Some 80% of the world's uncut diamonds flow through the fortress-like building in London identified only as 17 Charterhouse St. This is the headquarters of the Central Selling Organization, one of the world's last great cartels. Controlled by De Beers Consolidated Mines Ltd. of South Africa, the CSO buys diamonds from producers all over the world, sorts the stones into 5,000 categories, then packages them and sells them off, one box at a time, to authorized dealers called "sightholders." They in turn arrange for the polishing and cutting that transform rough stones into the dazzling adornments coveted around the globe.
Now, the cozy relationship is coming under fire as never before. The biggest irritant is a suddenly independent-minded Russia. That nation mines more than 25% of the world's diamonds from the most inhospitable reaches of Siberia each year, placing Russia second only to De Beers as producers. In the Soviet era, the Russians mostly cooperated with the CSO. But after four years of free-market experience and with a great hunger for hard currency, Russia wants more control over its diamond industry, its fourth-largest hard-currency earner. "Up to now, we have been more concerned with the interests of the world market," says Leonid Gurevich, deputy director of Roskomdragmet, the Russian State Committee for Gemstones & Precious Metals. "That's not normal."
Russia now wants to sell more uncut stones and expand its domestic polishing and jewelry industry to triple revenues from diamonds, to $6 billion, by 2000. Russia's current five-year agreement with the CSO is set to expire on Dec. 31. As a key condition before renewing, Gurevich wants more leeway to bypass the cartel. Under the current contract, Russia is required to sell 95% of its production through the CSO.
If contract talks collapse, diamond prices could start fluctuating wildly and badly damage consumers' perceptions that finished diamonds are worth buying for their investment value as well as their beauty. The specter of a free-for-all market is something both sides are taking seriously. On Aug. 1, Prime Minister Viktor S. Chernomyrdin met in Russia with a De Beers delegation, but no agreement was signed. Talks are expected to resume this month.
"CHEAP AND PLENTIFUL." The CSO, though, has already gotten a taste of what would happen if the Russians split with the cartel. Starting 18 months ago, Russian diamonds, some believed to be from state stockpiles, began leaking onto the open world market. Big gems made it to Tel Aviv, Antwerp, and New York. Small stones, previously classified for industrial use only, went to India, where polishers and cutters could use new technology and cheap labor to turn them into jewelry.
The CSO accused the Russians of violating the contract requirement that it handle 95% of their production. Russia retorted that some local polishers and cutters had illegally exported some of their allotted stones. Whatever the source, the leakages have eroded market prices of lower-quality stones by an estimated 15% in some cases.
De Beers says that in 1994, Russian sales outside the CSO approached $1 billion. The Russian estimate is $800 million. In contrast, Russia sold $1.2 billion in rough diamonds directly to the cartel. By cutting out the CSO as a middleman, the Russians can get more for their diamonds--as much as 35% more, some sources say. But others in the industry doubt it's nearly that much. "Absolute rubbish," says Marcel Pruwer, an independent Antwerp diamond broker.
The leakage of larger gems has apparently dried up, but not the flow of the lower-quality stones. "The supply is still cheap and very plentiful," says one India-based cutter. Because of the Russian dumping, says the CSO, it has reduced its purchases to about 85% of what it would normally buy from producers--even though jewelry sales are on an upswing. Then, on July 1, to meet the Russian threat, the CSO dropped prices by about 15% for its cheaper stones.
That incensed the Russians. "The price changes are an attempt to create conditions in the industry that are against Russia," says Gurevich. Tim Capon, a board director at De Beers, simply says the move was to redress "slight disturbances" caused by the Russian leak.
"TWO-TIER MARKET." Analysts wonder if something else is afoot. Maybe, in the end, De Beers will stop enforcing price discipline for lower-quality stones and focus its efforts on more profitable sectors. "There has been a de facto establishment of a two-tier market," says Niall Carroll, analyst at Ivor Jones, Roy & Co. in Johannesburg. If so, it's a step away from the cartel's total dominance.
Loosening prices, however, doesn't mean the CSO will stop meting out punishment to transgressors. While De Beers declines comment, industry sources say several Antwerp sightholders were suspended by the CSO for helping to finance Russian diamond sales outside the cartel. And Israel-based LID was suspended as a sightholder for the same thing.
Resolving the issue of the leakages will not remove another area of discord: Russia's ambition to establish a world-class polishing and cutting industry. In 1994, worldwide sales of rough diamonds were about $5 billion, but after polishing and cutting, the diamonds are worth almost $10 billion. The Russians want a piece of this action. In late August, a group of St. Petersburg banks got together to invest $12 million in a plant that will cut 720,000 carats annually. Russia has also begun enticing cutters from other centers, notably Tel Aviv, to set up joint ventures.
TRICKY TALKS. If these ambitions bear fruit, Russia would be the only country to have both a major mining and polishing industry. That would divert even more stones from the CSO. "What we are unable to polish inside the country, we sell to De Beers," explains Pavel K. Kovylin, chairman of Almazexport, the trading arm of diamond producer Almazy Rossii-Sakha and lead negotiator in the talks.
This doesn't suit De Beers, say experts. "If [the Russians] are a significant player in polish, they are undermining the De Beers position by bypassing the CSO," says Martin Rapaport, editor of Rapaport Diamond Report, the New York-based diamond-industry newsletter. De Beers wants Russia to sell its rough diamonds to the CSO and then buy stones at sight sales sessions like everyone else to supply its domestic cutting and polishing industry. But Russia would then lose its cost advantage.
Russia's government negotiators and diamond producers don't always see eye to eye on the best course to take with the CSO. Almazy Rossii-Sakha, which produces 99% of Russian diamonds, is counting on price stability to continue its plans for new mines, and so has stronger interests in a deal with De Beers. The government in Moscow, meanwhile, is set on developing the country's small polishing industry. "Negotiating with the Russians is like nailing jelly to a wall," says one observer.
What's the likely outcome? Both sides publicly state their belief a contract will be signed. What the conditions will be is another matter. Certainly, much of the industry believes that De Beers' strong grip on prices makes it invaluable for the business' stability. They say the CSO has weathered other crises, such as Angola's effort to flood the market. Whatever happens, it's unlikely that the CSO can continue its cozy ways unchanged. "As the saying goes, you can't put the cat back in the bag," says Martin Rapaport. Much less a hungry Russian bear.
PLAYERS IN THE DIAMOND DRAMA
-- DE BEERS The South African diamond giant controls the Central Selling Organization, which in turn controls the market for uncut diamonds. Now, the CSO's cartel is under attack by the Russians.
-- THE RUSSIANS As big diamond producers, the Russians want to loosen the CSO's grip on supply and expand their cutting industry. De Beers accuses them of bypassing the CSO to sell up to $1 billion of diamonds.
-- THE INDIANS Indian cutters and polishers have angered the CSO by buying lower-quality Russian stones on the open market.
-- THE ISRAELIS Many complain that the CSO is not giving them a good deal. Some Israelis have also bought "leaked" Russian stones.