In a flurry of announcements this week, executives of Alrosa, Russia's premier diamond-mining company, have attempted to prepare the international bond market for a $300 million placement with a 5-year term, scheduled for next month.

Support from De Beers is essential to the success of the bond issue. However, the company's claims are disputed by Russian diamond manufacturers, who allege their business is being hurt by Alrosa's preference to sell its rough to De Beers.

According to chief executive Vladimir Kalitin, his company mined $1.466 million worth of rough diamonds in 2002 - more, he claimed, than the company's target for the year of $1.420 million. The new figure contradicts an official company statement in January, which indicated that last year Alrosa mined $1.378 billion in diamonds. That figure marked a decline of 17 percent on the 2001 level.

Speculation

Kalitin responded to speculation among European diamantaires that the company has been unable to meet its production targets, because of a sharper decline than expected at its Udachny open-pit mine, and slower growth than planned at its new Jubilee and Nyurba mines, as well as from its underground conversions.

"There is no ground for saying that the company's mineral resources base is depleting. We have a mineral resources base which enables us to produce $1.8 to $1.9 billion worth of diamonds per year for 40 to 45 years. Mine output will not be decreasing. We will keep our production at the level of $1.5-$1.8 billion in the next few years, and will later increase it," Kalitin said.

In January, the company projected production this year at $1.41 billion. Another press release, issued March 5, claimed that by 2005 output would reach $2 billion.

Many critics

Domestic diamond cutters and polishers are critical of Alrosa for holding back on domestic sales, in order to maximize exports of rough to De Beers's Diamond Trading Company, and then to reserve the most profitable stones for Alrosa's affiliated manufacturers inside Russia.

Valery Morozov, who heads Ruiz Diamonds, the second-largest diamond manufacturer in Russia, said, "Unfortunately, the situation with supplies of rough to Russian polishers doesn't improve, and our potential, which amounts to about $500 million [worth of cut diamonds] per year, is not used to the fullest, but only to about one-third."

Ararat Evoyan, president of the Russian Association of Diamond Manufacturers, said the industry produced up to $850 million worth of polished stones in 2002, primarily for export. But affiliates of Alrosa report a sharp drop in their output of polished stones from $140 million in 2001 to $105 million last year.

Evoyan doubted 2003 production would be much higher than in 2002, but said Russia, despite a shortage of rough diamonds, shouldn't be much affected by a stagnant polished market. "Alrosa's domestic sales of rough are not very stable. I hope that if the company increases its output, which will require substantial investment into underground mines, it will sell more on the domestic market. Russian polishers still offer better prices [than] De Beers," he said.

Disadvantage

Morozov, whose company is owned by Lev Leviev, the Israeli rival to De Beers, said Alrosa's alliance with De Beers disadvantages the domestic industry. "If the Russian polishers would get some of the volumes and the type of assortment of rough that De Beers gets now," he said, "it makes sense to increase production of polished." But, he said, more instability makes it impractical to increase polished diamonds' production.

Yury Dudenkov, head of Alrosa's marketing divisions, admitted there had been a decline last year in Alrosa's polished production, but he did not explain why.

"The volume of our sales on the domestic market has not been changing much in the past few years," Dudenkov said. "We have sold between 49 percent and 52 percent of our mined rough on the domestic market."

Alrosa officials acknowledge it would be difficult to secure Western bank financing without a guaranteed offtake agreement with De Beers.