The Diamond Guru: Vybornov Gets The Chop !

“Swarovski produces glass, but sells it as if it were diamonds. We produce diamonds, but sell it as if it were glass” : Alrosa’s Ex president Sergei Vybornov

Has one of The Three Industry Wild Cards been dealt a bad hand or will he be waiting to be reshuffled in the pack for a new game later ? Time will tell

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Sergei Vybornov Forced Out

Alrosa Top Seat
(July 13, '09, Edahn Golan)

Sergey Vybornov was fired by the chairman of Alrosa's supervisory board, the Alrosa president told the Russian daily Kommersant. He will likely be replaced by Fyodor Andreyev, senior vice president of Russian Railways and a recent appointee to the Alrosa board.

Controversial mining and rough diamond sales policies during the current economic crises may have caused the dismissal of Alrosa President Vybornov (above)Vybornov's confirmation to Kommersant that he is leaving the post as of July 13 ends many weeks of market rumors that he is on his way out.

"I am leaving the post of president of Alrosa as of July 13. This is the decision of the chairman of the supervisory board," Vybornov told the newspaper. Russia's Finance Minister Alexei Kudrin is chair of Alrosa's Board

It is not known what stands behind Vybornov's dismissal, however he recently led a financially challenging policy that raised many eyebrows in the diamond industry. With very limited sales since November – estimated at below $500 million – Alrosa continued to mine diamonds at a great cost.

Alrosa insisted on very high prices, some 20 percent above current market prices, and failed as a result to find buyers. Limited sales of about $384 million to the state repository Gokhran did not offset mining costs, nor provide the type of income to meet financial obligations to its lenders and credit providers.

The company is believed to hold on to a stock pile of diamonds worth nearly $1 billion.

"The collapse of the company's sales policy became the main reason for the resignation," Kommersant quoted an unnamed source on the Alrosa supervisory board.

Alrosa did not issue an official statement about the changes.

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VYBORNOV’S SWAN SONG — CLAIMS OPPONENTS OF HIS MARKETING PLAN COST HIM HIS JOB

By John Helmer in Moscow

After months of bluster, denials that his job was under threat, and attempts to intimidate reporting with phantom lawsuits, Sergei Vybornov has issued a lengthy interview to a Moscow reporter, in which he intimates that his ouster — made official by the Alrosa board last Friday — was the result of plotting by rivals in the Sakha republic, and among international and Russian diamond-buyers unhappy with Vybornov’s new marketing deals. The text of the interview was published in Kommersant in its July 13, 2009, edition.

Asked to say why he had left Alrosa, Vybornov said he had not quarreled with the Sakha President, Vyacheslav Shtirov, a former CEO of Alrosa, or with anyone else. Sakha sources claim that Shtirov, who had helped Vybornov take the CEO post away from Alexander Nichiporuk in February 2007, has been trying to oust Vybornov for more than six months. But that conflict, the sources have also claimed, has been subsumed by the deterioration of Alrosa’s financial position since the collapse of the diamond markets last autumn. An investigation of the company’s books by the Accounting Chamber, the state auditor in Moscow, was for a time blocked by Vybornov. The results of the audit have been classified secret, Chamber sources have told PolishedPrices.com.

The appointment of the Alrosa chief executive was for many years the prerogative of the Sakha region government, until the federal government in Moscow reasserted its power, and restructured the capital and shareholding of the state-owned company to reflect a majority for the federal government, and 40% for the Sakha region. The control stake is administered by the Ministry of Finance, whose minister chairs the Alrosa board. No decision to oust the CEO or pick his replacement can be dominated by the Sakha government or by Shtirov. The key decision-makers are the Finance Minister, Alexei Kudrin, who chairs the Alrosa board; and his advisor, a VTB banker named Otar Marganya. Neither has ever responded to direct questions about Alrosa personnel or policy issues.

According to Vybornov, he has negotiated long-term diamond sales agreements for a total value of $900 million. He claims the pricing formula in the contracts was “the price-list of the Ministry of Finance plus 17 %”.

Vybornov now says there are 15 such contracts. A month ago, Vybornov told a US newspaper that six contracts had been signed with the price set “at a midpoint between the peak last August and this winter.” Each contract, according to Vybornov, is for not less than $200 million, and for terms of 3 to 5 years. In Vybornov’s latest claim, the new contracts include Tiffany of the US; Dali Diamonds and Diarough of Belgium; and some unidentified Israeli companies. “We have begun with [the Belgian companies] for the simple reason that the Belgian government declared the granting of guarantees to the diamond banks for a total of $1 billion A bit later, this initiative got the [additional] support of the Flemish authorities, declaring guarantees for $250 million.” Vybornov said offers to buy from “ephemeral firms” for $10 million to $20 million in diamonds, “are not interesting”. Up to 40% of Alrosa’s total sales volume has been set aside, according to Vybornov’s scheme, for these long-term contracts.

After running a campaign against Lev Leviev, the leading Israeli diamantaire, whom Vybornov once accused of securing unusually favourable terms of purchase of Russian rough, Vybornov now says that Leviev “is now thinking over our offer”, implying there has been no deal yet with Leviev, or with Ruis Diamonds, Leviev’s Russian subsidiary.

Vybornov added that Smolensk Kristall, the state-owned diamond-cutting enterprise based in western Russia, had been offered the same long-term contract deal in April, Vybornov said; but had rejected it for being “expensive. And now the window of possibilities has closed. But their problem has been solved — they will buy their raw materials on the spot market.”

Vybornov said his new marketing scheme ran into “a certain discontent” from “the authorities of Yakutia”. He claims that they had become used to the 50-year old system of favouritism in pricing and selection of stones. “Now conditions for all are equal, and this causes irritation, especially among those whose participation benefitted from preferences earlier.” Attacking “home producers” for falsifying the extent of their domestic beneficiation and diamond cutting as a cover for rough purchases and exports, Vybornov claims they benefitted from “the artificial difference between the prices on the internal and external markets. Discounts in the home market reached 30 %. The company could not support someone’s private interests indefinitely.”

The 30% discount has also been charged by Vybornov’s powerful predecessor, Valery Rudakov, as the basis for Alrosa’s long-term sales contracts with De Beers’s Central Selling Organization. When Rudakov made that charge, he was the Deputy Minister of Finance in charge of the diamond sector and head of Gokhran, the state stockpile agency.

It is unclear from Vybornov’s latest statements what sales of diamonds have actually been made, or will be made this year under the contracts he says he has signed. Vybornov claimed that while he sees signs of market stabilization, it “is extremely important not to break process of stabilisation by the desire to sell more in the market.” He said the Russian government will ensure there will be no dumping of diamonds from the state stockpiles at Gokhran. This year’s arrangement for Alrosa to withhold diamonds from the international market, as well as the fall in diamond prices, will cut substantially the total revenues the company will expect. “Last year,” according to Vybornov, “the volume of our annual sales was estimated at $2.8 billion to $2.9 billion. From that [for 2009] I would gather $2 billion from the market, with the understanding that the largest part goes to the Gokhran.”

An international diamantaire told PolishedPrices.com that he believes there have been no sales under Vybornov’s agreements because the price is too high, and because the contracts he refers to are no more than frameworks for future transactions, not sale-purchase commitments. “The MinFin plus 17% price is good for Alrosa, but not for potential buyers,” the source said. “There is a big difference between contracts for $900 million a year and real transactions, because the contracts don’t provide guarantees for purchase for this or that exact price. The eventual sums of money can differ from those indicated in the contracts, so it’s too early to say exactly what sums of money will be spent.”

An other well-known industry source told PolishedPrices.com that the formula of “MinFin plus 17%” is 20% above the current market price. “Only suicidals would buy at that price”, he said, adding he does not believe that there are 15 long-term sale contracts. “Fifteen contracts! Who ever saw those contracts? Nobody! I don’t believe what he says.”

No question or answer relating to the state audit of Alrosa’s books was published.
by John Helmer - Monday, July 13th, 2009

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