The Business Times

Russia fights efforts to declare it an exporter of ‘blood diamonds’

Published Tue, Aug 16, 2022 · 09:55 PM

RUSSIA’S invasion of Ukraine has led to global soul-searching about overreliance on Russian oil and gas, but a new drama is unfolding over another of Russia’s major exports: diamonds.

Russia is the world’s largest supplier of small diamonds. For years, engagement rings, earrings and pendants for sale in the United States and beyond have included diamonds mined from deep in the permafrost in Russia’s northeast.

Now, the United States and other countries are taking action that could officially label Russian diamonds as “conflict diamonds,” claiming their sale helps pay for Russia’s deadly aggression in Ukraine.

“Proceeds from that production are benefiting the same state that is conducting a premeditated, unprovoked, and unjustified war,” said George Cajati, a US State Department official, in a letter written in May to the chair of the Kimberley Process, an international organisation created by United Nations resolution to prevent the flow of conflict diamonds.

The European Union, Canada and other Western nations, as well as Ukraine and several activist organisations, have joined in similar calls for a Kimberley Process discussion about the implications of the invasion of Ukraine, including whether Russian gems should be considered conflict diamonds.

Also known as blood diamonds, conflict diamonds are commonly thought of as gems sold to finance war. The Kimberley Process, created in the wake of diamonds financing a deadly war in Sierra Leone and elsewhere, defines them more specifically as “rough diamonds used by rebel movements or their allies to finance conflict aimed at undermining legitimate governments.”

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But “rebel movement” doesn’t accurately describe Russia, and officials there vehemently object to labelling the nation’s diamonds as conflict gems. They chalk up the effort by Western governments to do so as “political demagoguery,” according to an emailed statement from the press service of Russia’s Ministry of Finance.

The issue is coming into sharper focus as Western nations outraged by Russia’s actions in Ukraine restrict Russian gas and look for long-term alternatives to their reliance on its fossil fuels. Revenues from Russia’s other big exports, such as diamonds, have gained new global relevance both for Russia as well as for countries looking to punish the nation for its actions in Ukraine.

The gems are one of Russia’s top nonenergy exports by value, accounting for more than US$4.5 billion of exports last year, according to US government data.

Russian diamonds have for years been popular with American jewellers weary of the taint of diamonds from African mines - even those far from conflict areas - that consumers could confuse for blood diamonds. But the debate over Russian diamonds is exposing an often-overlooked reality about the effort to rein in the murky US$80 billion global diamond industry, which commercialises the deepest of emotions and has spent years working to reassure people that its gems are trustworthy through Kimberley Process certification.

Because of loopholes and technicalities, so-called ethical diamonds do not really exist, many jewellers acknowledge. And the effort to block Russian diamonds underscores that fact. “We use the Kimberley Process as the greatest greenwashing machine the world has ever seen,” said Martin Rapaport, a leading diamond broker whose price list is used as a bench mark for the wholesale trade in polished diamonds.

For Russia’s part, its officials say the country’s diamonds were in line with environmental, social and governance standards long before they became fashionable in the corporate world. They say Russian mines contribute to the economy in a desolate part of the country, near an area called Yakutia, that would be otherwise destitute.

Diamond proceeds have paved roads, built schools and hospitals, Russia’s Finance Ministry said in an email, adding that payments are also made to institutional and private investors. “The livelihoods of 1 million people of Yakutia fully depend on the stability of diamond mining in the region,” the ministry said.

But Ukraine officials say the diamonds contribute to Russia’s invasion.

“Russian diamonds are involved in financing the war of the Russian Federation against Ukraine, which makes these diamonds not just conflict, but bloody,” said Vladimir Tatarintsev, deputy director of the State Gemmological Center of Ukraine, which is a member of the Kimberley Process.

Western officials have lined up beside the Ukrainians.

On the very day in February that Russia invaded Ukraine, the United States added to its sanctions list Serge S Ivanov, the CEO of Alrosa, Russia’s biggest diamond producer and the world’s largest diamond mining company. Ivanov is the son of one of Russian President Vladimir Putin’s closest allies, who was also added to the sanctions list.

Later, the US banned imports of Russian diamonds along with Russian vodka, caviar and other items.

But the US action had a major loophole: It applied only to Russian rough diamonds, gems that were dug from the ground but had yet to be cut and shined. And few rough diamonds from Russia reach the US market.

After being pulled from the ground, most diamonds are shipped abroad for transformation, regardless of where they are mined. The vast majority end up in polishing centres in India, which has no ban on Russian diamonds. Once the diamonds are transformed and readied for shipping, their origin changes. Diamonds mined in Russia are no longer Russian-origin diamonds; they are labelled Indian-origin.

Boycotts of Russian diamonds were launched by major jewellers such as Tiffany. De Beers increased efforts to trace the gems through the supply chain.

The US escalated its action not long after, targeting the mining giant Alrosa, which is majority-owned by the Russian federal and regional governments. It added Alrosa to a US Treasury list that essentially bans US nationals from doing business with it. Canada, the United Kingdom, New Zealand and the Bahamas took similar action.

But critics said the ban failed to close the loophole and left open the possibility that Alrosa’s subsidiaries could still find a way to get diamonds that are cut and polished abroad into the US. And they note that while the US is the biggest market for Russian diamonds, Alrosa can still sell diamonds freely in other major markets such as China, which has taken no action against Russian gems.

Regardless, shares of Alrosa, which the U.S. says generated more than US$4.2 billion in revenue last year and is responsible for 90 per cent of Russia’s diamond mining capacity, have plummeted. It was a hit for a company that five years ago had launched a new marketing campaign in America, hoping its Russian identity would be a bonus in a nation where savvy consumers were wary of atrocities in diamond mining that fuelled wars in African countries.

“Alrosa has a very strong focus on environmental and social issues and conforms to the highest standards of corporate social responsibility,” the company said in an emailed statement. Its website highlights efforts aimed at protecting water and soil, helping Indigenous populations and creating a park to protect reindeer and other wildlife.

The debate over Russian diamonds reached the Kimberley Process before the group’s scheduled meeting in June. A movement was already afoot by the US and other Western countries to determine whether Russia was exporting conflict diamonds and to reconsider Russia’s leadership roles in the organisation.

Russia itself had been among the numerous nations that for several years had been pushing within the Kimberley Process for an expansion of the definition of conflict diamonds, seeking to broaden it to apply to issues such as human rights, labour and the environment. But because the organisation is governed by consensus - all decisions must be unanimous among the more than 80 countries - the movement has stalled.

Tensions over Russian diamonds split the Kimberley Process member countries along increasingly familiar geopolitical lines, with numerous Western nations pitted against Russia, which was backed by China, Belarus and Kyrgyzstan as well as Mali and the Central African Republic where Russia has a big presence, including by its mercenaries who operate in diamond mines.

The Kimberley Process “has less and less to do with diamonds and in a way has become another geostrategic theater,” said Hans Merket, a diamond industry and human rights researcher whose organisation is part of civil society membership in the Kimberley Process.

At the June meeting in Botswana, discussions about Russia’s invasion of Ukraine, and its implications for the Kimberley Process, ended after vetoes by Russia, China and Belarus. Journalists were asked to leave sessions they normally would be allowed to attend, some participants said, and talks with the organisation’s chairman became tangled in disputes over whether Russia should take part. The US and British representatives boycotted sessions led by Russian representatives.

Merket said the group had become “an organ of bureaucrats” who sign off on diamonds that are problematic yet receive endorsements that falsely reassure jewelry buyers. “Consumers expect something that isn’t true,” he said.

The meeting left him and other participants frustrated and worried that important work was being sidetracked.

A new process awaits review for exporting diamonds from the war-torn Central African Republic, where Russian mercenaries operate in the diamond industry and have been accused of human rights violations. Reports of violence in diamond mines in Brazil and Venezuela are not being investigated, some participants said. Allegations of violence involving security officials at mines in Congo, Angola and Tanzania have gone unaddressed. NYTimes

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