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. Last Updated: 07/27/2016

Russians, De Beers Sign a Gem Of a Deal

The world's two largest rough diamond producers, Russia's Almazy Rossiya-Sakha and South Africa's De Beers, signed a new trade agreement Tuesday, calling a truce in their long-running battle over Russia's role in international markets.

Both sides hailed the deal, under which De Beers' Central Selling Organization will buy at least $550 million worth of Russia's diamond exports next year, as an important step toward stabilizing the world market, which has been hit by a steep drop in demand.

The deal represents the culmination of years of high-stakes wrangling, during which Russia's top negotiator resigned amid charges of corruption and diamond shipments worth hundreds of millions of dollars have at times been held hostage by Russian customs authorities.

"The importance of what we have done is reconfirming the cooperation between the world's two largest producers," said Gary Ralfe, managing director of De Beers' Central Selling Organization. He expressed hope that with Russia back in its fold, the CSO will be able to smooth out world diamond supply "to help and nurse the market back to health."

De Beers and Russia have been at odds over a new arrangement since the demise of the Soviet Union, which had sold almost all of its rough diamond exports to the South Africans, leaving them the run of the world market.

Russia wanted to sell more of its own rough diamonds abroad, keep more high-grade stones for domestic cutters and have a say in the CSO, which sets world prices on rough diamonds. De Beers wanted to re-establish its control over Russian exports, which as recently as last year were leaking independently onto world markets at a rate of about $60 million a month, threatening the CSO's pricing monopoly.

The new deal addresses both sides' concerns, but it is only a partial truce: Russia and De Beers will both be watching carefully how the other respects the agreement, which only lasts through the end of 1998.

"I would hope that this agreement would continue into the future," said De Beers chairman-elect Nicholas Oppenheimer. But if one or the other side does not fulfill its promises, "then there will be no agreement."

The deal involves several key concessions:

? Russia will get a say in the CSO's pricing policy through a new bilateral supervisory committee.

? Russia will be able to sell independently 5 percent of its annual exports from Almazy Rossiya-Sakha's production, 20 percent of the smaller diamonds that can't be cut domestically and 20 percent of exports from the national reserve. Previously, only the 5-percent allowance existed.

? Russian diamond cutters will be allowed to participate in the CSO's so-called "sites," at which diamond cutters around the world appraise and purchase rough diamonds.

? Russia promises to stop leakages of rough diamonds onto international markets, and De Beers will have more access to information on the amount and quality of rough diamonds that Russia is planning to sell, aiding the cartel's efforts to set world prices. "We'll have a good idea of what they're intending to market," said Raymond Clark, managing director of De Beers Centenary (Russia). "We're hoping for no surprises."

? De Beers will buy an annual minimum of $550 million in diamonds from Almazy Rossiya-Sakha, on a "run-of-mine" basis, which gives it a representative sampling of the full range of diamonds produced. De Beers officials have previously voiced concerns that ARS was holding back the higher-quality stones.

ARS President Vyacheslav Shtyrov predicted that the new deal would boost his company's financing plans, which he said include a Eurobond issue that should be placed by December. British bank NatWest Markets had been holding up a $500 million syndicated loan to ARS until the De Beers deal was signed.

Shtyrov said the deal was designed to benefit Russia's diamond cutting industry, giving local cutters access to the lion's share of production. The $550 million minimum, he said, represents only 35 to 40 percent of ARS's total sales.

"At one point we were selling 40 percent of our diamonds in Russia and the rest on the international market," he said. "Now it's the other way around."

De Beers, however, expects to buy more. Russia has traditionally accounted for about a quarter of the CSO's annual purchases, or just over $1 billion.

"They won't just buy the $550 million," said Des Kilalea, a diamond analyst at Fleming Martin in Johannesburg, in a telephone interview. "They'll end up buying as much as $1 billion worth a year."

Kilalea said the agreement was important for De Beers, but paled in comparison to the problem of world demand, which has fallen drastically as a result of economic sluggishness in the Asian-Pacific region. As gems have become harder to sell, diamond manufacturers have begun to complain that the CSO's pricing policies are killing their profits.

"It's a step toward some more stability [on world markets] but not all that much," said Kilalea. "The Russian question is far less perplexing than the demand side of Southeast Asia. They were very fast-growing consumers. What the market is worried about now is when the Asian Pacific economies will start growing."

Shtyrov suggested that ARS will be making its own inroads to international markets, with plans to set up offices in Antwerp and possibly Southeast Asia.