Amid intense uncertainty and speculation about the future of sanctions related to Russia’s full-scale invasion of Ukraine in 2022, companies across all sectors are beginning to imagine what a future of sanctions relief may mean for them.
One of those sectors is that of mining and sales of natural diamonds, which is navigating a number of major challenges, only some of which are directly or indirectly connected to business involving Russia. In any case, what happens in the diamond industry related to Russia could be particularly instructive for other sectors because of its exposure to Western consumers, the physical capability of tracing the product along the supply chain from beginning to end, and its experience with mechanisms intended to improve and promote standards for responsible business.
As in any sector, Russia-related sanctions are just one part of a complex web of factors that businesses have to navigate. The natural diamond industry is facing a number of near- to longer-term challenges:
- Can it manage to find a new way forward vis-a-vis the growing interest from consumers in lab-grown diamonds?
- Will tariff wars further damage the sector?
- Who will purchase DeBeers, the industry’s most iconic name, historic leader, and, in most years, largest mining company by value? Anglo-American, which owns most of the company, has indicated for the last couple of years that it’s for sale but has taken billions in value write-downs along the way, opening up questions about its future.
- What is the future of Signet, the largest retailer in the world (think: Kay, Jared, Zales), after a major leadership shake-up in March?
- How will India, where more than 90 percent of natural diamonds are cut and polished, sustain its sector amid a crisis?
- Will Chinese consumers ever come back?
On top of these market-specific questions, there is the impact of sanctions. The United States and several traditional allies have levied sanctions against state-owned miner Alrosa and other key Russian companies. And the G7 led a broader effort to restrict imports of Russian-mined diamonds over 0.5 carats by requiring import declarations and, eventually, traceability to ensure that none of these larger Russian-mined diamonds make it on to the fingers of Western consumers, which make up more than 70 percent of the global market. Traceability was expected to be required as early as September 2024 but has been delayed to ensure there is sufficient time and capacity to implement.
For an industry that has been struggling, the prospect that a major company like Alrosa would be removed from the sanctions list or might see an easing — or the end of — import restrictions on Russia may feel like a potential oasis in a desert of market challenges. But for companies and industry associations entertaining such hopes, it’s important to be cautious — and to be careful what they wish for, as a post-sanctions future could be much less clear and potentially far more fraught than the status quo.
First and foremost, full disclosure that I played a leading role at the working level in the G7 sanctions effort when at the State Department, both internally in the U.S. government, and within the G7 Technical Committee. And I continue to believe in the merits of the effort and approach from a policy perspective.
But for the sake of this discussion, let’s assume that the sanctions and import restrictions are removed entirely, including by the other G7 partners, so that there is no confusion about whether another country’s sanctions apply. What then for companies, for industry associations, and for consumers?
While the following focuses on diamonds, every industry will need to work through similar questions, navigating a series of overlapping and interlocking challenges, frameworks, and expectations.
Will the industry welcome Russian diamonds back into supply chains?
Given the current focus of the natural diamond sector on marketing to push back on lab-grown diamonds, is a message of “we welcome Russian diamonds back into our supply chains” going to be helpful? Or, even if not so glibly stated, is a position of backtracking on full implementation of traceability and identifying the country of mining for larger stones, returning to a state of more opacity and uncertainty about a diamond’s origin, the right message in a competition for the consumer? This is even more critical a question in a sector competing with the message from the lab-grown segment of the industry, which is often one focused on the fact that its diamonds are “more ethical” because they are free from abuses? (To be clear, I do not agree with this claim but rather align with the view that the product is most ethical when it benefits communities.)
If one of the key selling points for the natural sector is to emphasize the “story” of the people in the diamond supply chain and how they benefit from the mining and manufacturing processes, then welcoming Russian diamonds back without corresponding traceability could well have the opposite effect; in fact, it could encourage and even help provide another argument — or at least another question — for the lab sector to try to exploit vis-a-vis natural diamonds.
Beyond messaging, even if sanctions are removed in the context of a negotiation, it remains likely that the government of Russia will remain engaged in conflict in Ukraine and in various countries across the Middle East and sub-Saharan Africa, both directly and through proxies like the remnants of the Wagner Group. And Russia remains the majority owner of Alrosa and the precious gem and mineral repository Gokhran, where a significant reserve of diamonds is being built up to prop up Alrosa.
Are companies prepared to conduct meaningful due diligence on issues of Russia’s exposure to conflict or human rights abuse elsewhere, such as Sudan or Myanmar, pursuant to the Due Diligence Guidance of the Organization for Economic Cooperation and Development (OECD) or the United Nations Guiding Principles on Business and Human Rights? What will that due diligence consist of? How will issues such as corruption, or broader business ethics, factor in?
How will companies analyze the likely complicated results related to conflict and human rights abuses connected to Alrosa’s Russian government owners in order to make a clear and specific decision on a deceptively simple question: Can they buy Russian diamonds and remain compliant with these standards or compliant with their own policies and procedures, which generally state that they will not source diamonds connected to conflict or human rights abuses? Will they be public and transparent about these processes and decisions, through their own communications, as well as those of their auditors?
Finally, will they hold themselves accountable for the actual procurement and sourcing decisions they make? That is, it is one thing for companies to establish due diligence processes and send questionnaires to their suppliers; it can be quite another to meaningfully follow up on those processes to ensure they are more than tick-box exercises and acknowledge when there have been failures. Some industry leaders may be expecting that the Trump administration will simply ease all restrictions on business, but it isn’t clear that will be the reality across the board, as reports have shown that at least some enforcement has continued — related to forced labor, for example. So, the decisions companies make regarding purchasing and which suppliers are in their supply chains likely will still matter.
If they say they’re not welcoming Russian diamonds back, how will they prove it if not through traceability? Didn’t the Kimberley Process solve the problem by eliminating “mixed origin” certificates?
Several retailers, manufacturers, and grading laboratories across the United States and Europe made claims in March 2022, prior to the imposition of sanctions in April 2022, that they were ceasing sourcing of Russian diamonds. But it was not clear what mechanisms were being used to verify this declaration beyond engaging and auditing of suppliers (mainly in India). And those audits were not made public, nor were specific explanations offered of what changes in the supply chain had been made to adjust for this kind of disruption.
Even after Alrosa was sanctioned, the general view was that Russian goods were making their way into the marketplace because of a “loophole” that allowed Russian-mined diamonds to come into the United States because they had been “substantially transformed,” for customs declaration purposes, in India or wherever else they had been manufactured. Because the G7 restrictions have not fully come into effect, the same may still be true now (though with Alrosa in decline and producing less, that may be changing, at least partly as a result of the sanctions).
So, if companies make claims that they continue to ban Russian goods, how will they prove it, if not for traceability? If claims and audits didn’t work last time, and India’s policies haven’t changed, then what has?
Beyond Russia, other factors also point to the need for knowledge about where a diamond came out of the ground. For example, the Trump administration nominee for ambassador to Belgium, consulting company Constellations Group CEO Bill White, has raised concerns about the connection of diamonds to terrorism. More positively, Botswana is leaning into marketing its remarkable story of development and progress, thanks principally to diamonds, as an essential part of its sales pitch, as are other African producers. How else but through traceability can producers actually prove that story to a consumer making a purchase at the counter or from their keyboard?
Finally, some in the trade have asserted that the Kimberley Process (KP) is sufficient. That multilateral initiative, named after the city in South Africa where it was established in 2000, includes more than 80 countries — including Russia and many of its allies — to stop the trade in “conflict diamonds.” But because of political divides, the KP has not held a single formal discussion about whether Russian diamonds are “conflict diamonds” because it operates on a “consensus by unanimity” approach. The KP currently operates a system that finds, in essence, that there are no more conflict diamonds in the world, according to its exceedingly narrow definition. The KP was unwilling to look at diamonds connected to the remnants of the Wagner Group in the Central African Republic when it recently lifted its decade-old embargo there. The KP also failed to explain its decision to anyone outside of the initiative, as it again failed to produce a Plenary Communique or any information from the visit made by its “Monitoring Team” in September 2024. So with a multilateral system with an insufficient overall standard, inability to even discuss issues related to Russia/Ukraine, and complete absence of transparency, it is clear that companies cannot simply expect the KP to guide their approach.
Will industry associations admit Alrosa?
Finally, the diamond sector has a number of trade associations that serve as standard-setting and/or certification bodies, such as the Responsible Jewellery Council (RJC) and the World Diamond Council, the latter of which is the industry’s representative observer body in the KP. In February and March 2022, these organizations struggled to find ways to boot Alrosa, arguing that suspension could only come with sanctions by their home governments, notwithstanding the fact that the company’s owner – the Russian government — was responsible for a full-scale invasion and in violation of several of the standards the organizations promote. In the end, RJC never actually took action against Alrosa; instead, the company “self-suspended” and simply announced it was leaving.
Are these organizations, and others in the industry, prepared for a renewed discussion and debate? Will they take the approach that “it’s time to turn the page and welcome Alrosa back” and at least ask the company to go through a renewed membership process? If not, what will be the basis to keep Alrosa out if sanctions have been lifted? How will they advise members on due diligence if a company like Alrosa is re-admitted? How will companies in the North America, Europe, and Japan manage their decisions on sourcing with suppliers in India and traders in Dubai, which have continued to import natural diamonds from Russia throughout the last three years, even with sanctions in place? If companies in these centers purchased and imported Russian goods during sanctions, how will Western companies enforce decisions not to purchase them post-sanctions? As above, will they undertake to achieve a new level of transparency in both their processes and decision-making? Or simply ask everyone to trust them?
Diamond industry observers know that now is a precarious time for the sector, and geopolitics will continue to interfere, no matter who is in the White House. The question is whether the industry is prepared to meet it more effectively than in 2022.
And for sectors beyond diamonds, how will this experience inform their own approach to Russia engagement in the event of sanctions relief?