Dark clouds hang over Botswana's diamonds
by Kitso Dickson
GABORONE 5 November 2019, Botswana President Dr Mokgweetsi E K Masis officiate the Diamond Conference 2019 in Gaborone on 5 November 2019. First Lady Neo J Masisi, De Beers chief executive officer Bruce Cleaver, former Botswana President Dr Seretse Khama Ian Khama, American celebrity Broderick Stephen Harvey were present among the others during the opening ceremony. Cleaver delivering his speech during the conference. . (Pic:Monirul Bhuiyan/PRESS PHOTO)
Russian diamonds can still benefit on 'technicalities'
Kimberly Process constrained to deal with Russian diamonds
Fear of anti-diamond sentiments emerge
De Beers Group deploys blockchain for traceability
Retailers may increasingly turn to lab-grown diamonds
According to the Kimberly Process, in 2019, Botswana accounted for about 25 percent of global diamond production. Russia, through Alrosa, accounted for 30 percent. Alrosa, which is the world's largest diamond producer, is now subject to US/EU sanctions for trading and payments. This was after Russia invaded Ukraine, triggering a surge in commodity prices. Bankers saw this as an opportunity for Botswana diamond exports, given that Russia is one of the biggest rough diamond producers: if Russian supply of diamonds is impacted, Botswana is tipped to step into the gap.
However, it turns out that Russia can still sell diamonds to India, and this is where most of the processing takes place. India has not sanctioned Russian diamonds despite pressure from the US. India chose to abstain from the UN Security Council (UNSC) voting but urging Moscow to respect the law. After a break, rough diamonds from Alrosa began to arrive in India, The Economic Times reported. The Indian newspaper noted that diamond exporters are paying in euro through German banks to circumvent complications connected to sanctions imposed on Russia following its invasion of Ukraine. While India directly imports only around 10 percent of Alrosa's total rough diamond output, the report emphasised that most Russian diamonds nevertheless end up in India for cutting and polishing after passing through trading centres.
Substantive diamond processing changes country of origin
Botswana's Senior Policy Advisor at the finance ministry, Keith Jefferis, says the way international trade definition works is that once the diamonds are cut and polished in India, they are no longer Russian diamonds. "They are Indian because of the way that rules of origin work under WTO rules," Jefferis said at the Absa Economic Forum recently. This has sparked fears, mainly in the West, that diamonds may still find their way into the market.
But Jefferis quickly allayed these fears. "That is a technicality that is not going to change the picture, which is that these are still diamonds of Russia and there is going to be serious resistance to them in the US," he said. The US is the biggest market of diamond jewellery. Indeed in the US, Jefferis said, the Department of Trade is changing the rules to make sure Russian diamonds are not available for sale in the country even if they have been processed in India.
According to Ian Smillie, the author of "Freedom from Want, Blood on the Stone: Greed, Corruption and War in the Global Diamond Trade, and Diamonds," the US has the Countering America's Adversaries Through Sanctions Act (CAATSA) at its disposal. Smillie posted in a blog in March that this law allows the US to impose sanctions on any nation that has significant transactions with countries such as Iran, North Korea and Russia. Indian diamond exports to the US are second in value only to pharmaceuticals, and almost half of the worldwide sales of diamond jewellery take place in the US, he wrote.
KP's challenge dealing with Russian diamonds
One of the risks and issues ahead is that Russian diamonds are classified in some areas as conflict diamonds/blood diamonds. Any diamond mined in a war zone to fund a warlord's military efforts is known as a blood diamond.
The Kimberley Process Certification Scheme (KPCS) is an inter-governmental initiative in partnership with civil society and industry players to "certify shipments of rough diamonds as 'conflict-free' and prevent conflict diamonds from entering the legitimate trade", according to its website. The Kimberly Process has dealt with blood diamonds from Sierra Leone and Libya. The Kimberley Process Civil Society Coalition, a group of non-governmental organisations that has observer status at the Kimberly Process, has petitioned Botswana – which holds this year's Kimberley Process chairmanship – to call a plenary meeting to discuss the current issue of conflict Russian diamonds.
Jefferis worries that the Kimberly Process may have a major challenge dealing with Russian diamonds labelled conflict diamonds. This is partly because it was established to deal with blood diamonds from rebels and not from major nation states and not when the conflict comes from the biggest producer in the world who is a member of Kimberly Process. "This will complicate matters as to whether the established process can deal with these Russian 'conflict diamonds'," said Jefferis. "Botswana is chairing the process right now, so this big problem is on our watch. I think there is a risk that it may undermine the Kimberly Process as a channel for keeping order in the global diamond industry."
Bifurcation of diamond market
The other development Jefferis pointed out is bifurcation of the market due to war. From his slides, two channels are obviously emerging. The renowned economist said diamonds destined for the US and the EU will increasingly be focused on diamonds not from Russia. Then there are diamonds destined for China, the second largest market. "They do not really care and the Russian diamonds will end up in China," Jefferis noted. China did not criticise Russia's actions in Ukraine or term them an invasion, and has on several occasions slammed what it deems illegitimate and unilateral Western sanctions, according to Reuters. The report quoted Wang Lutong, director general of European affairs at China's foreign ministry as saying "China is not a related party on the crisis of Ukraine. We don't think our normal trade with any other country should be affected".
Against this background, Jefferis said the market will require two completely separate supply chains to keep Russian and non-Russian diamonds separate. This, he noted, will complicate matters "very significantly" in the global diamond market and the trading level and polishing level.
Traceability critical
A key development he touts is the emerging technology of using blockchains on diamond traceability. Essentially this is enabling the traceability of individual diamonds from the mine right through to the point of jewellery. Lucara Diamonds, in partnership with Clara, is using it.
On Thursday, De Beers Group announced that it is deploying the Tracr™ blockchain platform at scale for its diamond production. According to the miner, Tracr™ is the world's only distributed diamond blockchain that starts at the source and provides tamper-proof source assurance at scale, enabling sightholders to provide an immutable record of a diamond's provenance and empowering jewellery retailers to have confidence in the origin of the diamonds they purchase. Botswana's Minister of Minerals and Energy, Lefoko Moagi, commented: "Confidence in diamond origin is extremely important and we look forward to seeing the rollout of this new programme delivering new benefits to the diamond industry and giving more assurance to consumers."
In general, when it comes to the cutting and polishing stage, Botswana diamonds and Russian diamonds all get mixed together and are not kept separate. Jefferis expects that the technology will be ramped up so that when a consumer buys a diamond ring in the US, they will know that it was mined in Jwaneng.
Fears over anti- diamond sentiment
But the core issue is that there is a big concern about what is going to happen in the US jewellery market, which is still the biggest in the world. Jefferis said there is emerging concern among US retailers to keep Russian diamonds out of their stock. "The danger is if Russian diamonds can't be clearly distinguished, then it might just lead to anti-diamond sentiment in the world," Jefferis warned.
Because Russia is such a big producer, he said, it is already leading to shortages of diamonds in the US market and some of the big retailers cannot get enough diamonds for their sales. He fears that these shortages may lead to prices spiking. "You would think as a producer, price increases would be good, but it not quite so simple," Jefferis said, noting that there is always competition from synthetic diamonds. If the price of natural diamonds goes up because of shortages, he fears it may mean that some retailers will increasingly turn to lab-grown diamonds, which are a big competition.
According to March data, the number of engagement rings sold with a manufactured diamond in US increased by 63 percent over the previous year while the number of engagement rings sold with a natural diamond decreased by 25 percent, KSBW reported. KSBW, a virtual and VHF digital Channel 8, is a dual NBC/ABC-affiliated television station licensed to Salinas, California, United States, and serving the Monterey Bay area.
Going back a month to February, KSBW reported that the statistics revealed that the number of rings sold with lab diamonds increased even more, to 80 percent, compared to a year earlier, while the number of natural diamond engagement rings plummeted by 13 percent. "My feeling is that once lab-grown diamonds are in, they are not going to disappear and that, of course, is a problem," Jefferis warned.
According to BBC News, Pandora, the world's biggest jeweller, has said it will no longer sell mined diamonds and will switch to exclusively laboratory-made diamonds. "We're trying to open up this playing field and say, you know, with the type of value equation that we offer, you can use this everyday if you want," Pandora's chief executive, Alexander Lacik told the BBC.
Opportunities for De Beers
But on the bright side, Jefferis sees one positive note, which is that with Russia out of the US market, Botswana can become by far the biggest supplier of natural diamonds to the biggest market in the world. Following US President Joe Biden's Executive Order prohibiting importation of diamonds from Russia into the United States, De Beers Group encouraged retailers to buy with confidence by engaging with their suppliers to understand the origin of their diamonds. "Every diamond that De Beers Group sells is discovered at one of our mines in Botswana, Canada, Namibia or South Africa," De Beers said, noting that the Group is committed to working with sightholders to support the United States' demand needs and to provide the origin and impact of every diamond it discovers and sells.
While Jefferis acknowledges dynamics present a marketing opportunity for "our diamonds", he quickly emphasises the need to demonstrate that they are indeed conflict-free natural diamonds. De Beers said the Tracr™ platform brings together a range of leading technologies – including blockchain, artificial intelligence, the Internet of Things and advanced security and privacy technologies – to support the identification of a diamond's journey through the value chain. De Beers' provenance claims have been certified by the Responsible Jewellery Council and trust in the De Beers source of diamonds is also assured by the business's Pipeline Integrity programme which involves annual third-party verification visits of participants by independent auditors.
Bruce Cleaver, CEO, De Beers Group, said this "will underpin confidence in natural diamonds and represents the first step in a technological transformation that will enhance standards and raise expectations of what we are capable of providing to our end clients".
Tags: Alexander LacikAlrosaBBC NewsBruce CleaverCountering America's Adversaries Through Sanctions Act (CAATSA)De Beers GroupIan SmillieKeith JefferisKimberley Process Certification Scheme (KPCS)Kimberly ProcessKSBWLefoko MoagiLucara DiamondsPandoraTracr™ blockchainUN Security Council (UNSC)WTO