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Russia: Diamond Stockpile May Be Close To Exhaustion

Moscow, 3 February 1997 (RFE/RL) -- Two weeks ago, on January 23, armed agents of the Russian State Tax Police raided the offices of Almazy Rossii-Sakha (ARS), Russia's principal diamond producer and seller, in Moscow, Yakutsk and Mirny and seized substantial volumes of company documents.

The move was the culmination of a long investigation by Russia's Accounting Chamber, an independent government watchdog agency, into the state's precious metals and diamond stockpiles. The Chamber simultaneously conducted an audit of the Finance Ministry, the Committee for Precious Metals and Gemstones (Komdragmet), and Almazjuvelirexport, the state-owned marketing agency, focusing on their transactions with precious metals and diamonds.

The Accounting Chamber was created by the Russian parliament and empowered to conduct independent checks of state finances and state property along the lines of independent auditing agencies abroad, such as the U.S. General Accounting Office. The Chamber has the legal right to obtain all official data, whether classified or not. It reports its findings to parliament in open and classified form.

The diamond investigation started last April. The concluding report says that state gold reserves were fully sold by the middle of 1996. This refers to gold in what is known as the State Fund, which is under direct presidential and prime ministerial control. It does not include gold held by the Central Bank that is counted as part of Russia's monetary reserves. Their level is closely monitored by the International Monetary Fund, which also fixes the level the government is obliged to maintain every month.

According to the Chamber report, the stockpile of diamonds will be exhausted by mid-1998 if the sales rate of 1995-96 continues. The report recommends the government halt further sales of state stocks. It identifies the President and the government as responsible for ordering "non-planned" sales from the stockpile that "seriously violate the law on the federal budget." Government agencies responsible for the sales and the Ministry of Finance are also criticized for violating the law.

These revelations come on the heels of a review of the terms of the trade contract between De Beers' Central Selling Organization (CSO) and Almazy Rossii-Sakha (ARS), Russia's principal diamond producer and seller.

That review, which was sent to the office of Prime Minister Viktor Chernomyrdin on January 21, recommends government approval of the contract without further delay.

A spokesman for Chernomyrdin, currently in Switzerland, said there has been no discussion of the De Beers contract by the Council of Ministers and none is scheduled for next week.

The Chamber report is important because for the first time ever, details of Russia's diamond stockpile and of sales of diamonds on the open market are being disclosed by an official agency.

The disclosures criticize the presidential administration and the government for ordering a sell-off of diamonds during last year's presidential election that has almost emptied the stockpile. As suspected by the government's critics in the Duma, the volume of sales far outstripped the targets set by the deputies when they adopted the 1995 and 1996 budgets.

In 1995, for instance, the budget authorized sales of 4.6 trillion rubles from state gold and diamond stocks. The actual amount of the sales now disclosed was 13.3 trillion rubles -- almost three times the legally approved level.

In 1996, the budget documents did not specify revenue targets for stockpile sales. However, Chamber auditors were able to deduce these from Value-Added Tax and other revenue estimates, concluding that planned sales of gold and diamonds last year were 4.7 trillion rubles

But, in the first half of 1996 alone, actual sales of stocks totaled 11.4 trillion rubles, almost five times the projected amount. Total sales for 1996 reached almost 28 trillion rubles, the report said. The outcome, the report said, was "catastrophic."

Driven by orders from the Kremlin to sell stocks, the report says Komdragmet had "no state perspective concerning the aim of the state fund, its structure, the necessary reserves for securing national interests on the world market...and the support of the domestic industry. The necessary legal basis for these issues is lacking."

The report criticizes the system of stockpile sales for allowing Komdragmet and Almazjuvelirexport to skim sizable shares of the proceeds as commissions. It also attacks the system of allocation of rough from the stockpile to the joint ventures.

"The [Chamber] has information proving that Komdragmet supplies diamonds for a narrow circle of businessmen through their enterprises. There is no competitive basis for the sales of diamonds. Kodmragmet has closed the Russian market for the competitive diamond polishers."

These criticisms appear to support claims De Beers officials have made in the past about sales of Russian diamonds by Belgian and Israeli joint ventures abroad, outside the terms of the De Beers contract with Russia. On the other hand, by demonstrating that Russia's diamond stockpile is now almost exhausted, the report removes one of the reasons De Beers officials have given for demanding tougher control over Russian diamond exports in the new contract.