MOSCOW — The Kremlin is to take shareholding control of Alrosa, the largest diamond-miner in the world after De Beers, in an operation that will expand Russia's diamond-mining leader, both upstream into coal-mining, and downstream into diamond manufacturing, and precious metals refining.

Alrosa currently produces about 22% of the world's rough diamonds. Last year, it sold rough and polished diamonds for a total of $2.4 billion. This year the company is projecting 21% growth to $2.9 billion. Through affiliate IG Alrosa, the company also has a growing profile in gold-mining, with a big deal in the final stage of negotiation with Barrick of Canada.

There are those who are say that last Saturday's annual general shareholders meeting of Alrosa, the world's leading diamond mining company after De Beers, ended with less of a bang than a whimper. They are referring to the sound from the Alrosa management, whose 23-percent stake in the company is to be diluted, in order to allow a federal government takeover of shareholding control.

According to the official version, not much happened. A new board was elected, whose alaphabetical listing daintily obscures the fact that the chairman remains the strongest of the federal ministers, Alexei Kudrin, Minister of Finance. The 15 board members are divided, as before, into 6 representatives of the federal government; 5 of the Sakha government; 3 of the Alrosa management; and 1 from the Sakha region districts. This lineup reflects the current distribution of shares -- the federal bloc of 37%; the Sakha government bloc of 32%; the management bloc of 23%; and the Sakha district bloc of 8%.

Kudrin issued a statement in which he called on Alrosa to do more for the development of a "national" natural resource strategy. The unstated implication is that Alrosa is to be more, rather than less state controlled; while in parallel, foreign investment into Russian diamond mining will be encouraged to keep the behemoth on its toes.

"For this reason," Kudrin announced, "the Government of the Russian Federation undertakes actions to strengthen its position in Alrosa. For this purpose, the capital, and the share in this of the Government of the Russian Federation, will be increased to the level of control. That will generate conditions for creation on the basis of Alrosa, the national mining company which, alongside with development of diamond mining, could realize effectively a state policy in the field of development of other minerals, in the territory of Russia, and for the good of shareholders, the Republic of Sakha (Yakutia), all Russia."

What Kudrin said about this capital increase was not altogether clear. " Thus, the stake of the Government of the Republic of Sakha (Yakutia) will not decrease. The republic's executive authority can keep this by adding new shares."

Kudrin did not explain whose stake will be diluted, if the federal government stake is increased to 50% plus 1 share, while the Sakha government either holds on to its 32%, or increases it modestly. Alrosa spokesman Andrei Gusenkov told The Russia Journal: " First of all, it was not said that nobody's stake will be diluted. [Dilution] will be done in two steps: first, an a dditional emission, an increase of authorized capital, Second, the stake of the Sakha republic will not decrease, because it can bring [into the charter capital] additional shares [of other enterprises]."

What this means is that the 23% stake of the management -- most of them appointed in the past by the Sakha regional government -- is to to be reduced by at least the 13% plus 1 share required to bring the federal stake to the control level. According to Kudrin, the consolation prize for these shareholders is that what they have left ought to become more valuable with time. " I wish to address especially those numerous shareholders of Alrosa who are its employees: the actions of the Government of the Russian Federation are directed to the increase of capitalization of the company will mean that those shares belonging to you will grow in price, providing your wellbeing."

Sources close to Alrosa told The Russia Journal that the new shareholding plan is likely to see Alrosa's capital transformed by the addition of the state-controlled Prioksky precious metals refinery and Smolensk Kristall, Russia's largest diamond-cutting plant, as federal stakes. As the Sakha region's contribution to the capital, it is likely that the 75% stake the region presently controls in the big coal-mining company, Yakutugol, will be incorporated.

The implications of these additions have not been appreciated before.

Alrosa is clearly being pegged by the Kremlin as one of the foundations of its new natural resource policy. It will be diversified both upstream, into coal-mining; and also downstream into beneficiation, both of precious metals and diamonds. This is bad news for Mechel, the Russian steel and coal-mining group, which in January paid an extraordinary $411 million for a 25% stake in Yakutugol -- in the expectation that it would be able to buy a larger stake in future. Now with Yakutugol locked safely away inside the Kremlin's version of Alrosa, that will be impossible.

The good news for foreign diamond miners and investors may be glimpsed in Kudrin's remark that Alrosa is to be "the locomotive of economic development of Yakutia". This is a hint that foreign diamond miners will be welcome to develop greenfields projects outside Sakha, especially in the great northwestern diamond belt from Perm, in the Urals, to the Finnish border. In this belt, Archangel Diamond Corporation, as well as the Alrosa's affiliates IG Alrosa and Severalmaz, are already at work, while exploration ventures are under way from De Beers, Rio Tinto, and Lev Leviev.

In his public statement to shareholders, Alexander Nichiporuk, the federal appointee who took over as CEO of Alrosa late last year, noted that the company is committed to significantly raising its diamond prospecting. Spending on this item reached Rb1, 365.9 million ($48 million) in 2004, he said -- up 19% on the year before. For this year, Nichiporuk announced diamond prospecting expenditure will grow another 19% to Rb1,630 million ($57 million). Some of this will be spent outside Russia, he added, identifying new projects in Angola and the Democratic Republic of Congo.