The Russian Connection

It seems almost beyond belief that at a time when the new Russia is being torn apart by internal political dissent, by war with a wayward satellite and by economic dysfunction that more and more people in the diamond world are turning to that nation as some kind of savior.

The situation says more about disenchantment with De Beers than enchantment with Russia. Because it seems to be turning nastier by the month, it’s probably a good time to take a new look at what’s going on.

The bedrock issue is money. Diamond dealers from Hong Kong to Tel Aviv to New York have been complaining for some time now that De Beers’ sight selections and prices make it almost impossible to show a profit on cut goods. They are quick to point out that making money isn’t a major problem for De Beers.

De Beers, for its part, concedes that things are tough in the world diamond market and insists that its cautious, but inflexible, policies are best for the industry as a whole. Its officials promise the stability and single-mindedness that have seen the market through previous tough times and predict that good times will return.

In the past, these arguments were persuasive; after all, if you wanted a steady supply of diamonds, where else could you turn? But with Russia willing to reinterpret or bypass its selling agreement with De Beers’ Central Selling Organisation, the picture changes radically. There now is an alternative supply channel, and although it may offer what can best be described as gray market goods and while its continuity may be doubtful, it has one alluring asset: it offers the chance to make a buck.

How important this is was underlined recently when Tzafrir Anbar, the Israeli government official responsible for dealing with the diamond industry, wrote in the Israeli magazine Mazal U’Bracha: “I want to express understanding for those who have elected to take the Russian route. We must keep our priorities in order. We all want market stability. But what we need even more is profitability.”

The issue is further developed in this issue (see page 29) in a letter from Al Singer, the president of Solar Diamonds, which maintains offices in New York, Ramat Gan and Antwerp. He argues very forcefully that it’s time to bring real competition to the diamond market with the creation of a second established source of rough, namely Russia. The Solar Diamonds president is critical of some key De Beers practices, but he’s also a fervent supporter of the organization. He just believes the trade should be offered a viable alternative. As he says in his letter, “the best solution for [diamond manufacturers] is to follow the most important principle of the American success story, which is: competition, competition, competition.”

What’s De Beers’ reaction? We asked London if it would care to comment on Al Singer’s letter. Officials there, while very responsive, declined to get into a point-by-point answer. Instead, they referred us to recent speeches by Julian Ogilvie Thompson, De Beers’ chairman, and by Harry Oppenheimer himself. Less subtly, a De Beers public relations consultant suggested there was no point in publishing the Singer letter at all since that would merely arouse needless fuss.

The Ogilvie Thompson and Oppenheimer speeches, from which we quote excerpts, very reasonably stress De Beers’ immense contributions to the diamond industry: investment, research, stability and successful marketing strategies that have quite literally created huge consumer desire for diamonds where little or none previously existed. All this, in turn, has brought success and profit to jewelry retailing in many nations, including the U.S.

Both De Beers spokesmen brush aside the Russian situation as largely irrelevant, an unpleasant and troublesome side issue.

It may be that De Beers is right to treat the Russians in this manner. Given the state of their country and its lack of any track record for consistency or good faith, only a brave person, or a foolish one, would rely of them too much. But I think it’s very wrong of De Beers not to respond actively and openly to the issue that has given the Russians such favorable trade response. De Beers has got to address the issue of profitability. It has got to do a better job of taking care of the brokers and dealers and retailers and manufacturers who, collectively, give meaning to the cartel’s existence.

Experience tells me that De Beers doesn’t react favorably to pressure. So let’s say that this appeal for a new openness is meant in the spirit of cooperation, not condemnation. I can’t think of anyone in our business who wouldn’t welcome a new De Beers flexibility.