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By John Helmer in Moscow

Russia’s Finance Minister Alexei Kudrin, who also chairs the supervisory board of state diamond miner Alrosa, is considering selling rough diamonds from the state stockpile more than a year earlier than has been forecast by the stockpile agency, Gokhran. It is unclear whether Kudrin is trying to lower the price of the rough to be included in a sale of part of the stock Gokhran bought in 2009 from Alrosa for about $1.2 billion, or stampede the stockpile managers into doing what they have so far refused to do. Moscow sources agree that Kudrin is trying to secure the diamond disposals from Gokhran because Alrosa is running out of mine supplies to meet its buyer contract obligations, especially to the Indians.

Russian wire services report that Kudrin said on Saturday in Yakutsk, the capital of the Sakha region: “We are being asked to begin selling diamonds from the reserve we acquired last year. We are now considering these offers.” He claimed that the world market has “woken up” and prices for gems have recovered, adding that this “completely justif[ies]” the government’s decision to support Alrosa with government diamond purchases last year. Kudrin didn’t say who is asking to buy.

Although Gokhran officials rank below Kudrin at the Finance Ministry, they have retorted to the minister’s proposal by saying they have no intention of selling last year’s stock before 2012. Vyacheslav Ivanov, a Gokhran spokesman, told PolishedPrices.com: “The diamonds we purchased from Alrosa are now being sorted and evaluated. The amount is very big, and the process will take a lot of time. We will begin selling that material no sooner than in 2012. To tell the truth, we are short of sorters; many of them went to work for Alrosa.” Last March, the head of Gokhran, Nikolai Rybkin, said: “As for diamonds bought in 2008-2009, we shall not sell them during this or the following year. It is a great amount since we never bought in such quantities, and we have to do a long work to sort and evaluate them. They will probably reach the market in 2012 or 2013.”

Ararat Evoyan, head of the Russian Diamond Manufacturers Association, believes Alrosa has been shorting sales of rough to the domestic cutters in order to sell to export markets, and that Kudrin is trying to prise open the stockpile to meet domestic demand. He is not confident Kudrin will succeed. “Alrosa signed many long-term export contracts, but lately their stocks have been diminishing. Alrosa wants to stick to their export agreements, but this is creating a shortage on the home market, and this is why Alrosa suggested that Gokhran sell rough from their stocks, satisfying the home market demand. I would not guarantee that Gokhran will do that, first of all because nobody outside Gokhran knows how much rough they keep; and because they have their own rules and procedures, so it could take time before Gokhran starts selling.”

An influential Moscow diamantaire told PolishedPrices.com the pressure on the stockpile reflects the traditional reluctance Alrosa shows for selling to domestic cutters like Kristall and Ruis Diamonds (Lev Leviev). The source believes that Alrosa is having trouble filling the long-term contracts former Alrosa chief executive Sergei Vybornov arranged with Indian buyers. According to a recent Alrosa report for the first quarter of this year, “in Q I 2010 ALROSA signed three-year supply agreements with Indian diamond companies Rosy Blue, Diamond India Ltd and Ratilal Becharlal & Sons to the total of $490 million.”

A source with Ruis Diamonds said: “there are some talks going on around possible Gokhran sales. In order to sell rough from Gokhran, a governmental ruling is required, and as far as I know, such a ruling is being prepared, but it hasn’t been signed yet. It is a question of whether it will be signed at all. The government will first check if there is enough money in the budget to figure out if diamond sales are required. There is also a technical issue. Before Gokhran can sell Alrosa’a rough, they will have to sort all the lots they bought, and Gokhran experiences a serious lack of sorters. It can take years before the state fund can start sales.”

In July, during a speech to the World Diamond Congress in Moscow, Alrosa’s current chief executive, Fyodor Andreyev, admitted nothing about Alrosa’s contract problems, but claimed that sales of Gokhran stones may be necessary to counteract a new price bubble forming in the international market, as supplies fail to meet demand. According to Andreyev, Alrosa and the state stockpile agency Gokhran are now considering the sale out of Gokhran stocks of “$500 million to $800 million worth of rough…by the end of the year in order to stop supporting the speculative demand from the market.”

Andreyev’s spokesman Andrei Polyakov told PolishedPrices.com: “The initiative [to sell Gokhran stocks] belongs to the state, and namely to the Ministry of Finance. It is not only to support the cutters, but, more importantly, to satisfy the demand of the world diamond polishing companies. As of yet the volume of rough that can be sold by the state fund, as well as the selling mechanism, have not been determined.”

He acknowledges that Gokhran is digging in its heels in resistance. “It is an overall trend that demand surpasses supply, there is nothing new to it. We understand that the state would like to save and increase stocks of valuable materials, and we respect the state’s decisions. But certainly we hold a constant dialogue with Gokhran and the Ministry of Finance, and we openly express our views and forecasts. It is still a question what steps Minfin [Ministry of Finance] will take, but we believe that for the state there is no obstacle to selling some surplus rough.” Polyakov declined to predict whether domestic or foreign manufacturers would be allowed to buy if Gokhran is compelled to sell.

In production reports issued to date, Alrosa has admitted that mine output of diamonds this year is down on last year’s level. In the first quarter, the company says it produced 8.6 million carats; this was 7% below the 9.2 million carats produced in the first quarter of 2009. In the second quarter, output was 8 million carats, down 2% on the year earlier. For the first half of this year, production is thus lagging the year earlier by 800,000 carats.

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