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Russian PM Vows Support For Diamond Miner Alrosa

The Mir diamond mine in 1996
MIRNY, Russia (Reuters) -- Russian Prime Minister Vladimir Putin has pledged $1 billion in state support for diamond miner Alrosa to help it ride out a steep global decline in demand for gemstones.

"The overall level of support for the sector should total 30-35 billion rubles [$949.4 million-$1.11 billion] this year," Putin told a meeting of senior officials after visiting Alrosa's giant Mir diamond mine in eastern Siberia.

"This is difficult to do with the background of the financial-economic crisis, but we shall do it," Putin said.

The state support, which will include more state purchases of gems, is likely to help state-controlled diamond miner Alrosa service about $3.6 billion in outstanding debt.

Alrosa, the main rival to De Beers, produces about one-quarter of the world's rough diamonds and is one of the main sources of income for Russia's Yakutia region, home to 950,000 people.

"We understand that this sector, which gives serious revenues to the federal budget and regional budget, is in a difficult situation and needs support due to the global market situation," Putin said.

"To support the sector, the state has agreed to significantly increase state purchases of diamonds."

Putin said the state purchases, made by the State Precious Metals and Gems Repository (Gokhran), had risen to 14.5 billion rubles from 3.7 billion rubles. He did not say over what period.

Alrosa was seeking to sell Gokhran another $3 billion worth of gems during 2009-10 to earn enough to service the company's outstanding debt.

"The support given by the state will allow Alrosa to fulfill its obligations and to finance its investment program," a spokesman for the diamond maker said.

Diamond producers across the globe have been badly hit by weak demand. The world's largest diamond producer, De Beers, which is 45 percent-owned by mining group Anglo American, has said demand should pick up in the second half.

Alrosa President Fyodor Andreyev said on August 21 he expected diamond demand would recover by 2011 as long as there were no second wave to the financial crisis.

Putin also ordered officials to work out a way to give a state guarantee to Alrosa to help it restructure its debts to domestic and foreign creditors.

Diamond Crisis

Russia's economy is in the worst recession since the chaotic days of the 1990s and companies are asking the government for hundreds of billions of dollars in state support.

But with gross domestic product on course to decline by half a trillion dollars this year, officials say only major companies or those with particular social or political importance were likely to be bailed out.

Diamond sales make up 30 percent of the local government's revenue in Yakutia, which covers an area about one-third the size of the United States.

Alrosa, which traces its history to the diamond mines set up the Soviet Union in Yakutia in the 1950s, employs 15,000 people and produces 97 percent of Russia's rough diamonds.

"In recent years, $17.5 billion of diamonds have been found here [in Mirny] and about $80 billion in the republic as a whole, but when you work out how much has actually been invested here in the republic, in its infrastructure, the figures are really not very significant," Putin said.

"The problems come from this and have been mounting for decades," Putin said.

Alrosa sells more than half its polished diamonds in the U.S. market. Other major buyers of Alrosa's diamonds are located in Belgium, Israel, and the United Arab Emirates.