Gaborone meeting unlikely to blacklist Russian diamonds

Mbongeni Mguni | Tuesday April 19, 2022 10:25

When the world’s diamond producers, their biggest customers, civil society groups monitoring the industry and others, meet in Gaborone in June to discuss issues affecting the image of the precious stones, Russia will be the proverbial elephant in the room.

The world’s biggest producer of rough diamonds by volume is due to enter the third month of its invasion of Ukraine next week, with recent mounting claims of civilian casualties and atrocities, including the discovery of mass graves.

The Kimberley Process, which groups the producers, markets, civil society and in fact accounts for 99.9% of the global diamond trade, meets in Gaborone between June 20 and 24, as Botswana is chairing the group for this year. The Kimberley Process (KP) was established nearly 20 years ago to clean up the diamond industry by certifying that all trade does not involve conflict or 'blood diamonds'.

Conflict or blood diamonds have generally been taken to mean stones mined for the purpose of funding rebel group campaigns against legitimate governments, a definition that has meant the KP’s focus has been on war-torn Africa.

The debate within the KP to expand the definition to include vices such as human rights violations has been ongoing for years, but Russia’s bloody invasion of Ukraine has raised the urgent question of what constitutes conflict or blood diamonds. Those monitoring the KP don’t expect any sudden changes to the definition in June.

Hans Merket, a researcher at International Peace Information Service, which is a KP member, explains.

“Following several failed reform attempts, the Kimberley Process still looks at conflict through a 20-year-old lens,” Merket wrote in a report last week.

“This narrow definition has over the years led the KP to ignore various cases where public or private security forces, and not rebels, were inflicting violence and conflict to control diamond mining areas.

“It is therefore highly unlikely that the KP would consider action on a matter that differs even more from a scenario where rebels control diamond mines.”

He adds: “Decision-making in the KP is based on consensus, implying that no votes are cast and decisions are only taken if none of the 56 participants expresses disagreement.

“Even if Russia would in this case not be allowed to participate in decision-making, KP membership includes various countries that are unlikely to support KP scrutiny of Russian diamonds, such as China, the United Arab Emirates and India.”

But are diamonds actually funding Russia’s war effort?

Merket points out the linkages. Russia’s diamond mining is led by a mega-corp known as Alrosa. The Russian government owns 33% shares in Alrosa and, according to Merket, the group’s CEO, Sergej Sergejevitsj Ivanov, is not only part of Vladimir Putin’s inner circle but was also one of the first oligarchs targeted US sanctions.

“The Russian Federation shares in Alrosa’s profits,” writes Merket. “In 2021 this profit amounted to $1.1 billion (and) in Putin’s own words this ‘gives serious revenues to the federal and regional budget’. Alrosa has also reportedly directly funded the military previously, with reports that the group has paid significant amounts over the years to “increase the combat readiness of Russian submarines”.

According to Merket, newsletters from Alrosa indeed reveal that group engaged in a sponsorship agreement with the B-871 combat submarine in 1997, committing to “maintain the ship in a combat-ready condition”. Russia does not only generate revenues from diamonds as a shareholder but also directly buys and sells diamond production from Alrosa to manage global supply and pricing.

Last year, according to Merket, the state-run minerals trader known as Gokhran held six auctions garnering $225 million. Diamonds are particularly important for Moscow, given that existing sanctions have largely driven Russia out of the global financial system. The precious stones are an increasingly important source of foreign currency for Russia, whose major revenue earners such as gas and oil have been squeezed out of the market.

The US and its partners in the West quickly realised the importance of diamonds in the arsenal of sanctions against Russia, imposing numerous measures from February.

However, because Russian diamonds can still be traded through 'sympathetic' or neutral markets such as India and China, it is at the Kimberley Process where the flows to Moscow can be effectively plugged. And the US is focussing its efforts on lobbying KP partners, even if sanctions from the organisation would be unprecedented.

“We are engaged very proactively with partner nations and allies thinking about appropriate actions that could be taken in this respect,” Joshua Mater, senior sanctions coordinator in the US Department of State told Mmegi.

Mater was briefing a Foreign Press Centre virtual press tour on corruption, which ended recently. He explained that the US understood the limitations under the KP.

“The Kimberley Process itself is a multi-lateral body, which is consensus-based decision-making. “And of course, Russia is a member of that multi-lateral body.

“So, decisions that are coming out of that pursuant to sanctions or other types of deterrent regulations can often be extremely challenging to get adopted within the context of that organisation itself.

“But I think all members do recognise the importance and issue of the situation, especially in Ukraine, that's ongoing right now.”

Mater added: “It may not be within the Kimberley Process itself, but it may be within other sanctions tools and other tools that are available to the US government that can get after these particular industries.”

The US State Department is also facing pressure from within the country over the Russian diamonds.

A group of 11 members of Congress recently wrote to the department demanding tougher action against Russian diamonds. Specifically, the congresspeople want a tightening of the existing sanctions so that they cover polished diamonds which have their origin in Russia.

At present, the US sanctions only cover Russian rough diamonds, meaning these can still be sold into centres such as Dubai, India and China for polishing before being sold forward to the US market.

“As it stands at this time, a diamond can be mined by an Alrosa subsidiary, polished or cut in India or another country, and sold to the United States without any prohibition, making a profit for the Russian government,” the politicians wrote.

“The February 24 sanctions that listed Alrosa only blocked debt and equity transactions, making a small dent in Russia’s oversized stake in the global diamond trade.

“Although an important initial step, along with the designation of Alrosa’s CEO, these have yet to impede trade and revenues that eventually reach the Kremlin.”

Experts have said broadening the scope of the US’s diamonds to include the polished variety would help squeeze Russia, but that would require the cooperation of diamond manufacturers and retailers in 'Russo-sympathetic' or neutral countries such as India and China.

The US has other arrows in its quiver against Russian diamonds, but many are limited and have significant loopholes.

“If diamonds are being mined or sold under circumstances that violate laws that could be prosecuted in the United States like money laundering with a corruption object, it may be possible for us to take action against the profits that are earned through the sales, whether by Ukrainians, Russians or others,” Mary Butler, chief of the US Justice Department’s Money Laundering and Asset Recovery Section (International) told Mmegi.

“And so, I don't want to eliminate the possibility that the corruption itself linked to the mining or sale of diamonds couldn't be addressed.

“At the same time, a failure to abide by the Kimberley Process outcomes is probably not a basis for a US law violation.”

The US also is able to impose criminal sanctions for violations or evasion of sanctions. People who assist support financially, or with services the evasion of sanctions can face criminal liability in the United States that can lead to forfeiture. The US is also able to use civil confiscation as a basis to forfeit assets linked to sanctions evasion.

The network of laws however falls shy of preventing Russia from reaping the benefits of its diamond trade, particularly the lucrative foreign currency inflows that come with it.

The complications mean the KP remains the most appropriate platform for the world to make a decision on stopping diamonds from funding Russia’s war effort.

While Merket does not expect the KP to make any meaningful move on Russia when it meets in June, the Gaborone meeting could set off some cataclysmic events within the organisation.

“While many in the KP may want to ignore the matter, the Russian diamond controversy will considerably impact the process,” the researcher says.

“The geopolitical crisis and the opposing views on how the KP should deal with it will exacerbate the stalemate that has been hindering progress since the KP’s inception.

“It can also plunge the KP into an existential crisis, with a risk of implosion.”

According to Merket, increased friction within the KP is already emerging “as Russia chairs two of the six KP working bodies, both of which carry considerable political and strategic clout”. The KP, long accustomed to acting against smaller, African members, whose conflict diamonds comprise a small percentage of the global trade, is suddenly faced with tough decisions on a major producer responsible for a third of global supply.

“The fact that Russian diamonds present one-third of the global diamond supply may lead an increasing number of KP participants as well as civil society and industry observers to question whether they can continue being part of – and invest considerable time and resources in – a process that entrusts and legitimises this flow with KP conflict-free certificates,” Merket.

The US and other Western parties fired initial salvos at the Russians at the KP level, during a recent engagement hosted by the United Nations in New York.

More sparks are expected in Gaborone, but for now, the host nation and chairperson, are not taking a stand on the matter.

Diamond Hub coordinator, Jacob Thamage, who is effectively handling Botswana’s chairmanship of the KP, has reportedly told the KP Civil Society Coalition that any move or debate on Russia would have to be moved by a participant.

The global diamond industry reaches its moment of truth in Gaborone in June.