Effect of Russia- Ukraine War on Diamond Market

Introduction:
The unprecedented Russian invasion in Ukraine has caused the booming economy to come to a forced halt. Tight sanctions inflicted by the European Union nations and the United States are expected to cause a direct effect on the Indian diamond market. This seems to have come at a time when the industry was just under recovery mode and the diamond market was steadily booming after the pandemic. In FY’22 Indian diamond industry is targeting a revenue of 24 billion dollars.

The Russian diamond supplier, Alrosa is responsible for about 30% of the rough diamond sales internationally and is one of the main sources of diamonds in India as the country has a majority of market share in the world’s rough diamond markets (India polishes and cuts (imports) 90% of rough diamonds).

Before the war, however, the soaring diamond prices were a symbol of rough diamond demand which was predicted to rise 10 to 12% in FY’22. The unwelcoming effects of the pandemic level were soon expected to be worn off. Regardless, the Russian-Ukraine war now poses a threat to global economic peace and unfriendly sanctions (especially by the US) will most likely make it hard for the Indian diamond industry to make smooth transactions with the Russian exporters.

Rahul Guha, director of CRISIL ratings was quoted saying, “If the trade disruption is protracted, next quarter’s sales will be down by 25-30% shaving off about 2-2.5 billion dollars”.

Effect on the Indian market

The United States is the biggest importer of India’s polished diamonds and sanctions that were imposed with the intention to really bite the Russian economy consequently will also hit the Indian diamond industry. The diamond industry of Surat, which accounts for 85% of the world’s cut and polished diamonds, has almost halted its operations anticipating supply interruptions and hikes in the overall diamond prices. India predominantly imports its rough diamonds from the Russian mining giant, Alrosa (a large global diamond mining company) so the aggressive Slavic war is likely to make it harder for the surat diamond industry to obtain rough diamonds.

In spite of that, India is presumably getting ready for a rupee-ruble trade agreement, hoping this would smoothen the transactional part with India and Alrosa. However, this move can also potentially put the country under the critical eye of US lawmakers.

The chairman of Surat-placed Hari-Krishna Exports (one of the top diamond exporters of India) said, “There is growing uncertainty in the diamond industry due to the war. About 40% of our diamonds are supplied from Russia today and the payment issues are of serious concern to us. Today banks in the US and Europe are not allowing us to make payments to Russia. There could be an impact on raw materials supply in the coming days”.

Since Russia has been cut off from the global payment system, SWIFT, companies who buy from Alrosa will have complications paying for the goods.

Effect on the world market

The sanctions imposed on Russia in retaliation for its unprovoked attack in Ukraine have made the world’s economy come to a stagnant halt. Russia’s forced exit from the SWIFT payments has caused it to be completely isolated and impossible to make foreign payments. One of the sanctions the US government placed was on Alrosa, however, compared to other companies, the sanctions are not very strict in nature, it allows the Russian mining giant to make sales (but banned from taking credit from US businesses).

According to the Jewelers Vigilance Committee- “Alrosa was added to a list of menu-based sanctions but not added to the specially designated nationals list”. This means, Alrosa cannot enter into the debt transactions with the US but unlike other companies which are going through harsher sanctions; Alrosa can carry out its business.

Experts are of the opinion that the global diamond market could witness a surge in prices as a result of financial sanctions. Since the diamond market is already in a volatile state, the world might witness a rise in diamond prices which, looking at the long term, may not be sustainable.

Considering how rapidly the diamond and jewellery industry has grown over the last year, moved exclusively by US consumers, the current financial and economic condition might delay the progress.

Preventative measures

As previously stated, India is constantly looking for a trade agreement that allows them to make business transactions with Russia without coming under scrutiny. India is considering a rupee-ruble trade arrangement, which presumably may work out in the near future. Mining companies in Botswana are rising their manufacturing and exporting capacity as well, owing to the current conditions, they might profit from the current sanctions (that targets only Russia).

Dinesh Navadiya, regional chairman of Gem and Jewellery Export Promotion (GJEPC) was quoted saying “About 29% of the roughs come from Russia’s ALROSA mines. Alrosa has recently given some assurance. We will have to see how the situation unfolds”.

Presently, strict US sanctions have put Russia under considerable economic pressure, although its main importers like India and China are looking for some leveraging positions in trading with the country, further developments in the matter may perhaps, give us much-needed information which will help us shed light on the future of the global diamond market.