It has no material use Men and women desire to have diamonds not for what they diamonds can do but for what they desire To hear these words from a person who at tributes his entire wealth and power to the trade of diamonds illustrates the peculiar n ID: 32697
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inKimberleywhoabidedtoRhodes'termsofbusiness,recognizingthattheirowninter-estsandDeBeerswerecompatibleinthatbothaimedforhighpricesandanotionofscarcity.Inthefollowingthreedecades,aGermanimmigrantnamedErnestOppenheimerestab-lishedhimselfasaprominentgureintheSouthAfricandiamondandgoldindustry.Af-tersometimeasadiamondexpert,heen-teredthegoldbusinessbycreatingtheAnglo-AmericanCorporationofSouthAfrica,own-ingadominantshareofSouthAfrica'sgoldmines.Hisgreatestambition,however,wastogainaplaceontheboardofDeBeers,thecompanyhefeltwouldprovidehimwiththebestopportunitiestoexpandhisknowledgeandpowerinthediamondindustry.Op-penheimersensedthatthestructureofthesyndicatewouldprovideDeBeerswithinsu-cientpowertocontrolthedistributionofdi-amondsinthelongrun.Inparticular,hewasawareofthedangerthatthemembersofthesyndicatemightbetemptedtobreakawayintheexpectationofgreaterquantitiesandprices.DeBeersboardmembers,however,viewedOppenheimerasanoverambitiousnou-veauriche,andblockedhiswayintotheboardfordecades.Nottobediscouraged,Oppen-heimergraduallyboughtblocksofDeBeersshareswhenevertheycameupforsale,un-tilnallyhewasoneofthetwomostsigni-cantsingleshareholders,theotherbeingSollyJoel,hisfriendandbusinesspartner.Atlast,Oppenheimergainedfullcontrolandowner-shipofDeBeersin1926.Soonafter,hewasnamedchairman.Anevenlargercompany,theDiamondCorporation,wasformedthathadsubsidiariesdealingwithproducingandsellingdiamondsallovertheworld.OutsidecontractswerepracticallymadeimpossiblebyanexclusivityrequirementthateachsupplierwasforcedtosignwiththeCSO.Overtime,newdiscoveriesofdiamondre-servesinAustralia,Siberia,andWesternAfricabecameknownanderodedthecom-pany'smonopolypositionindiamondsup-ply.HarryOppenheimer,Ernest'sson,quicklyrealizedthethreatthisimpliedandfocusedhise ortsonmaintainingpowerindistribu-tionthroughtheCentralSellingOrganization(CSO),thecompany'smarketingarm.ThestructureoftheDeBeersconglomer-atehasremainedwidelyunchangedeversince:AsubsidiaryofDeBeersbuysdiamondsfromallproducers,includingDeBeers'ownmines(whichrepresentedaboutonehalfoftotalsup-ply).Eachyear,DeBeersdeterminestheto-talamountofdiamondsitplanstosellinthemarket.Eachproducerisguaranteedaxedpercentageoftotaloutput,thatis,De-BeerscommitstobuythatamountandmarketitthroughtheCSO.Producers,inturn,arechargedahandlingandmarketingfee,rang-ingbetween10and20percent,dependingontheamountpurchasedandthegeneraldemandsituation.TheCentralSellingOrganizationservesasaclearinghousefortheentireindustry.Itreg-ulatesthequantityandpriceinthemarket.Packagesofdiamondsareboughtandsoldatsights,heldtentimesayearinLondon,onatake-it-or-leave-itbasis.Asitremainsapriv-ilegetoattendsightsbytheCSO,fewdeal-ersdaretorefuseapackageo eredtothem.Theattempttohaggleoverquantityandpriceoftheo eredpackagecouldwellleadtothesightholdernotbeinginvitedagain.Over80percentoftheworld'sdiamondsweretradedthroughtheCSOinitsearlydays.Recentde-velopmentshavecausedadownwardtrendinthispercentage;presentestimatesrangebe-tween65and75percent.ThebuyersfromCSOaremainlydiamonddealerswhohavethestonescutandpolishedandresellthematoneoftheworld'smaindi-amondclearingcenters:Antwerp,NewYork,andTelAviv.OneofDeBeers'mainrolesistomaintainthenotionthatdiamondsareascarcecom-modity.Thistheydobymeansofadvertisingandbypurchasingexcesssupplieswhenthatisneededtoavoidpricedecreases:asamatterofprinciple,pricesareneverloweredbyDeBeers.Thistightly-knitorganizationhasprovenben-ecialformostindi erentways:producers,oftenstate-rundiamondminesindevelopingcountriesrelyingheavilyondiamonds,arepro-videdwithastablein owofforeigncurrency.Dealersenjoystablepriceincreaseswhichcaneasilybepassedontoconsumers.DeBeers,however,seemstobebenetingthemostfromtheagreement,askingforwhatproducersof-tenperceiveasinappropriatelylargefeesandinturnchargingpricestomerchantsattheirowndiscretion.Thetemptationforbothpro-ducersanddealerstoby-passtheCSOisthere-forequitesignicant.2 tofollowthetermsofthecartel.RussiaAsearlyasin1957,largequantitiesofdia-mondswerediscoveredinSiberia.DeBeersquicklyrealizedthelatentthreatposedbythesesuppliesandallegedlynegotiatedanagreementwiththeSovietgovernmenttochanneltheirdiamondsthroughtheCSO.Un-derstandably,thetermswereneverrevealed,butindustrysourceswereconvincedthatDe-BeersmadesurevirtuallynoSiberiangemswouldenterthemarketthroughotherchan-nelsthantheCSO.4ItwasestimatedthatSo-vietproductionrepresentedbetween20and30percentofworldproduction,orsome10to11millioncarat.DeBeers,undertheestimatedtermsofthedeal,guaranteedthepurchaseof95percentofSovietproduction,whileallow-ingtheSovietdiamondindustrytocut,pol-ish,andselltheremainingvepercentau-tonomously.ThiswasseenasaconcessionthecartelhadtomakeinordertokeepthelargerpartoftheSovietdiamondsundertheircontrol.ItisalsobelievedthatpricespaidforSovietdiamondsexceededtheprevailingcartelpricesbyupto10percent.Untiltheearly1980s,theSovietsweresatisedwiththepreferabletreatmenttheywereo eredandhonoredtheagreementswithDeBeers.TheSovietUnioneventuallyrealizedthattheprotpotentialfromsellingdirectlytothemarketwasenormous.Addingtothistheneedforforeigncurrencyand,morerecently,thepoliticalturmoilfollowingthebreakdownoftheformerSovietUnion,thecartelwasonceagainputtotheline.Inearly1984,Antwerp{Europe'smainclearingmarketforpolisheddiamonds{was oodedbyhigh-qualityRus-siandiamondsatalowprice.Diamonddeal-ers,whohadonlyjustrestoredtheircon-denceinDeBeers'abilitytodisciplinethemar-ket,werethrownintoastateofconfusion:Shouldtheycontinuepurchasingfromthecar-tel?ShouldtheybuypolishedRussiandi-amondsatasignicantdiscount?Diamondsuppliersweresubjecttoasimilardilemma:shouldtheycontinuesellingthroughDeBeers,orshouldtheyfollowtheRussians?DeBeers, 4Ocialrelationshipsbetweenthecountrieshadjustbeenstalledthatyear,sotheexistenceofsuchagreementswouldhavepresentedamajorembarrass-mentforbothparties,whichiswhytheyconsistentlydenieddealsofanysuchkind.meanwhile,su eredfromseverecutbacksinprots;quickactionwascalledfor.Eventually,theSovietUnionrejoinedthecartel,thistimeinanocialwayandatwhatindustryparticipantsbelievedtobesubstan-tiallyimprovedconditions.Inparticular,De-BeersguaranteedRussiaasteadyin owofforeigncurrencybybuyingallofthelatter'soutput,notapercentageofDeBeers'deter-minedtargetoutput.ThisfreedRussiafromthetaskofndingbuyersforthevastquanti-tiesitwasproducing.Fortheremainingman-ufacturers,Russia'soutbreakimpliedaverywelcomesidee ect:DeBeers'positionwassoprofoundlyunderthreatthat,in1985,thecompanywasforcedtoo eritsfaithfulsup-pliersapriceincreaseof7.5percentinordertokeepthemfromjoiningforceswithRus-sia.Forthersttime,DeBeersdidnotpunishmutinyinitsranks,partlybecauseRussiawasnotformallypartoftheircartel,partlybe-causeRussiawastoostrongacompetitortoplayhardballwith.Incontrast,dealerswhohadboughtRussiangemsduringthatperiodweredeprivedoftheirsightsandmadetopayfortheirwrongdoings.Theindustrywaspuz-zledastotheRussians'longtermgoals:Ifthegovernment,whowasoverseeingthediamondoperationsthroughKomdragmet,theCom-mitteeforPreciousGemstones,wasmerelyinsearchforhardcurrency,thesurvivalofthecartelcouldbesecuredsimplybyo er-ingthemfavorablecreditdealsandguaran-teedpayments.Ifontheotherhandtheyweretoabandonthecartelaltogetherandestablishanalternativemeansofdistribution,nocon-cessionwouldbesucienttomakeupfortheenormousprotstobemadebyreplacingDe-Beers.Bythemid-1980s,anunsteadyequilibriumhadbeenachieved:Thetermsfordiamondmanufacturershadbeennotablyimproved,theRussianswerebackunderDeBeers'um-brella,anddiamonddealerswereexpectingthenextmovebyeitherofthesides.InOctober1987,investingindiamondsbe-cameanattractiveoptionagain.Thestockmarketcrashdecreasedcondenceinpaperin-vestments;accordingly,demandfortangibleassetsincreased.DeBeers,inneedofnancialrelief,tookfulladvantageofthissituationbyrepeatedlyraisingpricesatitssightings,whileatthesametimediscouragingthepurchaseofdiamondsforinvestmentpurposes.Onceagain,dealersdisregardedDeBeers'warnings4 petroleumandminerals.WhileDeBeershasurgedBHPtosellitsoutputthroughtheCSO,BHPfearsthatthismighttriggeraninvestiga-tionbytheUSanti-trustauthorities.Infact,thelatterhaveformanyyearsattemptedtotakeontheCSO'snear-monopoly.However,thefactthatDeBeers'operationsarealllo-catedoutsideofUSterritorymakesthemim-munetoanti-trustlegislation.NegotiationsbetweenBHPandDeBeersarestillunderway;productionisscheduledtostartin1999.Russia,PartIITheearly1990sforcedDeBeersandtheRus-siandiamondindustryintoanuneasyalliance:DeBeerswasawarethatRussiawasthesin-glemostpowerfuloutsidememberofthecar-telandwouldthereforehavetobecourtedtobekeptinthecartel.Russia,ontheotherhand,wasindireneedofcreditandhardcur-rency,withtheironlycrediblesecuritybeingtheirvastsupplyofdiamonds.Bydestabi-lizingtheindustry,theRussianswouldhavehurtthemselves.InJune1993,inprepara-tionofaloanproposaltowesternbanks,theRussiansdisclosed,albeitunocially,thesizeoftheirdiamondstockpileasbeingabout200millioncarats,whichwouldbethelargestdi-amondtreasureintheworld.Thisdisclo-sure,togetherwithCSO-likesightingsheldbytheRussians,signalledtoDeBeersthatRussiahadthepotentialtoformadistributioncartelsimilartotheCSO.Ontheotherhand,itisnotcleartheRussianswouldmanagetostandontheirown:\withoutaguaranteefromDe-Beerstobuythestones,Russiacanndnolenderwillingtotaketherisk."7The1990agreementbetweenRussiaandDeBeerswastoexpireinDecember1995.Russia,afterhintingthattheirstockswouldenablethemtorunaparalleldistributionchannel,furtherdemonstratedtheirpowerby\leaking"alargefractionoftheirownstonesintothemarket.UnocialsalesthroughchannelsotherthantheCSOwereestimatedat$800m,ascomparedto$1bnsoldtotheCSO.Understandably,Russiaexpectedan-otherimprovementinthetermsitiso eredbeforeitstoppedfromfurther\demoralizingtheindustry;"8accordingly,itformulateditsnewdemands:Anincreaseintheshareof 7Diamond-backedloanproposal,EastEuropeanMarkets,February4,1994,p.10.8SundayTimes,December10,1995.CSO'ssales,higherprices,andaseatonCSO'sboard.DeBeersfeltthatthesedemandswereabsolutelyunjustiedforadiamondproducingnationthat,despiteitslargestocks,wasbe-lievedtoberunningoutofdiamondsandwasingreatneedofforeigncash.Consequently,DeBeerswasinnomoodtoyield,inpartalsobecausethecompetenciesontheRus-siansidewerenotclearlydened.Komdrag-metandAlmazy-Rossi-Sakha(ARS)arethemajorplayersintheRussiandiamondindus-try:Komdragmetownsthestockpile,whileARSowntheminesandcontrolsdiamondproduction.Eachplayerpursuesadi erentgoal:KomdragmetrepresentsStateinterestsandisinterestedinsecuringforeigncashin- owssoonerratherthanlater;ARS,inturn,hasaninterestinkeepingdiamondpriceshighandsupplieslimited.Thethreepartiescouldnotreconcile,andnally,in1996{forthersttimesince1957{,RussiandiamondproducersandtheCSOdidnothaveajointmarketingagreement.Thepreviousagreementwasmaintainedonaninformalbasisforanotheryear,duringwhichRussiaremaineduncommittedtotheCSOandcontinuedsellingmuchmorethantheagreed5percentoftheiroutputintheopenmarket.DeBeerslostitspatienceandannouncedtheendoftheagreementinDecem-ber1996.RussiasoughttoresumetalkswithDeBeers,realizingthatitsforeignreservesarehighlydependentonstablerevenuesfromdi-amondsales.AnAntwerpdealer,expressingthegeneralsentimentoftheunsettleddown-streammerchants,said:\Ifeveryonestickstothedealtheneveryonewins.Butifanyoneisstupidenoughtobreaktheagreement,theneveryoneloses."9RumorsofdecliningproductionatARS'mineinSakhaemerged.DeBeersandtheRus-sians,followinghigh-levelnegotiations,nallyreachedanagreement,essentiallyonDeBeers'terms.Notcontentwiththis,DeBeersbe-gantoundermineARS'authorityandthegov-ernment'stightgripontheRussiandiamondindustry.Intheircustomarilydiscreetstyle,DeBeersstartedbuyingacontrollingshareoftheLomonosovandVerkhotinadiamondelds,believedtobe\twooftheworld'srich-estundevelopeddiamonddeposits,"10muchtothedismayofthecash-strappedARSand 9FinancialTimes,October16,1997,p.28.10EconomistIntelligenceUnitCountryAlert,March12,1998.6