Diamonds as a Mobile Physical Asset
“Diamonds have historically been used to preserve capital. It is logical that in the current situation, people have begun to turn to them much more often than before,” said Dmitry Amelkin, Strategy Director of ALROSA, in an interview with Capital Ideas.
Russia is the largest diamond-producing power in the world. Tell us, what is happening now in the diamond industry?
Natural diamonds, from which polished diamonds are created, are a resource which is limited, not infinite. The volume of raw diamonds suitable for cutting has decreased significantly in recent years, and will not return to previous levels. Extraction is declining against the background of a decrease in resources and the decommissioning of mines, while there have been no new major geological discoveries.
According to the Kimberley Process, the global organization that certifies diamonds – even taking into account the recovery from the decline of 2019–2020 due to the industry crisis and the beginning of the pandemic – world diamond production in 2021 amounted to 120 million carats. It will remain at this level in the coming years. This is 21% lower than in 2017, when 151 million carats were produced, the record volume for the last decade.
At the same time, the demand for diamonds remains. They are actively acquired by wealthy people, including in rapidly developing Asian countries. The demand at times exceeds even the supply, and in the coming decades the shortage of diamonds will only increase.
Diamonds are not only jewelry, but also a financial investment. How attractive are such investments?
Abroad, the market for investment in rare large and colored diamonds has always existed. After all, in professional terms, a diamond is a compact, mobile physical asset with a maximum concentration of value per unit of volume and mass. It is undemanding of storage conditions and is free from the need to register property rights and transfer them.
All over the world, people buy diamonds in order to diversify their assets. Not surprisingly, the diamond market has been monopolized for most of modern history. There were no major players interested in lifting the veil of mystery around pricing. But now the situation has changed, in no small part due to the influence in the industry of ALROSA, a large independent major player that has a major impact in this market. In addition, the development of digital technologies makes it possible to make the determination of the price of a diamond as transparent as possible.
What are the prospects for the development of this market in Russia?
They’re impressive. In the current situation, our company has reoriented mainly to the domestic market. Today we offer investors within the country an assortment that used to be sold mainly abroad, and which is now very much in demand by them. That is logical; in times of uncertainty and high inflation, people are always looking for new forms of assets to protect their capital and diversify their portfolios. Diamonds here look like a very safe haven. In Russia, a complex of internal factors is superimposed on all this: from a decrease in rates on deposits to a shortage of available assets for investment.
Given the geopolitical situation, have the directions of diamond sales changed?
Yes, for obvious reasons, our company is strengthening its position in the domestic market – with both investment and jewelry products. Sanctions, as you understand, have a double effect. On the one hand, they limit the possibilities of our exports. On the other hand, they create difficulties regarding the import of diamonds from abroad. A number of major foreign jewelry brands have already limited their presence in the Russian market, which immediately increased our competitiveness in it. Now we feel more comfortable in the domestic market than ever.
What is the demand for investment diamonds?
Along with the increase in diamond jewelry sales, this is one of our main orientations. Here we clearly see a large amount of potential demand.
From October 1 of this year, your company has created a new investment offer based on diamonds. What is this project?
We offered partner banks two products for their private clients. The first is individual rare diamonds with the greatest investment potential. These are colorless diamonds weighing 2 carats and up, and specimens of exclusive colors. The second product is “diamond baskets,” sets of diamonds weighing from 0.3 carats. A key feature and advantage of these products is the resale mechanism. Individual diamonds can be put up for sale or offered at auction on ALROSA’s electronic trading platform. For diamond baskets, there is a buyback by the company itself, provided that they are stored with us. For the first investment product, the entry threshold is the ruble equivalent of 50 thousand dollars, and for the second – 25 thousand.
Recent changes in legislation give banks the opportunity to sell diamonds to individuals without VAT. How much will this help the diamond market?
Diamonds have historically been used to preserve capital. It is logical that in the current situation, people have begun to turn to them much more often than before. Since March 2022, there has been a significant increase in the number of applications of private investors coming directly to us. And this is despite the fact that until October 1, a Russian buyer of diamonds paid VAT in the amount of 20%. Now, when buying a diamond in a bank, individuals do not pay VAT, which makes this product much more attractive to a private investor.