New sanctions on Russian diamonds will change the global gem trade

(CNN) — After nearly two years of conflict, the world diamond market is about to suffer the economic consequences of the war in Ukraine.

In early January, the European Union added the world’s largest diamond producer, Russian company Alrosa, and its CEO, Pavel Alekseevich Marinichev, to its sanctions list. The new year marked the beginning of an increase in export restrictions on Russian stones coordinated with the G7, which includes the United States, the United Kingdom, Canada and Japan, as well as EU members France, Germany and Italy.

Although some countries had already imposed their own restrictions, creating a global system to effectively monitor the market proved challenging. Diamond traders in the Belgian port city of Antwerp, one of the main trading centers for these precious stones, pushed for a ban on this lucrative business. However, now that a sanctions regime has been agreed, radical changes to the way the diamond industry operates are expected, imposing new requirements on a sector that has historically operated with little transparency.

“These restrictions have been in place for two years and it took so long because it’s so difficult to set up a framework that everyone in the industry can follow,” said diamond industry analyst Paul Zimnisky.

What do the new restrictions mean?

Although the United States and the United Kingdom banned direct imports of rough diamonds from Russia shortly after the war in Ukraine began, cut and polished stones elsewhere in the world have remained legal until now.

However, since the beginning of January, the EU and G7 countries have banned direct purchases of non-industrial diamonds from Russia. New restrictions will be imposed on imports of Russian diamonds processed into third countries from March. And from September, diamonds sold within the group of powerful countries will have to follow a certification system to verify their origin. Europe will also include jewelery and watches containing diamonds.

In other words, even if the stones are sent to the other side of the world to be cut and polished, if they come from Russia they will be banned from European and G7 markets. And the industry has to figure out how to get around those restrictions.

A worker inspects a deep yellow Asscher cut diamond at the exhibition of Alrosa’s large colored diamond collection in Moscow on February 13, 2019. Weighing 20.69 carats, it is the largest yellow diamond mined in Russia in 2017. (Credit: Andrey Rudakov/Bloomberg/Getty Images)

How will the sanctions work?

No one knows yet. Diamond supply chains are long and complex, and stones often pass through dozens of hands in multiple countries before reaching the market.

This network of intermediaries is difficult to control, while it is very difficult to know where the stones come from. This is especially true of the smaller diamonds that Russia is known for producing, which are sold in large quantities and are often mixed with other stones from elsewhere.

So far, the EU and the G7 have only outlined their plans for a system to track and verify the origin of the stones, with a pilot system set to launch in early March. Industry groups such as the World Diamond Council, Antwerp World Diamond Centre, Gem and Jewelery Export Council of India and the Gemological Institute of America (GIA) have collaborated to develop an effective solution.

“It’s a work in progress,” says Morgan Winterholler, general manager of strategic brand and sustainability at diamond manufacturer Dymexon. “It is extremely important at this time to develop a roadmap.”

Technology can help. The GIA is able to triangulate data collected from a rough stone and compare it to finished diamonds, but this is still dependent on documentation of the stone’s origin. De Beers has developed a blockchain-based traceability system known as Tracker, while other companies are considering their own initiatives.

However, none of these solutions work on a large scale and there is currently no scientific method to locate diamonds in a mine.

What does this mean for the diamond industry?

The new restrictions will dramatically accelerate efforts to incorporate traceability in the diamond industry, reshaping supply chains spanning the globe.

Big companies are preparing for change. LVMH-owned Richemont and Tiffany said they stopped sourcing Russian stones soon after the war in Ukraine broke out. Dymexon isolated its supply chain to ensure that Russian stones did not reach Western customers, tracked every transaction and relied on direct business relationships with mining companies to prove the origin of each package of stones. .

These changes also affect the market. Russia accounts for about a third of the world’s diamond supply, and while Russian stones are likely to continue to shine in engagement rings, necklaces and bracelets purchased by consumers in places not subject to the new sanctions regime, those countries Will be included in the ban on diamonds. According to Zimnisky, about three-quarters of global jewelery demand.

“In the medium to long term, there will be times when the industry will face supply shortages because of this,” he said.

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