Will diamond king Alrosa be able to keep its shine amid Ukraine crisis?

Russian diamond producer Alrosa’s African production is exempt from sanctions — for now. The global diamond industry faces severe disruptions as the single largest producer is caught in the net of Russia-related sanctions.

Alrosa accounts for around a third of global extraction by carat volume.

US President Joe Biden issued an executive order banning imports of a range of Russian products, including “non-industrial diamonds”. The measure is in response to Russia’s military offensive in Ukraine.

Russia is the world’s largest diamond producer by volume and the second-largest by value. Alrosa is one-third owned by the Russian government. The diamond mining company produced 32.4 million carats in 2021 with sales exceeding $3 billion.

As a result of sanctions, world diamond production could be cut by as much as 25 per cent, according to diamond industry guide Rapaport.

This is in addition to constricted supply. Diamond industry guide Rappaport said this month that the industry must prepare for “prolonged disruptions” as long as Alrosa is out of the fold.

Although Alrosa produces most of its diamonds in Russia, it is also expanding its presence across Africa.

“The current sanctions only apply to diamonds of Russian origin, so at this time I do not see the flow of African goods being directly affected by the sanctions,” said industry analyst Paul Zimnisky.

Most of Alrosa’s African plays are around exploration and development, although it has some production in Angola.

In Zimbabwe, Alrosa has a partnership with the government that includes marketing the country’s diamond production abroad. The Russian company is also mapping out deposits in Zimbabwe and Angola.

Meanwhile, the global jewellery industry is bracing for a crunch in supply. Diamond prices have risen by 25 per cent since September, according to Rapaport.

“I think there is going to be a sharp supply shortage at least in the near-term, especially since almost all excess inventories held by miners were depleted last year,” Mr Zimnisky said.

“There is potential for acute supply disruptions, but this may not become most apparent until mid-year as the industry begins stocking for the holiday season 2022.”

While Alrosa is free to operate across Africa, this could soon change. The company owns a 41 per cent share in the Catoca mine in Angola, which is the fourth-largest diamond mine in the world, said Hans Merket, a researcher at the International Peace Information Service, a Belgium-based organisation that tracks conflict minerals.

Alrosa’s joint venture Angola mine generates $1bn in gems a year and will soon be earning from its participation in Angola’s largest diamond deposit at Luaxe, which will produce nearly 6 million carats from next year.

“Both the US and EU have been regularly tightening sanctions, so more restrictions could be announced anytime,” Mr Merket said.

“I think that particularly Alrosa’s operations in Angola may at some point come in the sights of sanctioning entities, particularly by virtue of their size.”

While this will not be good for Alrosa, African countries could benefit. In general, for African diamond producing countries, and particularly those that have no association with Alrosa, increased sanctions could offer increased opportunities rather than risks, Mr Merket said.

“The increased aversion to Russian diamonds, particularly in the US consumer market, may create a void in the market that could lead to increased investment in African diamond mining operations. Botswana is already stepping forward to fill that void and take over from Russia as the largest diamond producing country.”

As for Alrosa, it had just begun to recover from declining sales owing to the coronavirus pandemic. The company doubled its revenue in 2021 to $3bn over the previous year, it said this month.

The current sanctions regime would hinder business, Alrosa said. “These sanctions are preventing the group from obtaining financing from persons and entities connected to [the] US and from effecting payments through sanctioned banks,” the company said at the time.