After a fresh round of negotiations with European Commission (EC) officials in Brussels last week, De Beers and Alrosa have edged closer to a trade deal which the Commission will approve.

"The talks made good progress," commented Ray Clark, the head of De Beers's Russia operations, and a director of De Beers Centenary. He added that it was agreed that De Beers and Alrosa would draft detailed proposals for a final assessment by the EC's anti-trust and competition regulators.

Alrosa's chief executive Alexander Nichiporuk will be in South Africa later this month to participate in the South Africa-Russia inter-government trade and economic commission (ITEC) meetings, scheduled for November 17-18. In a confidential document issued to potential bond investors last month, Alrosa said that it did not back any move by Brussels that might require "a significant reduction or termination of our sales to De Beers." The document was prepared last month by Alrosa's financial advisors JP Morgan and ING to promote the sale of $800 million in 10-year Eurobonds.

It is now more than two years since December 2001, when De Beers and Alrosa first signed a trade agreement pledging $4 billion in diamond exports from Russia over five years, averaging $800 million per annum. In the interval, the EC called on both sides to provide additional undertakings to meet its competition guidelines. The Alrosa bond prospectus concedes that the risk of an EC veto "could cause significant disruption in our export sales and a corresponding adverse effect on our revenues."

In sales data revealed in the prospectus, Alrosa exports of rough diamonds to De Beers fell from $868 million in 2001 to $635 million last year, a decline of 27 percent. In the first half of 2004, Alrosa says itexports to De Beers fell another 7 percent to $279 million, compared with $300 million in the corresponding period of 2003. Much of the difference has flowed to Antwerp and other international diamond markets where Alrosa sold $165 million in rough in H1 2004, compared to $32 million a year ago, and zero in 2002.

For a time inside Alrosa, company officials argued bitterly among themselves over whether to break out of the De Beers pact and find alternative buyers of rough. One senior Alrosa executive, German Kuznetsov, argued publicly for cutting the allocation to De Beers by up to 50% per annum. He was replaced last year. Subsequent rumours of a dramatic cut to $200 million in Russian exports of rough diamonds to De Beers in the first half of the year turned out to be false.

Since 2000 Alrosa has been producing annually at a near constant value of about $1.6 billion, except for 2002 when output fell to $1.4 billion. However, the company says the target for production this year is $1.9 billion. The variations in production have reflected the falloff in production from the lynchpin of the company's mining operations, Udachny mine, and the slowness to open the underground mine at Mirny. Offsetting these developments , the new Nyurba mine has grown much faster than anticipated, while the relatively new Jubilee mine (at the Aikhal processing complex) has also been growing fast. Net profit claimed by Alrosa has seesawed between US$200 million and $350 million. Peak profit was $355.3 million in 2003. But according to the latest figures issued by the company, this year will be better. In the nine months to September 30, profit calculated according to Russian accounting standards was $330.3 million.