Ukraine War Economy

Introduction

The war in Ukraine has had significant economic implications, and Western powers are considering imposing sanctions on the import of Russian diamonds. G7 experts are visiting India on a fact-finding mission to discuss potential sanctions on Russian-mined diamonds, while the EU has been in discussions for months about imposing a ban. However, implementing new regulations on the global diamond market is a complex task.

The Russian Diamond Industry

Russia’s state-owned company, Alrosa, mines around one-third of the world’s supply of diamonds in the Siberian region of Yakutia. The diamond industry contributes approximately $4.5 billion to the Russian economy annually, making it one of the largest sectors that has avoided the sweeping sanctions imposed by Western powers since the start of the full-scale invasion of Ukraine in 2022.

Challenges of Imposing Diamond Sanctions

Implementing sanctions on the diamond industry faces challenges due to the global nature of the trade. Belgium, particularly the port city of Antwerp, is the world’s largest diamond trading hub, with around 84% of rough-cut diamonds and 50% of all polished diamonds traded through the city. Belgium has opposed EU sanctions, arguing that they would disproportionately impact its economy while allowing Russia to sell diamonds outside the bloc.

Complexity of Diamond Supply Chain

The journey of a diamond from mine to retail involves multiple destinations and changes of ownership. While rough diamonds can be tracked initially, complications arise when diamonds are traded multiple times between different locations. Traders can mix diamonds from different origins, making it difficult to trace the origin of individual gems. This mixing process allows Russian stones to evade detection and sanctions.

Tracing Diamond Origins

Tracing the origin of diamonds becomes even more complex when it comes to polished gems. Any diamond that has been cut and polished in a specific location, such as India, can be labeled as originating from that country. This labeling practice makes it challenging to determine the true origin of a diamond once it has been processed. Current US sanctions on rough Russian diamonds do not address this issue, as Russian-origin diamonds can still be imported if they were transformed or cut and polished outside of Russia.

Proposed Traceability Measures

The G7 aims to implement new traceability measures to block all Russian-origin diamonds from Western consumer markets. One proposal is to establish Antwerp as a central sorting hub where Russian stones would be eliminated, and others would be allowed to enter G7 markets. The technical aspects of the sorting system have not been revealed, but suggestions include document-based auditing via customs and the use of new tracking technology that creates a unique identification for each stone.

Challenges of Traceability

Implementing traceability measures faces several challenges. First, all industry actors across the global diamond trade, manufacture, and retail pipeline need to adopt the same technologies simultaneously. Second, not all diamonds can be easily traced, especially smaller stones that may not be economically viable to trace. Additionally, if a laser-marked diamond is divided into smaller stones, the unique identification mark may not be retained on every piece, making it impossible to validate the origin of the diamonds.

Potential Impact on the Diamond Trade

If sanctions are imposed on Russian diamonds, the international diamond trade is expected to adapt. Non-Russian diamonds may trade at a premium in certain categories, but there is not expected to be a significant price impact in the near term. Countries like Botswana and Canada could benefit from an increase in demand within G7 markets. Outside of the G7 market, sales of Russian diamonds may expand into countries that still maintain diplomatic ties with Russia, such as China.

Conclusion

The potential imposition of sanctions on the import of Russian diamonds due to the war in Ukraine presents significant challenges. The global nature of the diamond trade, the complexity of the supply chain, and the difficulty of tracing diamond origins all pose obstacles to implementing effective sanctions. However, the G7 is exploring traceability measures to block Russian-origin diamonds from Western consumer markets, with the possibility of utilizing Antwerp as a central sorting hub. The impact of these sanctions on the diamond trade remains to be seen, but it is likely that the industry will adapt to the new measures.