The G7 Russian Diamond Bombshell Holiday Gift

The G7 Russian Diamond Bombshell - Analysis by Edahn Golan photo-Erik Mclean
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The series of announcements in mid-December on the G7 Russian diamond sanctions caught the diamond industry by surprise. The anticipated and somewhat contradictory statements by G7 members went much further than anyone expected, laying down a collection of fast and extreme measures that touch on the very fabric of how the diamond industry operates.

The G7 seeks to transform the diamond industry, it was felt, as almost an afterthought. The economic powers have a goal to suffocate Russia, and the diamond industry, with all its fine nuances, appears to be just a means to an end.

While the G7 Russian diamond sanctions are important, the proposed framework unfortunately suffers from a lack of clarity, too many open-ended issues, and concerns over the viability of the implementations.

The series of announcements made by 10 Downing Street, 1800 Pennsylvania Avenue, Brussels, and the G7 as a collective have left the diamond industry confused. After long months of diamond industry bodies lobbying, it seems that the G7 has decided on picking the strictest options, going far beyond the industry’s expectations.

A diamond can enter Russia undervalued only to return as a high-value diamond and voila, you moved money into Russia without any trace in the proposed G7 system.

Significantly, it did not fully consult with the diamond industry, and this has resulted in a broad range of issues that will make it nearly impossible to implement in the G7-provided timeframe. These issues are primarily, but not only, technology related, and thus, the G7 is increasing an already considerable burden on a struggling industry.

Not only may the proposed G7 Russian diamond sanctions harm the diamond industry, but they may equally produce more substantive issues that touch on financing and dividing the diamond supply into two tiers: approved diamonds and unapproved. Conceivably, this could have terribly negative implications.

Who is the G7?

The Group of Seven is a forum of seven member states formed in the 1970s by the leading developed countries that is predominantly focused on economic issues.

Today, they represent a group of the world’s strongest economies, primarily aligned with the West: the United States, Germany, Japan, Canada, France, the United Kingdom, and Italy. In addition, the group includes the European Union, comprising 27 states.

Why G7 Russian Diamond Sanctions?

Following the invasion of Ukraine in February 2022, the US set out to fight Russia indirectly through imposing a series of economic hardships. One of these sanctions was a ban on Russian diamonds.

However, with Russia primarily exporting rough diamonds, and those exports primarily heading to polishing centers, the flow of Russian-mined diamonds into the US didn’t stop. It was just rerouted.

According to US regulations, the origin of a product is determined by where it was last “substantially transformed.” Since most Russian mined diamonds are currently polished in India, it was completely legal to import them into the US if polished outside of Russia.

In practical terms, demand for Russian diamonds hasn’t ended. Diamonds mined in Russia simply flowed into the US as polished, and the money Russia generated from diamonds continued to flow into Moscow.

The G7 is addressing this major loophole by expanding sanctions to more countries and more diamond products.

What We Know About the G7 Russian Diamond Sanctions

The first thing to keep in mind is that the system is a work in progress. While a general framework has been specified, many of the details are yet to be revealed or even decided.

The following is what is known at publication time, most of this information having been provided by the EU. For the sanctions to take effect, local legislation is needed, and each country may have a somewhat different application of the sanctions. This means that the G7 Russian diamond sanctions may look a bit different in each locale.

At its heart, the new G7 Russian diamond sanctions will cover most diamonds and create a system to ensure that any diamonds entering G7 member countries are not of Russian origin. This will be accomplished by documenting rough diamonds of a known source (more on that below), identifying them through the polishing process where they undergo a significant transformation, and then banning non-documented diamonds into G7 countries.

Currently, there are three planned stages to the G7 Russian diamond sanctions:

Phase One of the G7 Russian Diamond Sanctions

Starting on January 1, 2024, diamonds polished in Russia will be banned from entering G7 countries. This joins the already existing ban on Russian-mined rough diamonds, specifically unsorted and gem-quality natural diamonds. This is referred to by some as the direct ban.

According to the EU, this phase will additionally include natural diamonds purchased or transferred through Russia regardless of where they were mined.

Although not explicitly stated, there is no reference in the statement to size, implying that all sizes of natural diamonds are included.

The EU further states diamonds mined anywhere in the world are also subject to sanctions if they passed through Russia.

The addition of loose polished Russian diamonds is a relatively minor move as the country’s manufacturing is not large. It primarily caters to the Russian consumer market, and little is exported to G7 countries. In 2019, only 1.5% of US polished diamond imports were from Russia, and they made up just 0.2% of Japan’s polished diamond imports.

This looks straightforward, but the first phase also includes jewelry and watches set with Russian diamonds, plus Russian rough and polished lab-grown diamonds. But here comes another hurdle: How will authorities check diamonds already set in jewelry and watches?

It’s understood that when developing the G7 sanctions, jewelry and watches were not supposed to be added so early. More than anything, it was the EU that was interested in this, or at least some EU countries. The White House was interested in loose diamonds, with jewelry possibly being added much further down the line.

The US view is that the sanctions are subject to evolution, mainly from the technological side, and jewelry was to be added at a later stage. Checking watches and jewelry, for example, is extremely complicated from a customs perspective.

Although it seems to be farfetched, how will the G7 track a diamond transferred through Russia – especially if it has already been greenlighted by the system? Consider the following scenario: A diamond mined in South Africa and polished in India is sold to a Dubai-based trading company. If they ship it into Russia and back into Dubai, how would the G7 track such movement?

Also, why is this of any importance? Such a diamond could enter Russia undervalued, only to return as a high-value diamond and voila, you will have transferred money into Russia without any trace in the proposed G7 system.

Phase Two of G7 Russian Diamond Sanctions

As of March 1, 2024, the G7 Russian diamond sanctions will expand to include Russian diamonds that are polished in other countries. This is referred to as the indirect ban.

Specifically, natural gem-quality polished diamonds weighing one carat or above will be affected if mined or transferred through Russia.

This will thus close the abovementioned loophole.

The country that will be most affected by this move is India, where most diamonds are now polished. Since the US is the most important polished diamond export destination, if India remains the leading destination for Russian rough diamonds, Indian manufacturers and traders will need to precisely segregate these diamonds.

Phase Three of the G7 Russian Diamond Sanctions

The third phase is central. Planned to take effect on September 1, 2024, it is when all systems are supposed to be up and running, incorporating all components and expanding to their most encompassing stage.

First, this phase expands the one-carat threshold to 0.50-carats and above.

This is also when sanctions expand beyond loose Russian rough diamonds polished in other countries to add jewelry and watches set with diamonds weighing 0.5 carat and above that are polished in third-party countries. On top of this, Russian-produced lab-grown diamonds polished outside of Russia will also be included.

But most importantly, September 1, 2024 is when a centralized, technology-based tracking system is expected to start. This will cover natural rough weighing 0.50 carat and above.

Eight months does not seem like enough time. Will the G7 delay its implementation? Or will it insist on the timeline using temporary measures, and generating what is conceivably a massive bottleneck?

According to a G7 statement, “a robust traceability-based verification and certification mechanism for rough diamonds will be established within the G7.”

The EU was more specific, adding that the “Authority for the verification of diamonds” will be the Federal Public Service Economy at the Diamond Office in Antwerp, Belgium.

This means that the authentication lane will go through Antwerp. In theory, two-thirds of the global rough diamond production will need to be routed through Belgium.

There Are Exceptions

In practice, some goods will be exempt from going through Antwerp, while still being allowed by the G7.

Canada, a G7-member country, will be able to certify their own production. This will allow Rio Tinto and Burgundy to bypass the G7 documentation line in Antwerp.

Rough diamonds heading to beneficiation polishing in the country where they were mined will also be excluded from passing through Antwerp. Currently, that includes Canadian, Botswanan, Namibian, and Angolan beneficiation.

However, there are two conditions attached to this: that local production is not mixed with other sources, and as long as the diamonds stay in the country. This requires sufficient controls and reporting on allocations for beneficiation.

In the past, the beneficiation process was at times abused. There are numerous tales of such abuses in Africa, and even in Russia many years ago.

The second condition is that in order for the resulting polished diamonds to enter G7 countries, they will need to be verified upon entry. At this point, this can happen in any G7 country.

How Far Will It Go?

Another point to consider is that beyond the initial documentation of rough diamonds, none of the G7-member country statements make any reference to where diamonds are expected to be checked afterwards.

Including jewelry and watches in the first year of the G7 Russian diamond sanctions was an EU desire, not an American one.

Does the G7 expect Indian customs to document diamond exports to the US? Will G7 member countries check all entering diamonds (loose, jewelry, and watches) as they enter every single port, or will the group settle for spot checks?

Will the system be customs-based, with checks at the port of entry? If not, will jewelry and watch retailers be responsible to ensure that their goods are non-Russian, and if so, how? Will they be required to have the proper tools and access to the G7 tracking system? Will they be liable?

All these are important questions that require a fast, through, and detailed answer. Not only do governments need to meet their deadline, so do a broad range of businesses, organizations, and industry-supporting entities.

It’s understood that the goal is point of export to retail traceability, that is, the from point of rough diamond exports in the country of origin to the store—that is a very encompassing system.

Can Antwerp Manage Such a Massive Volume?

In Antwerp, the view is that, realistically, they are looking at the same volume that passed through the Diamond Office as in 2021.

In 2021, 90 million carats of rough diamonds were imported there. Total global production sans the Russian and Canadian production in the past few years was between 60 and 85 million carats.

While Antwerp’s assessment on volume is reasonable, the concern voiced by critics is that this is not just about volume, but also about the additional work of scanning and documenting the goods on a new system, and one yet to be built.

Such a system, aka the G7 Certification Scheme, may go far beyond the current parcel check. The EU is possibly looking into a very robust process that includes verifying not only origin against the data report at the point of export, but also details such as value. Conducting such a stone-by-stone check is a major undertaking, far beyond the current work process of the Diamond Office.

Many questions still remain: How long will it take to develop and deploy the new tracking system? How long will it take Diamond Office staff to master its use? Eight months does not seem like enough for that. So, will the G7 delay its implementation? Or will it insist on the timeline using temporary measures, and generating what is conceivably a massive bottleneck?

The End of Mixed Parcels?

Another implied provision is that rough diamond parcels of mixed origin will also be banned. Mixed origin means that the countries in which the diamonds were mined are unspecified.

This is important because mixed origin parcels are a staple of the Kimberley Process. Essentially, it resolves an issue that has troubled companies such as De Beers that mix their production to create cohesive parcels for their clients.

In actuality, mixed origin parcels are a widespread practice of creating standardized parcels by all rough diamond traders. In the last couple of years, the downside of these parcels is that they provided a perfect way to launder Russian goods: Take an ALROSA parcel, add to it a single diamond from anywhere else in the world, and you could export it anywhere as mixed origin.

The restriction on mixed origin parcels from being allowed into the G7 stream is intended to prevent this type of laundering.

And yet, there is a “but” attached to it.

The G7 Certification Scheme

Another open question is what information will be required for a diamond parcel to be approved for entry in G7 countries.

Some of the details companies will be required to add are obvious: for example, proof of origin, a Kimberley Process certificate, and name of the exporter. Other details such as destination and importer name will also likely be needed.

But will it be necessary to list value, weight, and diamond characteristics as well? Those were mentioned in the Belgian proposals.

These are elementary details.

The Technology Challenge – Or It’s Unknown How This Will Work

The technological framework, essentially the most important part of the system, is still unknown. The goal is to create a traceability system that is foolproof and difficult to fool.

The foundation is a series of tools that can document a diamond and store the data on a blockchain network that is already under construction.

Currently, there’s no one supplier that can do the entire job from mine to consumer market. That’s okay. But are there enough companies that can collectively supply and connect all the components and train the operators in time?

While approved technologies are yet to be decided on, the candidate list is truly short. There are about five companies that can carry some of the load. But from an application standpoint, this requires more than just cooperation between competing companies.

It’s not practical to use innovative technologies in remote alluvial locations such as the Kono district in Sierra Leone. So, goods will need to be carried to the port of export and be declared local. This requires a certain element of faith to be accepted.

Then there is the issue of costs. Alluvial diggers can’t afford the costs. The diamond midstream, operating on paper-thin profitability margins is always expected to carry the costs for the entire pipeline. This is expected to meet heavy resistance. Eventually, the cost will largely be passed along to consumers in the form of higher prices.

In the meantime, according to an EU statement, “The importer shall be responsible for the proper movement of those goods and the costs of such movement.” Importer beware!

Does this mean that anyone that wants to import rough from Africa to their offices in India, Dubai, or Israel will need to open a company in Antwerp? Here’s another hurdle: to operate a company, a local bank account is needed. Currently, it is practically impossible for a diamond company to open a bank account in Antwerp. No bank account, no company!

This is another issue that needs to be resolved.

Additional Diamond-Related Sanctions

The G7 Russian diamond sanctions don’t end with loose jewelry and watches, but extend to other diamond-related areas. Financial and technical assistance are prohibited too, as well as brokering services.

Are the sanctions on financial services aimed at UAE-based companies? Several believe this is the case, while others tie this to the wider context and that the UAE is not the target of these decisions.

What Happens To Non-Documented Diamonds That Are Not Russian?

This is another open-ended question. The group most at risk of being legitimate diamond producers without access to orderly exports to Antwerp are independent diamond diggers in remote locations all over sub-Saharan Africa.

They are an important and valid source of diamonds and important contributors to their local economies. They work at resources that are not economical for most full-scale diamond companies. It would be ethically wrong to block them out of the approved G7 stream.

The World Diamond Council (WDC) proposal addressed this directly. Hopefully, the ongoing negotiations will find a solution for these people.

Another group of non-Russian diamonds to consider are rough and polished diamonds that are already in the pipeline. A grandfathering system that accounts for loose diamonds, jewelry, and watches needs to be in place.

However, the G7 Russian diamond announcements have not addressed this so far. Do G7 countries know that diamonds linger on average 18 months at retail before being sold? That some diamonds circulate in the market for more than two years?

This is the type of question that requires the G7 to consult with the diamond industry to truly understand what it’s facing.

Russian diamond production in the years 2004-2023 by Edahn Golan diamond market research & analysis

Other Issues the G7 Sanctions Present

A centralized online repository that documents the movement of two-thirds of the world’s diamonds from mining to stores, through practically every company in the pipeline is an unnerving thought for many in the industry.

This raises the important question as to who will have access to the data. Will a G7 government representative be allowed to browse the data freely? What will they be allowed to do with it? How will they use the data? What kind of controls will be put in place to prevent data abuse?

Most companies will be forced to document their activities into this data repository, but some companies, those involved in beneficiation for example, are likely to be exempt. At least partially.

Will public or private companies feel comfortable being compelled to use a communal repository where their suppliers, costs paid, and the movement of their goods around the world will be tracked and possibly shared?

The diamond industry, which is directly affected by the G7 diamond sanctions, is understandably confused about the system. Naturally, those once removed are even more clueless.

Last week, a diamond trader based in one of the G7 countries received an email from his bank. In it, the banker asked for some information and then added, almost as an afterthought, that starting January 1, the bank will need the “tracking information of the diamond origin due to the new policy sanctions.”

The bank has no idea just what it’s asking for, what it should look like, how to use it, or even that it won’t exist for at least another eight months, yet the bank is already demanding it!

Alternative Solutions

Routing rough, and possibly polished, diamonds from all over the world through Antwerp decidedly impractical. The desire to have a single point of control cannot work. That is why Canada and beneficiation are already being exempted.

There is also a political side to the issue. The diamond industry prefers working cooperatively. Routing so many goods through Antwerp will antagonize other centers.

Further, there are serious and well-founded concerns that a single-entry point will result in bottlenecks and delayed supply, disrupting business. Thus, some are looking for solutions that fall within the already existing framework.

One simple solution that can circumvent the need to open a company in Antwerp is the use of shipping companies. They can deliver rough diamonds to Antwerp, pick them up after documentation, and deliver them to the buyer. Since many companies are already doing that anyway, why not remove an unnecessary layer of bureaucracy and allow companies to continue to do this?

If memory serves, this was part of the solution that the US adopted when the Kimberley Process was introduced in 2002.

Another suggested idea is for Antwerp’s Diamond Office to open representative offices in Diamond Office nodes in India and African diamond-producing countries to handle the documentation process. This will not only solve the need and costs of shipping through Antwerp, but also give the already designated authority the ability to do the job.

The longer view is that shipping the goods to Belgium should only be an initial stage. As this is supposed to be an evolving process, over time additional countries should be allowed to track diamonds. This already works well with the Kimberley Process.

Where Will Russian Diamonds Go?

Some hope – or fear, depending on their geopolitical view – that the G7 ban will end demand for Russian diamonds. However, I don’t think that is how things will develop.

The simple answer is they will go to mainly India, Dubai, and China for manufacturing. The smaller goods, first below one carat and then below 0.50 carat, may still find their way into G7 countries.

Everything else will go to consumers in China, India, the Arab Gulf, and the rest of Asia.

Russian rough diamond exports 2004-2023 by Edahn Golan diamond market research

G7-Washing as the G7 Russian Diamond Ban Creates Two Classes

The G7 Russian diamond tracking system will inevitably create a two-class system for natural diamonds: first-class goods and pariah goods. The first will command higher prices, primarily for not carrying the “undesirable” mark. The pariah goods will be marked down to help them find a buyer.

This is no joking matter. A third of global production, ostensibly Russian diamonds but also others that may also find themselves outside the G7 system, translates to a large amount of diamonds, and they will seek a home. With such a quantity, and lower prices, this situation may create a market for G7-washing.

G7-washed diamonds without the proper documentation will be a way into the G7 stream of diamonds. This is simply human nature. Ask any child psychologist or historian, and they will confirm that wherever you place a sign that says “No Entry”, there are some that can’t help themselves and will do everything to enter.

Human psychology aside, if this happens and becomes public, the possible fallout will damage the reputation of the diamond industry as a whole.

There Are Opportunities

The White House, which to date has released only basic information about the Russian diamond sanctions, is expected to publish an Executive Order with additional details in January. Keep an eye out for it.

The diamond industry is unhappy about the speed and breadth of changes, but it gets that change is coming. Now, it needs to act on the opportunity.

First, the industry needs to engage their governments immediately. Inner industry discussions are needed for drafting proposals, but the real action happens in senates, legislative committees, government offices, and executive branches. You know the drill: think globally, act locally.

Next, the industry can leverage traceability to dispel claims that it’s unethical, shady, opaque, etc. This is a superb opportunity to promote natural diamonds as taking an ethical path.

Renewable Energy Lessons

The war Russia wages against Ukraine has had a deep economic impact on all of Europe. One area most noted is Europe’s heavy dependency on Russian gas. Prior to the war, 40% of Europe’s gas supply was sourced from Russia. After the war broke out, European sanctions led to a drastic cut in gas supply, leading to soaring energy costs.

Seeking alternatives, Europe’s shift to renewable energies has accelerated. More than 50% of Spain’s electricity is now generated by renewable sources in 2023. In Germany, it’s already 52%, and Portugal has reached a record 72%.

However, this isn’t a story about energy. It’s a story about a path that was already decided on, and then was accelerated due to unforeseen circumstances that forced a different pace.

The diamond industry is no different in that respect. It had already been decided to add traceability to diamonds, but the process has now been forced to move forward quickly due to the same unforeseen circumstances.

The lesson to learn is not if this should happen, but that it is indeed happening. The ship has sailed, and there’s no turning back. These sanctions are coming and will last for many years, changing the diamond landscape forever.

Now, the industry needs to decide whether to assist governments to understand what can be done and how, and then implement it, or to complain bitterly and do it anyway, but not on its own terms.

My suggestion: there’s a win-win option for a successful G7 Russian diamond accord, but it requires the two parties to work it out jointly. I believe that this is the best path to take.

Here’s to new beginnings. Happy New Year!

For more details on the specific data on the G7 Russian diamond sanctions, please contact us.

Featured photo: Erik Mclean

About the Author:

Edahn Golan
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Edahn Golan has 20 years of experience as a diamond industry analyst. He has a unique ability to provide a global view with context to the exclusive granular data he shares. The New York Times, Wall Street Journal, Business Insider, and other leading publications quote him regularly.

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Comments 3
  1. In the past, Antwerp was always against any sort of penalties on Russia because much of Russia’s international trade is conducted through its port – not just diamonds but everything. I suspect this plan to route most rough through Antwerp is based more on Antwerp seeking a competitive advantage against other emerging diamond centers (Dubai etc) than outrage over Russian aggression. Realistically, two of the world’s largest consumer markets for diamonds, India and China, will not be participating so the G7 policies, whatever they turn out to be, will not result in much harm to the Russian treasury. Also, it should be noted that LukOil, the Russian metro-giant, is still operating freely in the US and EU.

    1. Post

      Russell, you nailed it perfectly. Plus, in the process Belgium probably harmed it’s efforts to warm up its diamond trade relations with African diamond producing countries.

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