Business & Industry

Dec 1, 2014

From Russia with love

It is Russia's largest diamond company engaged in exploration, mining, manufacture and sales of diamonds and one of the world's major rough diamond producers.

ALROSA accounts for about 100% of all rough diamonds produced in Russia and for about 20% of the world's rough diamond output. Geological surveys indicate that the company has sufficient diamond reserves to maintain production at the current level for the next 50 years.

The company has a near-monopoly on diamond mining in Russia and is also engaged in geological exploration, diamond cutting, and retail sales of diamonds. Its primary mines are located in the Republic of Sakha, an area about four times the size of Texas, which holds some of the coldest permanently inhabited communities in the world. The Soviets started a mining enterprise in the area after rich diamond deposits were discovered there in the 1950s. With the fall of communism, mining operations were privatized and transferred to a newly created company that became known as Alrosa. The federal and local governments, however, retain majority control of the company. As its original open-pit mines become depleted, Alrosa is starting to construct underground mines to access the remaining deposits. The company also is looking farther afield for rich deposits and has started operations in northwest Russia and in Angola. Recently, Alrosa is selling its gems through its own contacts and is working on building a marketing network at home and abroad.

Mining Pioneers in the 1950s
The first deposit of the diamond-bearing mineral kimberlite was discovered in Russia's far eastern Republic of Sakha, also known as Yakutia, in 1954. It was given the name Zarnitsa or "Lightning". As later discoveries proved, kimberlite deposits were scattered throughout Yakutia in formations known as pipes. Two of the largest deposits in the world were discovered in 1955: the Mir ("Peace") Pipe and the Udachny ("Lucky") Pipe. Over the next year, an expeditionary force built a pilot ore processing facility at the Mir site. In 1957 the Soviet Ministry of Non-Ferrous Metallurgy adopted a resolution providing for the construction of diamond mining and processing facilities in the vicinity of the Mir Pipe. The Yakutalmaz ("Yakutia Diamond") Trust was established to manage the operations. 

The territory where the first mines were built was rich in minerals but inhospitable in almost every other way. Temperatures in the winter regularly dropped to around -60 degrees Celsius. The area was covered in permafrost hundreds of meters deep; only the top few meters thawed in the short summer, allowing some small trees to grow. The ground consisted mostly of sand and would have been unstable if not for the ice holding it together. As a result, dwellings had to be built on high concrete piles to keep them from melting the ground under them and collapsing. Nevertheless, the Soviet government was ready to meet any challenge necessary to access the valuable mineral resources. In 1958 several hundred young people from the southern parts of the republic were directed north to establish the mining town of Mirny. After a year, the town had a population of more than 5,000 and two more factories had been built. The town grew in size while the open pit mine on its outskirts grew deeper.

The U.S.S.R. sold its first lot of diamonds on the world market in 1959. From the beginning, Yakutalmaz marketed its diamonds through De Beers's Central Selling Organization (CSO). Until the emergence of Russia, the CSO had been dominated by southern African countries but over the next few decades, the mines of Yakutalmaz became one of the most important sources of rough diamonds for De Beers. The trade relationship was threatened in the early 1960s when the United Nations imposed sanctions on South Africa related to apartheid. Publicly, Soviet leaders denounced apartheid while De Beers's 1963 annual report stated that trade with the U.S.S.R. was ended due to the boycott. But the two countries immediately cut a secret deal and the U.S.S.R. continued to sell all of its exports to the CSO through the next several decades.

Not only trade agreements, but most of the arrangements concerning diamond mining operations in the U.S.S.R. were kept secret. The lucrative industry was a crucial source of hard currency for the regime, and decisions concerning it were made at the highest levels of government. The industry developed along branches that involved several different government organizations. 

1999 and Beyond
With the most tumultuous years behind it, Alrosa moved ahead with plans to increase production and expand its activities in the areas of diamond cutting and marketing. The first underground diamond mine in Russia began operation at the Internatsionalnaya Pipe in 1999. The Anabar processing facility also was established that year to extract an alluvial deposit in the far northern city of Ebelyakh. Another new mining complex started on a pilot basis in Nyurba, at the Nakynskoye field, and began full-scale operations after a year. Total production in 1999 was $1.54 billion in rough and finished diamonds. Alrosa reported a profit of several billion rubles, as it had for many years in a row, but 40 to 60 percent of profits was generally paid in taxes.

The company made several advances related to its downstream activities in 2000. That year the subsidiary Brillianty Alrosa was founded to carry out diamond cutting and polishing. Cut diamonds could be worth almost ten times as much per carat as raw stones, so Alrosa was eager to increase exports of polished stones. Brillianty Alrosa opened a factory in Moscow in cooperation with Kristall, the longstanding Smolensk-based diamond cutting company. The factory used the highly regarded "Russian cut", which Kristall had introduced a few years earlier. Whereas diamonds were usually cut to retain as many carats as possible, the Russian cut sliced away all imperfections, with a wasteful yet stunning result. Alrosa opened offices in the diamond cutting centers of London, Antwerp, and Israel in order to develop marketing contacts. It also introduced the "Kristall-ALROSA" diamond brand in late 2001, a logo that would be stamped on all polished diamonds.

Alrosa entered the domestic jewelry retail market in 2000 with the opening of Almazny Dvor, or "Diamond Courtyard", just off Red Square in Moscow. At the grand opening, models walked the aisles wearing diamonds the size of golf balls. But the store's primary market, since Russian consumers were not particularly wealthy, would be small diamonds in the $100-$300 range.

These developments increased Alrosa's ability to market its production independently of De Beers. In the summer of 2000, De Beers had departed from its decades-old strategy of stockpiling diamonds to control prices. Instead, it would seek to increase demand through better marketing. The change raised a lot of questions about what sort of relationship Alrosa would maintain with De Beers once the current contract expired at the end of 2001. In the end, the two parties signed a five-year agreement that allowed Alrosa to market half of its output independently to the domestic cutting industry as well as companies in Israel and India. For the first time, Alrosa itself signed the agreement rather than the government. The deal could not be finalized, however, because it was being investigated by the European Commission for reasons of anti-trust regulation.

In the summer of 2001 open-pit mining stopped at the Mir Pipe because all the easily accessible ore had been extracted. Production was coming to a close at Aikhal and Udachny as well. Construction of underground mines had started at all those sites. Alrosa also was turning its attention to untapped deposits elsewhere in Russia. The so-called Lomonosov deposit had been discovered in the northwest region of Arkhangelsk in 1980. De Beers had started work on the site but backed out in 2000 because the local climate was not favorable to a foreign company. Over the next few years Alrosa acquired a more than 70 percent stake in Severalmaz, the company that had a tender to develop the field. In addition, Alrosa partnered with the Australian company Ashton Mining to explore for deposits in Karelia, the province bordering Finland.

In 2002 new legislation was passed regarding the diamond industry. Alrosa now was allowed to choose its own buyers and prices, although export quotas would still be set by the government. Alrosa also lost its monopoly as the export market was opened to other producers and diamond cutters.

CONTACTS:
6 Ul. Lenina 
Mirny 678170 
Republic of Sakha (Yakutia)
Russia

Telephone: +7 41136 227 717
Fax: +7 41136 304 517
http://www.alrosa.ru 

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