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. Last Updated: 07/27/2016

De Beers Fights to Keep Diamond Share

MIRNY, Sakha -- When the first team of Soviet geologists struck diamonds under the ice in this desolate Siberian outpost, they reported back to Moscow in a coded telegraph: "We have smoked the pipe of peace, the tobacco is good."

That was in 1955. Two years later, Soviet Russia started selling its gems to South Africa's diamonds giant De Beers.

In the old days, all Russian diamond sales were handled in Moscow. No more.

Now, world markets watch as Russia's emerging new players fight for a share of diamond spoils, making it impossible to know who controls the gems in one of world's biggest producers.

"Everyone wants to sell diamonds," says Vitaly Basygysov, mayor of Mirny, a poor diamond town six time zones from Moscow in the semi-autonomous region of Sakha, formerly known as Yakutia. "People don't like monopolies."

Russia, under a five-year deal expiring in 1995, sells 95 percent of rough gem exports via De Beers's Central Selling Organization, which controls 80 percent of the world market. But Russian diamonds -- polished and industrial -- are leaking to the world outside the De Beers system.

"There's no real boundary between Russian industrial diamonds and rough gems," says Nikolai Eudin, director of a diamond sorting plant in Mirny. "It's no secret that Indians buy industrial stones and polish them into top-quality diamonds."

An increasing number of cutting plants enjoying the right to attractively priced rough gems are adding to the leaks.

Semion Zelberg, vice president of Almazy Rossiya-Sakha, Russia's diamond mining and marketing conglomerate, sees cut diamond turnover soaring to $1 billion in the coming years.

Sakha's Tuyimaada firm hopes to double the number of its polishing plants to 16 in 1995 and market 200,000 carats of cut diamonds to Russia and the world through its foreign partners.

"Businessmen from Japan and India come here to buy cut diamonds," says deputy chairman Svetlana Maksimovna.

"We have joint ventures with Israeli and Japanese firms. We are positioning ourselves to supply more to the West."

Such remarks are enough to scare diamond traders. "Market confidence is very important," says Raymond Clark, head of De Beers Centenary in Moscow. "Russians understand the theory of single-channel marketing, but it doesn't always work out in practice."

De Beers is spending a fortune to plug leaks from Russia. "We've had cracks before," Clark says. "Somehow we managed to weather the storms. I don't see why we can't do it now."

Almost all of De Beers' business partners in Russia agree on the need for a monopoly. But there are too many of them and each one wants a bigger cut.

Zelberg says: "De Beers sees itself at the same level as countries and not companies. It should deal directly with our company, not government officials in Moscow."

In Sakha, Foreign Economic Relations Minister Vitaly Artimonov says the republic is not getting enough. "We're losing money. This problem is being openly put before De Beers."

Sakha, a republic the size of India which produces one fifth of the world's diamonds, is the latest potentially market-moving force to emerge on the world diamond market.

Russia wants equal terms, higher prices and increases in its current quota, 26 percent of De Beers' world sales.

"Russia is not Africa," says Nurgun Timofeyev, director of the rough diamonds trading arm of Almazy Rossiya-Sakha. "With Russia, you can only cooperate. You cannot dictate your terms."

Disputes are also simmering between Russia and Sakha.

Artimonov says Sakha wants to keep 40 percent of its gems compared to 20 percent now. Officials in Moscow laugh at this, noting Yakutia-Sakha has no licence to trade rough or cut diamonds.

"If Yakutia wants to go it alone, it has to quit the Russian Federation first," says Yury Kotlyar, deputy chairman of the Precious Metals Committee in Moscow.