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When President Vladimir Putin this week handed a visibly nervous Vyacheslav Shtirov a bouquet of flowers in a red wrapper, a revolution in Russian diamond policy began.

The flowers were a farewell from the Kremlin for the man who has headed Almazy Rossii-Sakha (Alrosa), Russia’s dominant diamond miner and the principal source of wealth for the Republic of Sakha,

The reason the wrapper was red, and Shtirov so nervous, was that Shtirov has been told that he WILL be permitted to run for president of Sakha, in the election due on Dec, 23, on condition the incumbent Mikhail Nikolayev agrees to step down, abandon his bid for a third term, and swiftly retire. When Putin chose to say it with flowers, what he meant was: No more plundering the diamond business.

The effects on the international diamond business and on Alrosa will be visible very soon.

The terms of the new diamond-trade agreement, which Alrosa has been negotiating with De Beers, have already been and, now that new management at both Sakha and Alrosa is on its way into power, there is no reason for delay in signing the deal. Russian sources have disclosed that the contract is a much-simplified version of the expiring one, without the quotas, exclusivities, ban on consignment and other paraphernalia of the old deal. This will make it easier for the trustbusters in the European Commission and at the U.S. Department of Justice to tolerate.

Alrosa will sign its commitment to sell $4 billion worth of rough diamonds to De Beers’ Diamond Trading Company (DTC) over five years. At $800 million per annum, that is between 10 percent and 20 percent less than Alrosa has shipped this year and last. The Russian side says it is satisfied with a pricing formula that may be a little better in a falling market for diamond prices than in a rising one. But the Russians also get the predictability of revenue the federal Ministry of Finance likes.

If Alrosa can manage to keep diamond production up at the $1.6 billion level each year, then that should leave half the annual output for sale to Russian diamond manufacturers. Their demand for access to the best stones, and for the right to sell the smaller, lower-value diamonds to cutters in India or Israel, can now be satisfied. The fact that in this year’s depressed diamond market, Russian manufacturers will manage to cut only about $550 million worth of rough makes it easier to accommodate De Beers’ insistence on a run-of-mine assortment of at least $500 million per annum. A run-of-mine commitment to De Beers prevents Alrosa favoring the domestic polishing industry, and shipping the lowest-value stones to London.

Because the two sides haven’t been able to decide what to do with these leftovers, it is likely that decision will be made each year of the new agreement, leaving room for bargaining in light of market conditions.

A nice deal all round – except for the current management of Alrosa and the republic.

Societe Generale, which has been waiting in the wings to lend Alrosa $120 million, will have the security it needs, at least financially speaking. But the bank managers will have to wait until the night of the long knives at Alrosa. That’s when most of the management will be replaced.

One of the two serious candidates for Shtirov’s place as chief executive officer is Valery Rudakov, who currently heads diamond policy-making for the government as Deputy Minister of Finance and head of the stockpile agency Gokhran. Rudakov was the first chief executive officer of Alrosa, but he resigned in anger at the political machinations of Nikolayev and others in the Yeltsin administration. He was also unwell. Now, he’s approaching his 60th birthday.

The other candidate is Vladimir Litvinenko, director of the St. Petersburg Mining Institute, Russia’s leading light in the education of geologists and miners, and also friend and mentor to President Putin.

Whichever man takes charge of Alrosa, the company will undergo comprehensive reorganization. Shareholding control will pass to the federal government, and the years of asset stripping and fund diversion will be rolled back. Russia, the world’s second-largest diamond producer, will try to start with a clean slate.

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