“There will be no problems with the demand for investment diamonds”

The director of the company for strategic development told Kommersant about how ALROSA’s strategy has changed in the domestic market against the backdrop of sanctions Dmitry Amelkin.

— How has ALROSA’s strategy changed in the domestic market after the imposition of sanctions?

— The volume of production and sales has grown over this year: ALROSA, for obvious reasons, is strengthening its position in the domestic market, primarily due to the growth in investment demand. This applies to both cutting and jewelry business. As you understand, the sanctions have a two-way effect. On the one hand, they limit the possibility of exports, but, on the other hand, they also led to difficulties in importing polished diamonds from abroad. Moreover, a number of large foreign jewelry brands have limited their presence in the Russian market, which in a certain sense increases our competitiveness. We feel even more comfortable in the domestic market than before. This is a strategic priority for us today.

— What is the load capacity of ALROSA’s cutting facilities — the Moscow branch of Brillianty ALROSA, Smolensk Kristall and the plant in Barnaul?

– Loading is now 100%. According to the results of eight months, the volume of production increased by 30% compared to the previous year. Moreover, the company is currently implementing a number of investment programs that allow it to increase its production of polished diamonds in 2023–2024.

– Before the sanctions, the load was also 100%?

– The load was 100%, but the volume of production was less. Due to the fact that, as I said, we are developing, we are recruiting additional staff and increasing production capacity, and the workload is always full.

— Is the Russian diamond cutting competitive with India in terms of cost?

— In Russia, cutting has historically been concentrated on large and medium-sized diamonds. The main role in their production is played by the level of professionalism of workers, the level of equipment. ALROSA has all this. In terms of equipment, we are provided similarly to the leading Indian enterprises. In this part, ALROSA has invested quite seriously in recent years, so in general, the cost level is the same. Moreover, I would say that for the same amount of money, Russian polishing produces diamonds of a higher quality on average than our Indian counterparts.

— Are diamonds produced in Russia supplied only to the domestic market?

“They enter the domestic and foreign markets, taking into account the current restrictions, but our domestic market share is growing significantly.

— How did the sanctions affect ALROSA’s exports?

We do not comment on this issue.

— From October 1, VAT on the purchase of diamonds will be cancelled. How do you assess the capacity of the investment stones market?

— Investment diamonds are one of our main directions for increasing our share in the domestic market, in addition to increasing sales to Russian jewelers, here we see the largest amount of potential demand. It is no secret that the modern Russian investor has difficulty choosing instruments for saving and increasing money. Based on the results of work and communication with banks and a number of our clients, we see that there will be no problems with the demand for investment diamonds. Rather, supply may not keep pace with demand. With proper organization of work, the market capacity in the coming years could reach about $200 million.

— What are the advantages of investment diamonds over other instruments?

— Large, expensive and unique diamonds, the cost of which can vary from $50,000 to several million, are an understandable investment product that has been sold for a long time. We already have a queue of customers who are ready to purchase them. These stones are unique, they are rare, so their value will always be high. The cost of an investment diamond in dollars, in the normal development of the diamond market, provides protection from both exchange rate fluctuations and additional profitability. Essentially, foreign exchange earnings. In this sense, diamonds are an alternative to gold.

We also suggest investing in the purchase of smaller carat diamonds. This will be an average cut of our production with a fixed price per carat. In addition, we are conducting a series of negotiations with colleagues on the creation of more complex investment instruments in the form of mutual funds or digital assets, which can also be actively used in our market.

We also offer our customers the option of resale of diamonds.

How will she work?

— For unique, large and rare diamonds, this is an opportunity to put the diamond up for auctions and online platforms of ALROSA. For “diamond baskets” (the so-called investment product with a fixed price per carat), a buyback guarantee is provided by ALROSA. The buyback price will be determined on the basis of an aggregated index based on international price data weighted by the basket structure. The spread will be competitive.

— Will ALROSA be able to meet the demand for polished diamonds given that the cutting capacity is fully loaded?

“This is the biggest issue for us right now. Although we have a special program to increase the volume of cut, we do not rule out that a number of investors may stand in line for some time, especially for large unique diamonds. Nature itself created them in limited quantities, so we, with all our desire, cannot produce many of them. This is the additional competitive advantage in relation to gold. Stocks of rough and polished diamonds are an order of magnitude smaller, which creates additional value for the client. And, of course, investment diamonds cannot be printed, like money, in unlimited quantities.

— The advantage of gold as an investment product is the availability of price information and liquidity. The same cannot be said for diamonds.

– You are absolutely right, but this is a vicious circle that must be broken once. Until we have an investment instrument, we will never have a common, regular indicative price for it. In this part, we are now working with banks on a mechanism that will work independently of ALROSA based on international indices. The pricing system will be transparent and allow investors to monitor the price of their asset.

We also offer a diamond storage service at ALROSA, the cost will be 12,000 rubles. in year. If a client wants to take a diamond with him, he can do it at any time, and it will not be difficult for him: there is no need to move around with bags of money or kilograms of gold. In addition, the investor has the opportunity to order custom-designed diamond jewelry from us.

— De Beers, while comparable to ALROSA in terms of production, has a more recognizable jewelry brand. Why did it happen?

— We entered this business only in 2019, and it is developing. Every year we practically double the volume. At the same time, we do not set the goal of some kind of aggressive capture of the market at any cost. Our jewelry business strategy requires good margins. As I said, given the limitations of international jewelry brands on their presence in Russia, we see potential in this market. Our diamonds, as you understand, are of the best quality at the best price that can be for any jewelry manufacturer. Jewelry productions comply with international standards and are not inferior to the quality of production of world brands. In addition, the jewelry group has been actively investing in design over the past two years and will continue to strengthen this competence. As a result, we have jewelry that is world-class in quality and design, and much more competitive in cost. Therefore, we see good opportunities in our market with a potential expansion to Asia in a few years.

— India, as a diamond cutting center and export hub, plans to double the export of synthetic diamonds in 2022, to 10% of all exports. How does ALROSA plan to protect the long-term demand for natural diamonds in these conditions?

– At one time we assessed this risk, but the situation is developing quite favorably. The synthetic market has begun to separate from the natural diamond market, and synthetic diamonds themselves compete more with other inserts used in jewelry than with natural diamonds. Over the past few years, synthetic diamond prices have fallen three to eight times. Therefore, no one will now invest in synthetics as an investment or saving some money.

— Do you expect a decrease in demand for diamonds in the world due to a possible recession?

— Demand for diamonds in the world is stable. The largest consumer is the United States, which accounts for almost half of global demand. China is in second place. At the moment, according to our estimates, the demand approximately corresponds to the supply on the market, so we do not expect any significant fluctuations in the short term. There is a clear trend towards an increase in demand. The main growth driver is the Asian region led by China. In the medium to long term, production will decrease and demand will increase, so we are positive about the market development and further prospects for polished prices.

Interviewed by Evgeny Zainullin