IF Russia declines to extend an existing marketing deal with De Beers that expires in December, Russian diamonds may no longer be the South African giant's best friend.
Under an agreement reached five years ago, 95 percent of all Russian rough diamonds are exported through the international diamond cartel De Beers's Central Selling Organization (CSO), based in London.
Russian officials have not said they want to break off contacts with De Beers, and both sides are optimistic that a new agreement will be reached this fall.
But following months of tense negotiations, Russia and its main diamond producer, Almazy Rossii-Sakha, say they want a less restrictive deal to increase their quota with De Beers, which now makes up 26 percent of the $4.25 billion CSO market.
While De Beers would like to see 100 percent of Russian diamonds channeled through its CSO, Russia would like to be able to sell more of its rough (uncut) diamonds independently, in part through its own domestic polishing industry.
''More than anything I want to express my optimism that a new agreement will be met. Such an agreement is not only in the interests of these two great producers, but in the interest of stability of the world diamond market,'' says Sergei Ulin, president of Almazy Rossii-Sakha. ''But my personal view is that allowing us to sell only 5 percent of our diamonds is not the way to check prices.''
Russia is the world's third-largest diamond producer by value. The precious gems, vital to its economy, make up its fourth-largest source of foreign currency earnings. Last year, Russia earned about $2 billion from diamonds and diamond products.
Desperate for hard currency, Russia was eager to sign on with De Beers. While De Beers had purchased Russian rough diamonds since 1959, the ex-Soviet Union had declined to deal openly with the firm because of South Africa's former policy of apartheid.
De Beers was thrilled when Russia decided to accept its $1 billion loan offer in 1990. The firm shipped some diamonds to London for collateral and signed Russia up in its exclusive club for five years, allowing it to sell 5 percent of its rough diamond trade independently as a market-testing technique. Uncut diamonds that Russia polishes at home were not included in the agreement.
But the Russian diamond industry has changed significantly since the deal was signed. Three separate suppliers of rough diamonds have replaced Russia's one quasi-ministry monopoly, and in 1992 Russia's semiautonomous republic of Yakutia, now called Sakha, was given permission to dispose of 20 percent of the diamonds on its territory on its own.
That means that over the past three years De Beers has had a dual contract with Russia, with 80 percent of rough diamonds sold through Almazy Rossii-Sakha and the remaining 20 percent through Sakha, which produces about one-fifth of the world's diamonds.
If Russia does decide to break with the CSO and floods the market with diamonds, prices could plummet.
The CSO, which controls more than 80 percent of the global trade in rough diamonds, acts as the international diamond industry's main regulator, ensuring there are no violent fluctuations in the market.
De Beers says that because Russia has exploited loopholes in the contract, a flood of rough gem diamonds from Russia that did not go through the CSO channel has appeared on international markets.