Valery Rudakov: Experience has borne out my argument about the development of the diamond industry in Russia.

by Alexey Chertkov

 In our “exclusives,” we traditionally present interviews with the best-known and most professional figures in the international trade in precious metals and precious stones. In the past, we have spoken with De Beers Chairman Nicky Oppenheimer and former De Beers Managing Director Gary Ralfe; Maxim Shkadov, managing director of Smolensk Kristall; Gaetano Cavalieri, president of CIBJO, The World Jewellery Confederation; and many others.

This time, Valery Rudakov has agreed to share with us his ideas about the future of the diamond industry in Russia.

V.V. Rudakov’s entire career has been connected with the diamond and gold mining industry. In 1965, he started to work for the Yakutalmaz trust, rising to become its director from 1978 to 1983. In 1983, he was named Deputy Minister of Nonferrous Metallurgy of the USSR, and then was appointed chief of the Central Administrative Board of Precious Metals and Diamonds of the USSR Ministerial Council. With the onset of perestroika, he became president of the Russian corporation Almazzoloto. In 1992, he became the first president of the new joint-stock company Almazy Rossiyi-Sakha, later known as ALROSA. 

 Rudakov also gained additional experience in the public sector. From 1999 to 2002, he occupied an important post as Deputy Minister of Finance and head of Gokhran. Now he is the chairman of the board of directors at the gold mining company Polus, and also serves as head of Russia’s Committee of the Commercial and Industrial Chamber on Precious Metals and Gemstones.
 
In the late 1990s and early 2000s, there was much heated discussion about the characteristics and future prospects of the diamond mining company ALROSA. Relations between the company’s top managers and government officials were unpleasant, to put it mildly. Rudakov, who was then Deputy Minister of Finance and a former president of ALROSA, took a strong stand amidst this controversy.

 It now seems to be a good time to revisit that discussion, although time, as always, will have the final say.

Valery Vladimirovich, in an interview with the Independent Newspaper (August 24, 2001) you said: "The diamond complex is a chimera. It was invented by ignoramuses who fecklessly took over management of the sector in the early 1990s. Journalists have picked up this chimera, but there is no such complex. There is a diamond mining industry. And we should exploit diamond deposits with peak efficiency for the good of the country. Antagonism has always existed between diamond manufacturers and diamond cutters.” Do you stand by these views today?

Today, experience has borne out my argument. The diamond business has endured a lot of very complicated situations in recent years. Diamond manufacturers and jewelers say that the trade was sucked into this complex situation by diamond manufacturers. It is natural that these contradictions have always existed and will always continue to exist.

  A close analysis of the structure of this business shows that it consists of three sectors—diamond mining, diamond polishing and the trade in diamond jewelry. At every stage along this pipeline, there is conflict between the manufacturers. But that is not the main point. As experience has proven, diamond manufacturers do not really compete with each other, because the volume of diamond mining all over the world corresponds nicely with market demand. Diamond polishing companies, however, always compete with each other. Almost every year, many diamond polishing companies are created and many go out of business. Competition between them is constant. Jewelers also compete with each other, as do retailers. If you walk into a jewelry store and see that it is offering discounts of up to 50 percent, it is clear that this is nothing more than a struggle against competitors and an attempt to stay in business.

  That is why I have always been a supporter of the following idea, which accords well with more than 100 years of world diamond industry practice: diamond mining companies should never cut diamonds.

  As I have always said, you should solve the situation with the efficiency of the polishing plants run by ALROSA yourself. Experience confirms my argument that the creation of polishing plants affiliated with diamond mining companies and operating in "hothouse" conditions is inefficient. But the management of ALROSA did not agree with me. In fact, when it comes to diamond polishing, the only companies that prevail are those that are expert at marking and cutting diamonds and organizing the trade. In order to function well, they must have the proper motivation. What kind of motivation is that? Simply this: if they work badly, they will be ruined. But when mighty companies like ALROSA have diamond polishing companies affiliated with them, these cutters do not have the motivation to work effectively, because the conditions of competition are purposely made unequal.

 So if today, ALROSA comes to see the necessity of reducing its polishing business, this will be an absolutely correct decision. The business of ALROSA is to mine and effectively sell rough diamonds. These are its two basic activities. Of course I do not mean the entire company, which is rather diversified, but I am speaking of its mining division.

Let’s return to several years ago. You drew a line between the rough and polished diamond markets, saying: "For me, it makes the most sense for the development of the Russian polishing industry to focus on creating new workplaces and promoting Russia’s entry into the world market with polished diamonds instead of rough…"

My attitude in this has not changed. The more we cut rough diamonds in Russia, the better it will be for our country and for everyone engaged in and connected with this market. But there are some exceptions. In Russia, they mine rough diamonds that are so-called "Indian goods." Polishing these diamonds under the conditions that exist in Russia is labor intensive and ineffective. These goods must be sold directly to India, and we should cultivate regular buyers there. Other jewelry quality goods, including +10 caraters, should be sold in Russia.

  Certainly, it is necessary to develop the Russian polishing industry. This is advantageous to ALROSA in many respects. First, using this strategy will not lead to competition with other diamond manufacturers. De Beers is still dominant in the market for rough diamonds, but we can observe growth in diamond mining around the world: in Canada, Angola and Botswana it is certainly not declining, nor in other countries. As a result of the policy most countries have adopted of mining diamonds within the strictures imposed by the Kimberley Process, the issues connected with the legitimacy of diamonds mined in African countries, which were previously referred to as "blood diamonds," have been resolved.

  Given this background of growth in diamond mining, competition among manufacturers of rough stones is bound to grow too. What exactly is this competitive struggle? It is, first and foremost, about price cutting. Under Russian law, ALROSA pays a 6 percent customs duty when it exports unprocessed rough. If the company can instead sell these diamonds within Russia at standard international prices, it can save this 6 percent.

  The diamond polishing sector in Russia is highly professional. Yes, the sector has some problems connected with the absence of a real competitive banking sector that could grant credit for the manufacture and purchase of rough stones. In fact, all over the world diamonds are bought for cash: pay cash—receive the goods. Also, the rough diamond processing cycle is long. It is necessary to cut the diamonds and sell them to jewelry manufacturers, and in some cases it is necessary to wait further until the jewelry manufacturers sell their diamond jewelry to retail dealers, which make the sale to the end user. This cycle often takes about a year. The diamond polishing companies should receive credit for this entire period.

  In countries with a highly developed diamond sector, such as Belgium, Israel or the United States, there are banks that specialize in financing manufacturers of polished diamonds. In Russia, with interest rates of 12 to 15 percent or more, it is impossible for the cutters to work effectively. But, nevertheless, the sector does have its investors, who can get cheap credit in the West. There is nothing wrong with this, because by working in Russia, these investors are creating and supporting jobs, while the diamond polishing companies pay taxes in this country on the goods they polish here.

 In the last analysis, that is what Russian President Vladimir Putin is taking about, and rightly so: it is necessary to trade not just raw materials, but also high-tech finished goods. And what is a polished diamond? It is just a high-tech product. It would certainly be even better if the industry evolves further and can export finished jewelry to the West. The Russian jewelry industry is developing effectively enough along these lines, producing competitive diamond jewelry.

 Thanks to the presidential decrees of the early 2000s, today our jewelry manufacturing companies can penetrate foreign markets on their own. All of these companies are boldly participating in the world’s largest jewelry exhibitions and are properly presenting products of the highest caliber. It is necessary to create the economic conditions under which it would be even more favorable to deal in polished diamonds and finished jewelry. For Russia, this situation is ideal in every respect: jobs are created, the tax base expands at every stage of the diamond pipeline, and the proceeds from the sale of finished goods continue to grow.

You mentioned the problem of the high interest rates that Russian banks charge the industry.
Of course, at such high interest rates, it is impossible for a normal economy to develop. But what is really behind these high rates? When a company takes out bank credit, it should be able to count on recouping what it spends on manufacturing, and when it pays back the loan, it should be able to expect to receive a certain profit from its investment. But at annual interest rates of 15 percent, I cannot imagine economic efficiency for any business, be it construction of a gold mining plant or any other large project.

  For example, for construction of any gold mining project, it is necessary to raise hundreds of millions of dollars, and if the mine is very large, the figures go off the charts and may reach billion or more. Everyone says that Sukhoy Log will cost more than .5 billion. Recouping the initial investment on such huge projects would take five or six years, even under ideal circumstances. But at interest rates of 15 percent per annum, if a loan is made with a six year repayment term, it will be necessary for the company to repay the loan twice over. Who wins from this? Nobody! There will be no profit for the investor, and the company will stagger under this debt load. All over the world, the normal cost of credit for long-term economic investments is 3 percent per annum. Western banks always finance diamond polishing companies at 3 percent interest rates, or at most 4 percent per annum. That is the problem. Only when the whole banking system becomes more advanced and starts working on developing a real manufacturing industry will there will be real achievements in this country’s economy.

When you recently took part in the 50th anniversary celebration for Yakutalmaz, which was held in the city of Mirny, you took part in a television program in which someone said that the fact that ALROSA’s headquarters are in Moscow was due to a decision you made. What actually happened?

True, some ignorant people are now saying that Rudakov is responsible for ALROSA’s headquarters being in Moscow, instead of in Mirny. Nothing like this happened when I was president of ALROSA. First, I should note that then, the company was not called ALROSA, but the Joint-Stock Company Almazy Rossiyi-Sakha. At that time, in 1992, by decree of the President of the Russian Federation, we were required to have a representative office in Moscow that would organize an independent diamond sorting and trading operation. And then, following decisions made by the Russian president and his government, we were required to take over part of Gokhran’s premises, along with the division of Almazuvelirexport that was engaged in the diamond trade. And for this purpose, it was necessary to have a small office in Moscow that could work on these issues. As president of the company, I stayed there too.
  In the early 1990s, we decided that only the staff members who were helping to resolve these external matters and had therefore assumed some responsibility for coordinating supply and transport for the company’s main production would remain in Moscow. Direct production control, the central bookkeeping department, and the bank all stayed in Mirny. The company’s entire basic financial system was concentrated in Western Yakutia, and we were not going to change that at all.

  At that time, the company had not begun the enormous diversification of its manufacturing. There were no projects in Angola or even Arkhangelsk, though I think that even now it is possible to control these projects from Mirny. Today, though, the country itself has developed so much that all large Russian companies working in Siberia, the Far North or the Far East have headquarters in Moscow. I thought at that time and think now that corporate management should be where the main manufacturing activities are. So my name should not be connected with a development that I disapprove of.

You have given a big part of your life to Western Yakutia. What do you feel is the mood of the people working at the main manufacturing plant today?

The general spirit of the labor collective is not bad, but constructive, I think. However, you can feel a certain intensity connected with the absence of wage indexing, which in Northern conditions should be at least 40,000 rubles.

Let me quote you once again: "ALROSA is a one-product company, and all talk about diversification of the business is for neophytes. Everything that I say is directed at the profitability of Yakutalmaz as a mining enterprise.” What do you think about the company’s diversification now?

ALROSA has two main sources of diamonds—the mine in Yakutia and a big project in Angola. By the way (though you may not want to write it), we began the Angolan project with V. Piskunov. When we visited Angola for the first time, we agreed about mining diamonds at Catoca. This is a successful project, but all the other businesses, to put it mildly, are a bit petty for such a huge company.

  However, I would like to observe that all the projects that have been set up in Yakutia as ancillary operations that help keep the main manufacturing operation going are useful. But when some Far Eastern mining companies start to become engaged in the resort or restaurant business, or any other field, this adds little value and detracts from the main business.

Do you think that ALROSA should be everywhere that diamonds are mined?

Anything that is to ALROSA’s advantage is all to the good. But it is necessary to think about the fact that in trying to expand into many different territories, ALROSA is diverting resources from its basic product, which brings in the main income for the whole company. Look, it is only thanks to help from ALROSA subsidiaries that diamond mining survives in Arkhangelsk. The fulfillment of this project is blocked by complexities connected with technological questions, and also by problems with the quality and quantity of the rough stones that have been mined there. ALROSA is also helping out with other enterprises. The manufacturing plant, which I still call Yakutalmaz, is also in a difficult condition due to the fact that the open pit at Udachnaya is being exhausted, and the start-up of the underground mines at Ikhal, Mir and Udachny has been delayed. 

According to classical mining principles, if an open pit mine is exhausted today, an underground mine should be started tomorrow so that mining never flags, but this is only in theory. In practice it turns out differently. The diamond miners were lucky that it was possible to start work on a fresh diamond deposit in the Nakynskoye ore-field—the Nurnbinskaya pipe—and to build an ore processing plant there in time. However, similar large discoveries have not yet been made.