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. Last Updated: 07/27/2016

A Diamond in The Rough

For MTRussia?s first diamond mine, at the Mirny works, now produces about 20 percent of Alrosa?s output. But Lazutin says that although production is costly, the quality is so high ?every fourth diamond ring is probably a Mirny diamond.?
The republic of Sakha in the Far East is the coldest place in the world, with temperatures plunging to minus 68 degrees Celsius in the winter, but it is also one of the richest. The Alrosa mining company produces a fifth of the world's diamonds at five mines deep in the tundra, and it is about to negotiate a new five-year contract with De Beers, the international diamond cartel. Ben Aris reports.

President Boris Yeltsin created the Alrosa joint stock company in 1993 with a decree that split the ownership of Russia's largest diamond mine between the federal government and the republic of Sakha, where the mines are located.

In Soviet times the mines produced raw diamonds, but as part of the Communist Party's total control over the economy, the federal depository, or Gokhran, did all the sorting and selling. Created two years before most of Russia's industrial jewels were sold off in 1995 as part of the now notorious loans-for-shares deal, Alrosa took over the sorting and marketing functions as an early experiment in privatization.

"There was a need for a new relationship between the federal center and the regions. We decided to try a model of mixing the authority of the two power centers," said Vyacheslav Shtyrov, Alrosa's president. "We were established by presidential decree and were a model for reforms in other regions. And it was a success."

Producing almost all of the country's diamonds since the early '50s, Alrosa has managed to boost output in the last two years and is gearing up to increase production to more than $2 billion worth of diamonds a year from the $1.6 billion it dug out of open pit mines in the permafrost last year.

De Beers Partnership



Alrosa has a long history with De Beers stretching back about 40 years. Like many Soviet enterprises, Alrosa knew little about marketing and had no contact with distributors in other countries. It relied on De Beers' global position in the rapacious diamond trade to bring in a guaranteed income.

During the chaos of the Yeltsin years, however, De Beers became increasingly worried about the number of Russian diamonds smuggled onto the international market and lowering prices. Relations soured as a result.

The two companies signed a temporary agreement in 1998 -- which is due to expire at the start of next year -- stipulating that Alrosa is only allowed to sell 5 percent of its production abroad on an independent basis.

Last year De Beers sold about $800 million worth of Russian diamonds under the temporary agreement, and both sides are looking to make a long-term arrangement to put their relations back on a civil footing.

"We are very keen to sign a new agreement with Alrosa," said Kate Evens-Jones, De Beers' spokeswoman. "And the same is true for Alrosa. We don't think that they want to do anything that will upset the market as it is not in their interest either."

Negotiations for a new five-year agreement will begin in November, and Shtyrov said he hopes Alrosa will arrange to sell half the $1.6 billion worth of diamonds the company is planning to produce this year on an independent basis.

Evens-Jones said De Beers would be willing to agree for Alrosa diamonds to account for up to 26 percent of De Beers' total sales, which is more than Alrosa currently produces.

"Russian Cut"



But Alrosa is also keen to increase its own sales, and the company is also setting up its own distribution system for cut and polished diamonds. The raw stones that teams of middle-aged women in white coats shuffle through hour after hour in a central Moscow sorting office may only fetch a few hundred dollars per carat, but a cut and polished stone can fetch 10 times as much.

There are already 120 cutting factories in Russia, of which the Brilliant Alrosa in Moscow, founded 18 months ago, is the biggest. Omnipresent security cameras survey the workrooms and corridors, which are littered with half-unpacked new machinery. A whole room stands full of polishing machines, but empty of workers, who have all been moved to the new machines in the workshop next door.

Production of cut stones is already rising fast from $60 million last year to the $150 million planned for the end of this year.

Although their experience is limited, the Russian cutters do world-class work. A few years ago, Russian cutters caused a sensation when they introduced a new cut to the world, the well-received "Russian cut."

However, when ?migr? cutters in Israel -- one of the two big diamond cutting centers -- showed the local houses how the cut is achieved, most were horrified.

"They took a stone and cut it for perfection," said Steve Bensson, editor of a diamond trade magazine in Israel. "When you look at a stone you are looking for the optimum cut that leaves as many carats as possible. The price you pay is that you may leave a few imperfections behind. The Russians were looking for the perfect cut and wasted a lot of diamond. For the Israeli houses, this cut just wasn't profitable."

Alrosa has also made a careful start to breaking into the retail market and set up its own shop in Moscow, Almazny Dvor, or Rough Diamond Court, in the Gostiny Dvor shopping complex off Red Square. Models regularly give private shows to invited customers, showing off Brilliant Alrosa's latest designs. The shop is an exercise in marketing, where the company hopes to determine the most popular cuts and jewelry designs.

To increase their international profile, Alrosa took an exhibition titled "Twentieth Century Diamonds of Russia" around the world last year. This included some classic pre-Revolutionary pieces as well as items from modern Russian designers.

Strategic Investment



Alrosa wants to increase production further and this year launched an extensive investment program. It has already been active on the domestic ruble bond market to raise the cash to upgrade its infrastructure. Along with diamonds, Alrosa also produces gold, silver and other precious metals.

It even discovered a new, marble green mineral in the '70s. After 20 years of extensive tests to determine its uniqueness, the geologists decided to name it Dianit after Princess Diana, who died at about the time.

Sakha is larger than the whole of Western Europe but has a population of only 1 million people. There are also large deposits of oil. As the mines are so far from anywhere else, Alrosa has begun construction of an oil refinery and a hydroelectric dam to provide for their fuel needs.

In all, the company wants to spend some $3 billion over the next five years in the hopes of boosting production to $2 billion worth of diamonds a year. Next year, Alrosa will raise $650 million including a $300 million Eurobond, which, if it goes ahead, will be the first corporate Eurobond Russia has floated since the 1998 crisis.

With the exploration and exploitation of the diamond pipes in Sakha already well under way, Alrosa is beginning to cast its net further afield. As part of the 2001-05 investment plan, Alrosa will start working more diamond deposits found in the Arkhangelsk and Karelia regions in northwest Russia. It has also bought a stake in the Catoca mine in Angola and plans to develop four more mines there as well as another project in Namibia.

World's Second Largest Mine



"Welcome dear guests to a little island of socialism!" said Anton Popov, the general director of the Udachny Mine, Alrosa's most productive, as he toasts a group of foreign journalists who have been shown around the mine. "In the rest of the world, socialism was broken, but here, we took the best elements from communism. We work for the benefit of our company and for Russia."

The mine provides for all the workers' needs. There is a modern gym and a 25-meter pool where the mine's synchronized swimming team trains. The houses are in good condition by Russian standards and there is even a nightclub to fill in the long, cold evenings, although the cinema was recently closed down.

Russia is the second largest producer of diamonds after Botswana, and the Udachny mine is the second largest in the world. Having already produced some $25 billion worth of diamonds, Popov said Udachny has at least another $50 billion worth of diamonds to mine, enough work to keep the mine running for another 50 years.

Sakha is littered with the blue earth "Kimberlite pipes," as the diamond-bearing mineral is known. Alrosa has already found about 800 pipes, of which maybe a dozen have a sufficient concentration of diamonds to make them worth mining.

Discovered in the '50s, the Soviets began mining works at Udachny in 1955. The mine is now already 490 meters deep, about as deep as it can go without the sides collapsing. However, the diamond pipe extends another 500 meters underground, and the company intends to build two 1,000-meter shafts off to the side. The only way to get to the rest is by beginning underground mining. At Russia's first diamond mine, the Mirny mine, about an 1 1/2 hours' flight away, construction of an underground mine has already begun.

"It is more expensive but worth it," said Eduard Lazutin, the Mirny mine's chief engineer. "The Mirny diamonds are some of the best in the world; clear, with a beautiful color. Every fourth diamond ring is probably a Mirny diamond."

Conditions for the workers are hellish. Of the 39,000 people who live in Udachny, only 8,000 are directly involved in bringing the ore out of the pit.

"The problems are worse in the winter when the temperature drops to about minus 60 degrees Celsius," said Popov. "When it is so cold, the trucks' exhaust fumes can't escape the pit, and all the drivers have to wear gas masks. They never get out of the cabin in the winter."

And warmer weather can bring its own problems. Alrosa has said its net profits this year will drop due to the unscheduled cost of rehabilitating the flood-ravaged city of Lensk, where the company is based.

The company has forecast net profits to shrink to 6.519 billion rubles ($222.5 million), a 34.3 percent drop over 2000, Interfax reported. It is anticipating a pretax profit of 10.909 billion rubles and it will pay 4.39 billion rubles in tax.

Alrosa has budgeted 3 billion rubles for the cleanup operation in Lensk, where it will build 1,200 new apartments and a new embankment that will double up as a dam if the River Lena bursts its banks in the future.

The town is surround for thousands of kilometers on all sides by vast expanses of tundra. In the summer, for a short two months at best, the top 2 meters of soil thaws and small trees grow in the sandy soil above the permafrost that extends down to 1,400 meters in some places. Their roots quickly hit ice and so they never grow more than about 2 meters high before the winter closes in again and the permafrost rises back to the surface.

If the weather were warmer, the whole of Sakha would be covered by sand dunes, but the ice fixes the sand. The ice freezes the soft ground to the hardness of concrete, but houses have to be lifted clear and are built on 16-meter-deep piles, otherwise the heat seeping through the floors would melt the permafrost and the houses would fall over.

Despite the harsh conditions, the company has no shortage of potential employees. Those that work in the pit can expect to earn between $500 and $800 a month. The national average is currently about $95.

Lyuba, who did not give her last name, just arrived a month ago from a Black Sea resort town, on the same latitude as much of Italy, to work at the mine.

"Life is OK here if you have a good job and isn't if you don't."