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. Last Updated: 07/27/2016

Kristall Tries to Make the Future Shine

KristallWorkers at Smolensk's Kristall factory, Russia's largest cutter and polisher of diamonds, earn three times the average local wage.
SMOLENSK, Western Russia -- The slick yellow and white Kristall plant stands out like a gem among the decaying factories in the outskirts of the sprawling western city of Smolensk.

And looks are not deceiving. Kristall is literally a jewel in the crown of the state-controlled diamond industry, running the country's biggest cutting and polishing operation. Its 3,000 employees, half of whom are specialist craftsmen, turn rough gems into finished diamonds ready for sale to international dealers.

Rows of cutters inspect the stones through magnifying glasses and hold them to abrasion machines for second-long intervals. White-coated workers carry out further operations in glass cubicles, which line another part of the vast, open factory floor. The plant offers an average monthly wage of $340, triple the region's standard.

By all appearances the plant, which survived the changeover to a market economy relatively unscathed, is a modern-day success story.

But a big question mark is looming over its future. With the government announcing recently that it is looking to privatize the Alrosa diamond monopoly, on which Kristall depends for rough gems, speculation is swirling that the Smolensk plant could follow the same path. The plant's large social liabilities and special government breaks are raising questions about whether its business would be financially viable in private hands.

The government has ordered that Kristall be converted into an open joint-stock company this year, although the sale of equity from state ownership is not officially on the Cabinet's agenda, said Leonid Tolpezhnikov, head of the Finance Ministry's directorate for precious metals and stones.

"The future ownership structure of Kristall is not being discussed," Tolpezhnikov said.

As a state-owned company, Kristall has a special relationship with Alrosa that has riled competitors and prompted Valery Rudakov, the former head of Gokhran, the state agency for precious stones and metals, to call for the privatization of all cutting enterprises.

Rudakov said a level playing field must be created in buying stones from Russian mines, ending the current situation where state cutters have privileged trade credit and price arrangements with Alrosa. He criticized such arrangements as a dangerous burden for Alrosa, and for leaving private operators unable to compete in the capital-intensive cutting industry.

"All risks must be borne by the cutters because if cutters go bust it is not the same tragedy as if Alrosa goes bust," Rudakov said.

Rudakov's recent retirement from Gokhran could mark a setback for the privatization drive. Nevertheless, private sector diamond cutting is already well represented in Russia by an Israeli-owned company, Ruis Diamonds, whose Moscow-based polishing operation has the second-largest turnover in Russia and could match Kristall's target of $240 million this year despite employing four times fewer craftsmen.

"Kristall is not a bad plant, and its management does the best job it can," said Valery Morozov, the head of Ruis. "But the fact is that such a monster is not viable."

The Smolensk plant has extensive social overheads, from subsidizing new housing for its employees to financing the local soccer team. But the managing director, Yury Rebrik, is unapologetic. "There are people who have worked 30 years at the plant and still live in hostels. That is not fair, and we will go on building houses for them," he said.

Morozov said Kristall's ability to show a profit is purely due to special terms from Alrosa, which sells the Smolensk polisher batches of stones that are sorted to meet its needs instead of the mixed batches that are usual in the industry.

Morozov also said Kristall gets a 5 percent price discount and three-month credit from Alrosa.

He did not specify his sources, and Kristall was reluctant to describe its relationship with Alrosa.

"The production scale is unusually large because we get most of our stones direct from the miner, while most cutters buy from middlemen," said Vasily Tarko, Kristall's marketing chief.

Kristall workers relish in showing off the plant's computer systems, which give multiple geometric projections of the raw stone to help choose the most profitable cut, and machinery designed and built by Kristall's own specialized engineering subsidiary.

Viktor Petrov, officially acclaimed as the best diamond polisher in Russia, was unwilling to put down his work to meet with a reporter, but Tarko explained that Kristall's biggest and most profitable stones are usually entrusted to him for polishing.

While the United States is by far the most important market for polished diamonds, taking more than 50 percent of global production, most of Kristall's direct contract with the world market is through trader-customers based in Belgium and Israel. The plant has wholly owned distributors in Antwerp, Tel Aviv, New York and Hong Kong.

In an attempt to boost margins, Kristall has its own in-house jewelry production, which it sells in Russia through outlets in Moscow and St. Petersburg and also in the United States under the brand Diamonds of Russia.

"The U.S. is an extremely tough market. But we only started jewelry sales there in 2000 and already had turnover of $4 million in 2001, and we are getting new orders from U.S. retailers," Tarko said.

The rich and the curious can view some of Kristall's masterpieces at its Moscow salon. Its prize gem is a particularly large stone named Lord Leslie, after a Scottish mercenary who helped the Russians drive the Poles from Smolensk in the mid-17th century. (Leslie founded a dynasty of landowners who were prominent in the region until the 1917 Revolution. One descendant set up the first of the partisan detachments that attacked Napoleon's army from the rear in 1812.)

The price tag on the sparkling Lord Leslie: a cool half a million dollars. A wealthy Russian recently visited the Moscow salon with his wife and $15,000 to spend and was immediately drawn by the massive stone, salon officials said. The price came as a shock, and he quietly left the shop after spending $20,000.