Online sales of Russian cut diamonds

While analyzing the trends in the Russian market of polished diamonds, we have come to a conclusion that our presence in it is necessary. Smolensk Kristall is probably the only Russian manufacturer of polished diamonds, which can render high quality service to the consumers. A year ago, we launched an Internet project (http://www.kristallsmolensk.ru/ – D&G), which performs several functions. The first function is educational - a visitor of our website can receive exhaustive information on diamonds’ characteristics and get to know what Russian cut, Excellent, Triple Excellent, etc. is. Not every jewelry shop can provide such comprehensive information.
Secondly, it is an online store where one can easily buy any diamond he or she likes. Russian consumers’ trust is proved by a rather large number of transactions which have been made during the first year. Our website creates a new niche of loose diamonds consumption in the market. Its third function is to provide service to jewelry companies, both large and small. It is very convenient for the companies, because when they receive an order for a piece of jewelry, it is easy to choose the required stones on the site order them and receive polished diamonds through a reliable delivery service. 
Trade via the Internet is rapidly developing all over the world. Its current volumes make about billion a year, and growth trends could be expected. In Russia, Smolensk Kristall is a pioneer in the online sales. We consider our Internet project to be successful and having promising prospects.

Speaking about the plans for 2008, I would like to note that we expect a 10-percent growth of diamond sales. The volumes of consumption in the local market are growing, this being connected with the increase of polished diamonds and jewelry production, and also with many jewelers, who prefer these days to work openly and fairly, while abandoning their underground .
Kristall Jewelry Centre, Uwest, Jewellerprom are among our major clients. I cannot but note the increase of jewelry quality, which stimulates the growth in the market activity. In fact, Russian cut diamonds are premium-class goods. Design and quality of a piece of jewelry should certainly meet the quality of a diamond. We are pleased with the quality growth of the Russian domestic jewelry, which is often highly competitive with jewelry pieces produced by the Italian masters. Undoubtedly, a large amount of consumer-level diamonds are made in India and China, but the occurrence of an increasing number of jewelers in Russia, who position themselves as premium-class jewelry manufacturers is, of course, a favorable trend.
Kristall carries out special projects and creates diamonds with exclusive shape . For example, the production of the Triple Excellent diamonds, with a widely known Hearts and Arrows effect, is a rather labor-consuming operation. We actively promote this direction and estimate its potential rather high: 15 to 20 percent of growth in 2008.

As to the general trends in the diamond market, it constantly undergoes changes. This behavior of the market is connected, first of all, with the occurrence of a lot of players in the market. The market becomes more and more competitive.
Following the crisis of 2006, speculations in the industry can still be observed this year. The Indian community is extensively presented in the market: the volume of diamond exports from India is about -8 billion, and the country’s local market parameters are growing rapidly. It is important to note that currently a policy of the governments of those countries where the major diamond industry centers are concentrated play the leading role.
Therefore, the speculations in the market are caused mainly by India’s state policy. This actually means the financing of diamond purchases through authorized banks: the Savings Banks allocate about to billion, and the state in this case is a guarantor of the credit. We all understand that to obtain a credit is not so simple, and in this particular case, there is a possibility to access money easily. The system of obtaining a credit without mortgage generates considerable excitement. Nevertheless, the only condition for obtaining a credit is the availability of a diamond supply contract, and this causes speculations. It speeds up prices for diamonds, which, at times, become simply illogical and absolutely do not depend on the trends in the market of polished diamonds. Thus, the market of rough lives according to its own laws, and the market of polished lives according to its own laws. All this is extremely dangerous, as it can lead to another crisis. There is no increase of sales, because supply exceeds demand.

The crisis of over production in the market is evident, and in such conditions, there is no possibility to raise prices. The situation in the U.S. market of mortgage lending is known to all, and it shows that the Christmas sales season is expected to be not just unprofitable, but will probably fail. Therefore if diamonds are not turned into money and the money is not returned to the banks, there will again be a crisis situation in the industry . All these trends will persist in the future, but in 2008 everything will certainly depend on India’s policy.
I think that one more trend that was recently discussed at the Antwerp conference should be mentioned: Namibia, Botswana, South Africa and Congo declared the establishment of processing plants through foreign investment as a state policy. It is rather difficult to comment on it, but, nevertheless, this program exists and the task before the governments of the diamond mining countries is set. There is no doubt about this trend, because the speakers’ level was rather high: ministers of natural resources of African diamond mining countries had the say. These countries account for about 70 percent of the world diamond mining volume.  
We have already gone this way in Russia. The cutting industry has existed here for already 45 years. Smolensk Kristall, which will celebrate its anniversary in spring 2008, was the first to cut diamonds in our country.
Certainly, Kristall is worried by the fact that the global diamond production volume is increasing in terms of quantity. It is connected with the exhaustion of many deposits in Africa, Australia and Russia, and also with ALROSA’s switch to underground mining. It is a complicated and costly process, that is why a decrease in the diamond production can spur a price rise and speculations.
Our primary goal in the future will be to develop new markets. The premium-class diamonds market share is tending to grow. We see this clearly and plan to strengthen our positions.

- How do the relations between Smolensk Kristall and the Vinnitsa factory Kristall develop?
    
Credit should be given to this enterprise. It is one of several factories of the former Kristall chain, which has survived in hard conditions of the modern market, having no direct access to rough. We have been partners with Vinnitsa for a long time. They process a part of our rough on commission. We also implement joint projects of jewelry brands promotion on the territory of Ukraine.

- Please comment upon ALROSA’s decision to reinstate VAT on all rough diamond sales to Russian cutting plants.

VAT has not been imposed yet. There is only an intention to do it. But all cutting enterprises have been notified regarding this matter. This is undoubtedly a rather serious problem, but it does not concern only one company. It is a problem of the entire industry and the state policy, because we all know that there is no VAT in all diamond mining countries, and this fact makes normal progressive development possible.
From the point of view of an economic entity, which struggles with its costs and searches for additional earnings, ALROSA’s behavior is correct. This issue is very important, and the fact that it has aroused a considerable interest shows that the problem should be solved anyway. Consultations with the RF Ministry of Finance are currently underway, which will define, whether VAT on rough diamond sales is imposed or not. The solution will be found. ALROSA representatives give consultations too. They are interested in a positive solution of this issue. In the very near future, all of us will know how this problem is solved.

- What do you think of the idea to set up an OPEC-like organization in the world diamond industry?

The idea we spoke about has nothing in common with monopolistic or cartel price control. We said that it is necessary to have a regulatory body that will assist its members in the transition from a single-channel to a multi-channel sale system of the diamond market. On the one hand, speculations exert positive influence because the companies have an opportunity to earn additional money, but, on the other hand, speculations could pull the market downwards. Speculations resemble a financial pyramid, which can fall to the ground any moment, and all participants of the market will get the worst of it. It is very difficult to predict who will bear the losses in such a situation, and for how much. Consequently, these tendencies should be regulated.
That is why the extracting companies were offered to create an association, which would watch this process. Africa has already established such an organization.

- What is the sales volume of loose diamonds on the Internet?

The sales volume has been modest so far, but the niche in the market is designated. We shall develop the Internet trade further on. Our advertising campaign is rather powerful, that is why we expect a burst of interest in the near future. Now we are going to launch another project - models of the most known historical polished diamonds as a gift object on the website. Such a stone will be a unique gift, because at present, nobody makes anything similar except us.

- What shapes of diamond cuts do the Russians prefer?

The Russian market is already formed. Unlike in the U.S., pique diamonds are not sold on it. Russian people basically demand better quality products. Quite a lot of fancy-cut diamonds are sold. Round diamonds are traditionally preferred.  
In 2007, we expect Smolensk Kristall domestic sales to reach million. The local market of diamonds is dynamically developing; We expect that Kristall’s turnover in the home market will increase by 15-20 percent next year.

- Is it possible to create the united brand “Russian diamonds” in the global market?

Certainly, this question is crucial for us. Such a brand should be created, but we cannot do without the support of the major diamond manufacturers, who are actually the core for the “Russian diamonds.” It requires heavy expenses, first of all, for advertising. It is necessary to attract additional investment for this purpose. But those who have interest in it will get good dividends.
I can say with confidence that the Russian cut diamonds are as famousas the Russian defense and space technologies.