Russian Invasion of Ukraine Will Not Disrupt Supply of Diamonds, Gold in the Short Term

March 10, 2022

On February 24, 2022, Russian President Vladimir Putin ordered an invasion of the sovereign nation of Ukraine, continuing a war that began on February 20, 2014, when Putin ordered the annexation of the then Ukrainian-controlled region of Crimea. 

Russia has some of the world's largest and richest diamond reserves and produces and exports the highest quantity of rough diamonds globally. The state-backed mining company, Alrosa, accounts for nearly 90% of the country's diamond mining output. "Alrosa was 32% of global rough supply and 30% of the value to the market in 2021," said Avi Krawitz, Senior Analyst and News Editor at Rapaport Group, in a webinar on March 7.

In addition, according to Investing News, in 2021 Russia was the world's third-largest producer of gold, only trailing Australia and China. Before the conflict, Russia had intentions to become the world's largest producer of gold by 2029.

Currently, international sanctions on diamonds and gold are narrow. "It is legal to purchase and sell diamonds - rough or polished - that are from Russia," said Sara Yood, Senior Counsel at the Jewelers Vigilance Committee, while speaking at the Rapaport Group's March 7 webinar. "You can still transact with Russian businesses if they aren't owned more than 50% by a blocked person," said Yood. The CEO of Alrosa, Sergei Ivanov, is a blocked person, but he doesn't own more than 50% of Alrosa.

Multiple reports state that, due to the limitations on the Alrosa sanctions, the global supply chain for diamonds will not be disrupted. Krawitz agrees that there will be little to no disruptions in the short term. "Most of Alrosa's clients have seen the goods and paid for them in advance," he said. 

But there are two issues. First, it will be difficult for an international company to pay Alrosa because Russian banks are sanctioned. "Will Indian and Belgian buyers be able to circumvent the SWIFT system? Will they take the legal risk of other methods of payment?" asked Krawitz.

There will also be disruptions to shipments. "Right now it's more a question of delivery. There may be some delays in the short term of receiving goods from recent sales," said Krawitz. 

If the war between Russia and Ukraine lingers throughout 2022, the restrictions on Alrosa may deepen, and that could cause the price of diamonds to rise around the world. Most of the demand for diamonds comes from western companies and Japan, meaning consumers of diamonds will play a significant role in how much of a hit the diamond market sees. 

There may also be social sanctions against Russian diamonds as consumers ask where their diamonds come from. "This becomes a moral and ethical issue," said Martin Rapaport, Chairman of Rapaport Group. 

If the demand for diamonds, especially those mined by Alrosa, sees a significant drop, the price of diamonds may not see a drastic hike. However, if demand remains the same, the market will see a major uptick in diamond prices.
"It will be at least three to four months before the rough diamonds being bought today end up with polished diamond wholesalers and retailers," diamond industry analyst Paul Zimnisky told Business Insider. "The longer this plays out, the more complicated and problematic it becomes for the industry."