawing the action against the trade cutoff. Later, Vybornov claimed that, since Ruissia is not a member of the European Union, it might reserve the right to trade with De Beers whatever the European Commission ruling ordered.

“I personally do not fully understand what is the necessity of all of this,” Vybornov was quoted as telling a Russian wire agency in March. For what purpose do we have legal proceedings?” His words were confirmed for Mineweb by Alrosa spokesman, Andrei Polyakov.

In the most recent Russian customs data for 2005, Alrosa’s deliveries to De Beers amounted to 8.8 million carats, or 38% of total carats exported from Russia for the year. The value of the shipments to De Beers was $669 million; average carat value, $75.90. The proportion of Alrosa’s shipments to De Beers dwindled further in 2006, but precise data are not yet available.

On February 22, 2006, the European Commission (EC) in Brussels issued a ruling to halt all diamond exports from Alrosa to De Beers from the start of 2009. Before the ruling — which took Alrosa by surprise — Alrosa believed there was an agreement with De Beers and the EC regulators to fix a minimal level of direct trade at $275 million per annum from 2009. This also kept the door open for cooperative mining and trade between the two companies in countries outside Russia. It also gave Alrosa access to De Beers’s price book for its rough.

The minimal trade figure was projected at less than 4% of De Beers’ annual diamond sales, and less than 10% of Alrosa’s annual production. EC anti-trust rulings have rarely, if ever, ruled against a dollar figure, or trade percentages, as low as these.

After the ruling was issued, Alrosa, then headed by Alexander Nichiporuk, believed the EC had been improperly influenced by De Beers, and had reached its decision by keeping their negotiations secret from Alrosa, despite an undertaking between Alrosa and De Beers officials to coordinate their positions before the Commission. Although he was too polite to say so, Nichiporuk believed that a victory for Alrosa at the European Court would be a significant warning from the world’s number-two diamond miner against the tactics used by the world’s number-one. Diamantaires, who have filed complaints in Brussels against De Beers’s marketing tactics, felt the same.

Uhlin said Alrosa is expecting a ruling from the court in the near future. He also confirmed a plan to restructure Alrosa’s marketing strategy, selling the majority of its rough to large companies and developing a branding strategy that could include locally cut stones.”We expect to sell about 80 percent of our rough in Russia,” Uhlin said.

This is not a plan to sell to Russian consumers, an Alrosa spokesman explained to Mineweb. “The plan is to sell up to 80% of total production to foreign companies on a long-term contract basis, not on commodity markets, nor at domestic auctions.” This suggests a downgrading of Alrosa’s already established marketing outlets at Antwerp, Dubai, and Hong Kong.

Russian Customs data for rough diamond exports, released a year ago for 2005, show that Belgium, Britain and Israel have been the main trading destinations for Russian exports. In that year, Russia exported 10.8 million carats to Belgium for $662 million, 8.8 million carats to Britain for $668.5 million and 2.4 million carats to Israel for $233 million. Antwerp, in Belgium, is the main independent marketing centre for the non-De Beers trade; the De Beers trade figures are shown as Russian exports to Britian.

De Beers has also used its clout to dissuade its sightholders, especially the big Indians in Antwerp, from risking their positions by trading under or above the table with Alrosa in Antwerp. The pressure tactics, and also the narrow margins available to diamond cutters, have encouraged the Indian and Israeli diamantaires to negotiate quietly for special access deals in Moscow; or in the Sakha region, where the stones are mined. The most adventuresome, including an Israeli buyer and several Indians, have ended up in jail, charged with smuggling offences. Competitiveness among the Indian cutters of Mumbai has largely precluded them from forming a buying consortium to deal with Alrosa.

When Nichiporuk was in office, the plan to offset the EC ruling against the De Beers trade emphasized open market dealings at diamond bourses in Dubai, elsewhere in Asia (Hong Kong, Bangkok), and in the US, where polished Russian diamonds are actively sold.

As a new marketing strategy, the Vybornov plan suggests that the biggest of the global diamond cutters and manufacturers, including the Indians based in Antwerp and Mumbai, and the Israelis, will have to knock on Vybornov’s door for special concessions. In the past, when Vybornov was a subordinate to Nichiporuk, he was sharply critical inside the company of schemes allowing diamantaires like Lev Leviev of Israel and Maurice Tempelsman of the US, to enjoy favoured access to rough at discounted prices. Others, like Israelis Arkady Gaidamak, Beny Steinmetz, and Dan Gertler have attempted to exploit inside tracks and schemes of favouritism, which have triggered hostile reaction from the Kremlin.

Vybornov is risking fresh recriminations if Alrosa’s new marketing strategy reopens these rivalries. According to Uhlin, “the goal is to establish long-term relationships with prominent clients who can take responsibility for a substantial amount of goods”. The more prominent the client, and the bigger the volume, the more sensitive price discounting will become for Alrosa’s managers and state supervisors.

Vybornov has created further concern about what he has in mind by announcing in Moscow that he is thinking of repricing Alrosa’s diamond exports in roubles, instead of the currently used currency, US dollars. The announcement, which has yet to be confirmed in policy terms, has already triggered industry concerns at the prospect of rising unit prices and price volatility, not to mention the spectre of discounting.

According to Uhlin, if the 80% sale target for Alrosa’s output is reached through long-term contracts, the remaining 20% would be sold outside of the country, mainly to small and medium-sized firms, buying in the range of about $300 million anuually. Alrosa already sells large-size diamonds of plus-10 carats through a monthly auction conducted in Moscow by the state marketing agency, Almazjuvelirprom. Buying is conducted by closed-envelope bidding. About $200 million worth of goods are sold through this auction annually.

“The president of Alrosa plans to develop the company up to the modern standards of an internationally operating company,” Uhlin said.

Whether Vybornov will hold office for long enough remains in doubt. A brief press release issued last month by Alrosa indicates that a predicted change of Supervisory Board Chairman for the state owned company did not occur at the June 23 board meeting in Mirny. If the Chairman is replaced, it is believed inside Alrosa that Vybornov will follow.

The two dominant figures on the former board, federal Finance Minister Alexei Kudrin and Sakha president Vyacheslav Shtirov, have remained in their seats. As chairman, Kudrin has been unable to overpower Shtirov, a former Alrosa chief executive, after the Kremlin ordered the federal takeover of the company. Shtirov was titled deputy chairman of the board in 2003, but lost that title from 2004. He did not lose his power over the company, however.

Five changes on the board have been announced, reflecting turnover in federal and regional government nominees. However, the key ratio of federal to regional board seats, reflecting the underlying shareholding, remains unchanged at 7 to 6. This confirms that the federal shareholding in the company remains at 48%, and has still not reached the target set by the Kremlin more than a year ago — 50% plus one share. The Sakha regional government holds 32% of the Alrosa shareholding, and the local districts of Sakha, another 8%.

Vybornov takes the seat on the board previously occupied by the former CEO Nichiporuk. Ivan Demyanov, a senior vice president of Alrosa, keeps his old seat on the new board. It is not clear whether they vote with the Sakha government group on the board, or with the federal government.

Management holdings of Alrosa shares amounted to 23% before the federalization. About half of those shares were sold to VTB, a state bank which now holds the stake in trust for the federal government, with an official stake besides of 37%.

Company shareholding rules require the nomination of new candidates for the board within the month of January for the regularly scheduled annual shareholders’ meeting. Since no new candidate for Chairman was agreed with the Kremlin in time, no replacement move could be taken at the board meeting last month. Sources inside Alrosa say the Kremlin is considering three candidates to replace Chairman Kudrin. A vote on replacement can be taken by an extraordinary shareholders’ meeting, but up to 60 days of notice would be required. Vybornov can now be confident of holding on through the summer holidays.

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