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. Last Updated: 07/27/2016

Diamond Industry Hopes For Deal Despite Tax Probe

Russia's diamonds could face a rocky future with tax officials seeking a bigger cut from rough gem exports, but industry sources have said they hoped a deal with South Africa's De Beers would proceed.


In the latest shock to hit the Russian diamond sector and relations with De Beers Consolidated Mines Ltd, the prosecutor general's office on Tuesday accused Almazy Rossii-Sakha, or ARS, Russia's largest diamond producer, of financial irregularities.


"Maybe it will affect the [De Beers] agreement and maybe it won't -- my personal opinion is that it won't and an agreement will soon be signed," said Pavel Kovylin, first deputy director of ARS's Central Selling Organization, which handles exports.


The export body has the same name as De Beers's own London-based Central Selling Organization.


Diamonds could provide a windfall for the Russian tax authorities. ARS is the world's second largest diamond producer and its sales of uncut gems rose 6 percent in 1995 to $1.38 billion.


ARS, which mines nearly all of Russia's diamonds and is its sole official exporter, reached a preliminary agreement with De Beers to export rough gems under a memorandum in February.


But the text of the agreement, undergoing review in various ministries, is awaiting government approval.


"The final agreement must correspond to the memorandum, since it was signed by the government and we are obliged to fulfill it," Kovylin said.


The prosecutor general's press service, which told Russian news agencies on Tuesday of the investigation, said it was investigating ARS' finances but stressed no formal criminal charges had been filed.


"At this point, there are no indictments," said press spokesman Natalya Vishnikova, declining to comment on whether formal charges would be pressed. "We are investigating and the matter has been passed to the Federal Tax Inspectorate."


The investigations center around alleged unpaid taxes and breaches of hard-currency regulations for which fines could total $379 million, according to Russian news agencies. The probe has generated further uncertainty over the relationship between Russia and De Beers.


"There's a whole lot of political infighting going on between Moscow and Yakutia," said analyst Roger Chaplin at T Hoare & Co in London, referring to the main diamond-producing region in Siberia where ARS is based.


"It could possibly affect the agreement with De Beers -- but then again, it could be somebody in Moscow trying to throw a spanner into the works."


The diamond world, recovering from the decision of Australian producer Argyle to say goodbye to De Beers, is impatiently waiting for Russia to finalize its relationship with the South African cartel.


Russia has been accused of leaking hundreds of millions of dollars' worth of diamonds onto world markets outside its previous deal with De Beers. The new deal, once approved by Moscow officials, could give De Beers greater control of Russian output.


But it may not give greater comfort to Russia's increasingly ambitious mineral-rich regions -- especially to Yakutia, which wants a greater cut from exports of rough gems.