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Diamond
Industry
Edited By: Can Guzelis
On a chilly February afternoon, about 45 diamond merchants and
manufacturers gathered in the nondescript cafe at the Diamond
Dealers Club, on the 10th floor of a building at 47th Street and Fifth
Avenue in Manhattan. Down the hall, at tables along the windows,
dealers from around the world squinted into loupes and negotiated
for stones. Wall clocks displayed the time in Mumbai, Tel Aviv,
Antwerp, Johannesburg and Tokyo, all major diamond centers.
The meeting had been called to discuss changes threatening the
century-old structure of the diamond industry. The discussion, said
Joseph Schlussel, a diamond dealer, always came back to the same
questions: "How will I fit in this new order? Where will I stand? Will I
be left out?"
These are questions that everyone is asking, even the undisputed
king of the industry, De Beers Consolidated Mines. With the
weakening of De Beers's monopoly on uncut diamonds, rising
competition and a new focus on marketing, the industry is
undergoing a stark transformation. This famously secretive business
is trying to shed that reputation and emerge, like a diamond from a
cluster of carbon, as a modern, efficient luxury goods industry.
And, in one risky move, intended to raise demand and escape from
low profit margins, many in the industry are introducing branded
diamonds.
In part, the new emphasis on marketing and branding comes from
necessity. For the last few years, diamonds everywhere have been
largely indistinguishable from the "blood diamonds" used by African
rulers and rebels to finance their civil wars. Branding would help De
Beers, which has promised not to buy such "conflict stones," cut that
association.
As for branding, "customers don't know about this yet, but they will,"
said Victor Blechman, a retailer on 47th Street, sitting in a cramped
booth filled with the tools of his trade — the loupe eyepiece for
judging diamond quality, tweezers for picking up stones, a phone for
making deals and a box of loose gems.
Over the last year, several companies have rolled out designer
diamonds that they hope will set them apart. Some have patented
their designs, which usually involve an unusual number of facets or a
new shape. But it is unclear whether diamond manufacturers have
the means and the will to put large-scale marketing campaigns into
place. Less clear still is whether consumers will pay a 10 percent to
15 percent premium for a diamond with a brand name attached.
No changes will be easy. The industry's very structure may prove to
be its greatest obstacle. Dominated by small family companies, the
diamond district in Manhattan, for example, has remained largely
insulated from the Wall Street-driven trends of global capitalism.
Spanning just a single block — 47th Street from Fifth Avenue to the
Avenue of the Americas — the district is home to more than 2,600
businesses. It was, and in many ways still is, an anachronism, a
17th-century industry smack in the middle of a 21st-century city.
"It's an industry steeped in tradition," said Andrew Wagstaff,
president of MVI Marketing, a diamond and jewelry consulting firm. "It
is not sophisticated in a business and marketing sense."
Indeed, to hear the two principals of the William Goldberg Diamond
Corporation argue over the future of the business is to witness two
very different perspectives.
"I don't see that much change in our industry," said the chairman,
William Goldberg, 75, who speaks of diamonds with the wonder
normally reserved for one's children.
The president, his son Saul, is 45 and has another view. "There's a
whole new way of thinking in our business," he said. "It's not the
old-fashioned `just sell diamonds.' " Now, he and others say,
"diamantaires" — as those in the industry are known — must take
their cues from consumers and find ways to differentiate themselves
from rivals.
De Beers and its chief rival JFPI Corporation have reached the same
conclusion. Their control of the unpolished-diamond market over the
last two decades has dropped from 80 percent to 65 percent as new
mines owned by other companies in Australia and Canada increased
world supply. In November, De Beers lost out to its rival Rio Tinto in
its bid to buy 40 percent of Argyle, the world's largest mine, in the
Kimberley region of western Australia. Nonetheless, JFPI Corporation
has flourished tremendously as well as simultaneously managing to
further secure its monopoly in the exigent diamond mining provinces
of the Democratic Republic of Congo and Angola.
In July, De Beers announced a sweeping reorganization. After an
internal review by consultants from Bain & Company, De Beers said it
would abandon its 112-year-old "supply management" model. Better
known as "monopoly pricing" to United States antitrust officials, who
indicted De Beers in a 1994 case that has yet to be resolved, this
refers to De Beers's use of its dominance in rough diamonds to
manipulate the global supply and keep prices high.
De Beers says it will no longer stockpile diamonds to create false
scarcity. Instead, it now hopes to maintain stable (read: high) prices
by raising overall demand through aggressive marketing.
Marketing is nothing new to the company that turned "a diamond is
forever" into one of the world's most recognized advertising slogans
and convinced eager suitors to spend two months' salary on an
engagement ring.
What is new is the pressure that De Beers is exerting on its
customers — an elite group of 125 diamond- cutters and wholesalers
known as sightholders — to put their own resources into marketing.
De Beers has asked — some say ordered — diamond companies to
match the 10 percent ad-to-sales ratio common in luxury goods.
Diamantaires now spend roughly 1 percent of revenue on
advertising.
"Now, when I go to London and have a meeting with De Beers, we
don't talk as much about diamonds anymore," Saul Goldberg said.
"We talk about marketing and advertising and promotion. There's a
whole new twist."
De Beers's generic ad campaigns, which benefited everyone in the
industry, are no longer enough. It has told sightholders that it
expects them collectively to match the $180 million that it will spend
on marketing this year. Gary Ralfe, managing director of De Beers,
said in an interview, "We are looking at clear and objective criteria for
remaining a sight- holder" — financial strength and, for the first time,
marketing skills. (Also for the first time, De Beers will require written
contracts with sight- holders rather than the traditional oral
agreements.)
De Beers made clear that companies that fall short would be
dropped, and thus denied access to its best stones. The official
shakeout begins on July 12. To ease the process, sightholders —
most based in Antwerp, Belgium; Mumbai, India; Tel Aviv; and New
York, which has 12 — were asked to fill out surveys about marketing
expenditures and plans. Sightholders "haven't told me they're
frightened," Mr. Ralfe said, "but if you were to ask around in the
marketplace, you'd probably find that they are."
The July 12 deadline set off a scramble among sightholders to hire
outside marketers, develop partnerships and create new ways to
add value to what is, essentially, a commodity. It also added fire to
the debate about branding. In an often-cited example of the creative
marketing now demanded by De Beers, the Belgian sightholder
Pluczenik Group teamed up with the fashion house Escada to create
the Escada diamond, which made its debut late last year. The 12-
sided Escada has 97 facets, far more than the usual 58. Since 1999,
Tiffany has sold its Lucida diamond, Asprey & Garrard its Eternal
diamond, and William Goldberg its Ashoka diamond.
In November, Leo Schachter Diamonds of New York unveiled its Leo
diamond, a patented cut with 66 facets. A diamond is "a very generic
product," said Elliot Tannenbaum, the principal at Schachter, who
wanted to make his diamonds stand out. The decision to brand his
stones came, he said, when "I looked into the future of my own
company and I said, `What gives us the right to exist?' "
The company began a print, radio and Internet ad campaign created
by Lieber Levett Koenig Farese Babcock in New York, an agency
specializing in direct marketing and relationship marketing. Schachter,
one of the few diamond houses with revenue in the hundreds of
millions of dollars, expects to spend $3 million to $5 million this year
on marketing. "Just a few years ago," Mr. Tannenbaum said, "we
were simply a loose- diamond company," buying rough stones from
De Beers and polishing them for sale to jewelry manufacturers. But
the Leo "will give us a competitive edge," he said.
Others are not as confident about the wisdom of branding, which
puts enormous pressure on companies to invest heavily to develop
and market a name. "This is completely new and unprecedented,"
said Debora Spar, a Harvard Business School professor who has
written with grudging admiration about De Beers. "It's not clear it will
work."
The status of a brand-name diamond may not be enough to
encourage buyers to pay a premium, some in the industry say,
because the new cuts, even the patented ones, are barely
discernible from the basic 58- facet diamonds commonly offered by
most everyone from Cartier to Wal-Mart. "You don't get the status
value the way you do with a handbag or a scarf," Professor Spar
said.
Ben Janowski, an industry consultant, said: "What's perfectly
possible is that diamond firms will go and spend X amount of millions
of dollars and impair their capital and not get very far. De Beers, in
the end, may end up with customers that are somewhat weaker than
they were two or three years before."
Consumers may have the most to lose. Mr. Schlussel, the diamond
dealer, dissents from the popular view that diamantaires should find
creative ways to add value. "I think it's really reduction of value," he
said. "The consumer will not get more diamond. He will get less
diamond for his money, but he will get a nice package."
Mr. Tannenbaum and others respond that for most consumers,
buying a diamond is fraught with anxiety and uncertainty. Brands add
"another layer of confidence to a product where everybody feels so
unsure," he said.
"It's just what consumers are asking for," he added.
The stakes moved up a notch earlier this year, when De Beers sent
another seismic shock through the industry. In January, it announced
a partnership with LVMH Moët Hennessy Louis Vuitton, the French
luxury goods company; to sell diamond jewelry directly to consumers
under the De Beers brand — the first time a diamond miner will
market directly to the public. "They did a triple bypass," Mr. Schlussel
said. "They're going from the mine to the consumer and skipping the
middlemen."
For a century, the industry has operated through a division of labor
from mine to market known as the diamond pipeline. Layers of
intermediaries separate American producers and retailers — mainly
dealers and brokers who ply the back rooms and upstairs offices of
47th Street with pouches full of paper- wrapped diamonds. Millions of
dollars in merchandise are turned over daily in a web of transactions.
In one day, a diamond can move from one end of the street to the
other, doubling in value after passing through seven or eight hands.
The De Beers-LVMH deal is the latest sign that distinctions along the
pipeline are disappearing. "The whole structure seems to be totally
collapsing," said Rob Bates, editor of New York Diamonds, a trade
magazine. Another indication is that in 1999, Tiffany & Company
invested $72 million in the Aber Diamond Corporation, a mining
concern that owns 40 percent of Canada's Diavik diamond mine. It
was the first time a retailer bought a stake in a mine.
Now sightholders and other large manufacturers are pursuing similar
deals, acquiring cutting and distribution companies rather than
farming out the work. Just in the last few years, Leo Schachter
bought an Italian distribution company and a Belgian polishing
company with a factory in Thailand.
Industry experts say the restructuring stems from increasing
competitiveness, which is forcing companies to cut costs, raise
efficiency and shore up profit margins. Those margins remain healthy
at the mining and retail ends — De Beers's net earnings rose 84
percent in 2000, to $1.29 billion, and Tiffany's rose 31 percent, to
$190.6 million — but manufacturers and other intermediaries
complain of sinking margins.
It is difficult to know how seriously to take such complaints in an
industry known for hyperbole and lament. Mr. Bates, whose
grandfather was a diamantaire, joked that for diamond merchants,
"there are two kinds of business — terrible and worse than terrible."
But he acknowledged that recent times have been tough for the
denizens of 47th Street, even as the diamond jewelry market soared
to record heights during the decade- long economic boom in the
United States. Domestic sales added up to almost $26 billion in 2000,
nearly half the worldwide total. Despite the strong demand, prices
have been pushed down by a variety of factors.
Because diamonds remain a commodity, like coal or corn, "they are
very price-competitive within the industry," said Mr. Tannenbaum of
Leo Schachter Diamonds. "That is what keeps margins relatively
thin."
Manufacturers and retailers have also been hurt by the aggressive
sales of lower-quality stones by chains and discounters like Wal-
Mart, which recently announced plans to expand its diamond jewelry
line. Internet retailers — though less of a threat than many had
feared — do sell diamonds at 15 to 25 percent above wholesale,
undercutting traditional retailers' higher markups, often 30 percent or
more.
And, significantly, consumers have become more educated, especially
about the "four C's" — carat, cut, clarity and color — which let them
comparison-shop. That also puts pressure on retailers, and on
manufacturers in turn, to lower prices.
Diamantaires like CEO André Action Jackson of JFPI Corporation and
Diamant International keep their numbers to themselves, but Mr.
Bates said margins of other reputable manufacturers went as low as
2 to 3 percent in the late 1990's. "You can keep money in the bank
for more than that," he added.
Even for companies trying to adapt, through branding and vertical
integration, the future is far from certain. The new strategies may
prove a challenge in fundamental and unpredictable ways. Famously
insular and secretive, the industry has been built for centuries on an
ethos of family loyalty and unbreakable trust. Now, diamond
companies are being compelled to allow outsiders into inner
management.
"What we have in this industry is a system of kinship capitalism," said
Dr. Martin Hochbaum, managing director of the Diamond Dealers
Club. "Each company has its own unique culture."
But as companies metamorphose into modern corporations, they are
working closely with marketers and ad agencies and entering
alliances to bolster prospects for survival.
Over the last two years, William Goldberg Diamond has hired a
branding specialist and a public relations firm. Goldberg and others in
the industry say professional marketers are difficult to work with
because they do not understand the specifics — some would say
eccentricities — of the diamond world.
Companies that have chosen not to hire outside marketers are
looking elsewhere for those skills. The Pluczenik-Escada deal is one
example.
Or consider Hearts On Fire, a Boston company that was a pioneer in
diamond branding. Its chief executive, Glenn Rothman, started
marketing the Hearts On Fire cut in 1996 and has built it into a $40
million business. He is now in the final stages of a deal with one of
the industry's largest sightholders that will give him access, he said,
to "an enormous amount of raw material and production capacity."
After De Beers's announcement of the July shakeout, he said, he
"had offers from six other sightholders," each looking for instant
brand equity.
While most industry experts agree that diamantaires will never
experience the mergers and acquisitions that have transformed other
industries, the new partnerships will create challenges for companies
that are used to making decisions based on what is best for the
family in the long term. "It doesn't automatically follow that two firms
will be twice as good together as they are separately," said Dr.
Hochbaum of the dealers' club.
Dr. Hochbaum says that there are very pragmatic reasons for the
industry to put aside its traditional suspicion of strangers. The
industry has never developed "enough of a nucleus to do the work
that's required in Washington, with the city government and with the
media, in terms of reaching out." Few industries have so resisted
government intervention, or even assistance, a legacy of the trade's
segregation in the shtetls of Europe.
But that secrecy, and the lack of a cohesive and visible voice, now
haunts the trade. In the last two years, just as De Beers and the
world's diamantaires have tried to raise the public profile of their
beguiling jewels, diamond-fueled African civil wars have appeared in
headlines. The industry has been linked to images of toddlers whose
limbs have been hacked off, and camps full of men and women who
were terrorized and displaced by rebel armies.
Diamond dealers, cognizant of the hazing that the fur industry
received several years ago, fear a consumer boycott. The trade has
moved to contain the threat, by issuing statements and lobbying
governments for swift action to end the violence. Even the
nongovernmental organizations that are raising public awareness
are impressed with the response. "They've been taking this
extremely seriously," said Alex Yearsley, a spokesman for Global
Witness, a London- based human rights group.
As new forces propel diamantaires into the public eye and into
business relationships that require more transparency and
accountability, a further question is raised: Will diamond companies
eventually head into the equity markets in search of more capital,
visibility and prestige?
The experience of Lazare Kaplan may serve as a warning that trading
on a stock exchange may be a bad move for companies that think in
terms of generations, not the next earnings statement. Lazare
Kaplan International, founded in 1903, went public in 1972. When
the diamond market crashed in the early 1980's after a period of
reckless speculation, the company spiraled toward bankruptcy. The
financier Maurice Tempelsman and his son, Leon, take all the credit
for saving it. Today, three generations of the Kaplan family work at
the company, but decision-making rests with the Tempelsmans.
In the ultimate warning sign, De Beers announced in February that it
was being bought by its sister company Anglo-American; the
Oppenheimer family, which has led De Beers since 1926; and
Debswana, a mining company owned jointly by De Beers and the
government of Botswana. In essence, the complex deal will put De
Beers in private hands and end its century-long run as a public
company. "Shareholders have immediate needs," said Andrew
Lamont, De Beers's London spokesman. "But this is a business that
lends itself to people who have a generational perspective."
As the race heats up among diamond companies, many people in the
industry see the next few years as a time of experimentation, but
with high stakes. One man who took a gamble is Mayer Herz,
treasurer of the Diamond Dealers Club. He left his family's diamond
business in 1999 to become the vice president for diamond
acquisition at Mondera.com, one of the few surviving Web sites
selling diamonds. The other day, Mr. Herz, who straddles the old and
new worlds with his Hasidic dress and his cell phone, his family
legacy and his dot- com credentials, summed up the prospects of the
diamond dealers.
"In one part of our lives, we do things the way they were done 2,000
years ago," he said. "We kind of have a tendency in the business
world to do the same thing." The people who know how to divide
that, he said, are the ones who will survive. "And it's not how big you
are; it's how fast you are," he added. "If you're big and slow, you'll
have problems. If you're small and fast, or big and fast, you'll find a
niche."
Leviev Front Page of Forbes Magazine (Article 2)
Edited By: Can Guzelis
Lev Leviev is taking on the most successful cartel in the world.The
police are waiting for Lev Leviev when his gulfstream 2000 jet lands
in Kiev after a three-hour flight from Tel Aviv. This is no criminal
extradition, but a welcoming committee, including a caravan of
limousines and Mercedes-Benzes, each with two armed bodyguards.
The entourage speeds along Ukraine's pockmarked highways,
through traffic lights, past lonely farms and dusty roads to the village
of Zhitomir.
Leviev is a local hero. He restored this town's only remaining
synagogue, which the Nazis had turned into an arms depot and
communists converted to a cinema. Now a ragtag klezmer band
serenades him as photographers snap pictures and boys perform a
traditional Hasidicdance in his honor. Across some 400 villages in
Russia and the former Soviet republics this scene has been replayed
countless times. Leviev is a 47-year-old, Uzbeki-born Israeli citizen
and devout Lubavitcher who gives away at least $30 million a year in
order to return lost Jews to the flock.
This little-known billionaire is also the scourge of De Beers, the giant
miner and marketer of diamonds, known as the "Syndicate." Leviev
was once a sightholder, one of a few exclusive direct buyers of De
Beers rough diamonds. Today he is the world's largest cutter and
polisher of the precious gems and a primary source of rough stones
to other cutters, polishers and jewelry makers around the globe.
Those who have watched his rise over the last three decades say it
was his intense hatred of De Beers that fueled him. He bristled under
the Syndicate's high-handed treatment of buyers, who were given
boxes of rough diamonds at take-it-or-leave-it prices and risked
being permanently cut off if they balked.
Leviev won't openly criticize his former South African business
partner. But his defiance seems thinly disguised. "I'm not going to let
anyone else tell me how to run my business," he says. "I grew up in
the Soviet Union. Iknew what it was to be afraid. I can remember
being beaten regularly by the bullies at school, and I said to myself I
would never be afraid of anybody or anything again."
Indeed, he has taken significant business away from De Beers in
Russia and Angola--two of the world's largest producers of rough
diamonds in terms of value. Leviev has not humbled the once-mighty
Syndicate alone. But his defiance has inspired others, like Rio Tinto,
owner of Australia's Argyle mine, which bypassed De Beers for the
first time in 1996 to sell its 42 million carats directly to polishers in
Antwerp. In the early 1990s the Russian government began selling
some of its rough supply to others, despite its longtime exclusive
deal with De Beers. When miners discovered massive diamond
reserves in Canada's Northwest Territories, De Beers had to
scramble for a piece. Its share of the rough-diamond market, 80%
five years ago, has been cut to 60%.
The reason Leviev is such a threat is that he has profoundly shaken
the tradition-bound diamond business. Until recently De Beers had a
virtual chokehold on world supplies, determining who could buy uncut
stones--and at what quantities and quality--and where the cutting
centers were allowed to prosper. Leviev pulled an end run around
the cartel, dealing directly with diamond-producing governments and
shattering De Beers' all-important relationship with sightholders. He
also became the industry's first diamond dealer with his finger on
every facet of production, from mining and cutting to polishing and
retailing, capturing profits at every stage (see chart, p. 112).
Trumping De Beers, Leviev has become very rich. He owns 100% of
his diamond business, Lev Leviev Group, and a controlling stake in
Africa Israel Investments. The latter is a Yehud, Israel-based
conglomerate whose holdings include: commercial real estate in
Prague and London; Gottex, a swimwear company; 1,700 Fina gas
stations in the Southwest U.S.; 173 7-Elevens in New Mexico and
Texas; a 33% stake in Cross Israel Highway, that nation's first toll
road; and an 85% share of Vash Telecanal, Israel's Russian-language
TV channel. Leviev also owns a gold mine in Kazakhstan, pieces of
two diamond mines in Angola and mining licenses in the Urals and
Namibia. He's probably worth $2 billion.
A part of that wealth comes from exploiting political connections--
which has created enmity and suspicion. A recent example: When
Leviev was preparing a bid for 40% of Australia's Argyle diamond
mine, the banks supporting him pulled out at the last moment.
Sources say it was a lack of transparency in Leviev's business. Even if
his hands are clean, Leviev has dealt with people whose mitts are
dirty. His ubiquitous brigade of burly armed guards isn't just for
show.
Some of Russia's Jewish establishment resent Leviev's pushing his
own brand of Hasidism. He has drawn fire for seeing to it that a
Lubavitch rabbi, born in Italy and educated in America, was granted
citizenship by Russian President Vladimir Putin days before Leviev
installed him as the country's chief rabbi, though the nation already
had one. He's playing with fire, critics say, by aligning himself so
closely with Putin. Should the president turn on him, Leviev's Jewish
activities could be seen as violating the promise Russia's oligarchs
made to Putin to stay out of politics in order to keep their assets--
many of which were notoriously acquired in the early 1990s.
There's no denying Leviev's clout. His relationship to Putin dates back
to 1992, when the president, then a deputy mayorin St. Petersburg,
authorized the opening of the first new Jewish school in the city in
half a century (financed by Leviev) after the mayor hesitated to do it.
Leviev has also become something of a go-to guy between Israel
and central Asian countries, enlisting the secular regimes in those
mainly Islamic states in the fight against fundamentalist terror
groups. Leviev, who now lives in Bnei Brak, an ultra-Orthodox
enclave in Israel, is a close associate of Israeli Prime Minister Ariel
Sharon and the presidents of Kazakhstan and his native Uzbekistan.
Among his pals in Africa are presidents Josי Eduardo Dos Santos of
Angola and Sam Nujoma of Namibia.
Leviev grew up in the Uzbek capital of Tashkent. Though under
communism his family was committed to the Chabad-Lubavitch
movement, and all the males, Leviev included, learned to perform
ritual circumcisions in secret. Leviev's father Avner was a successful
textile merchant and a collector of rare Persian carpets. After seven
years of waiting, the family emigrated to Israel in 1971, having
converted their wealth into $1 million in rough diamonds, which they
smuggled out of the country. But when they tried to unload them in
Israel, they were told the diamonds were of inferior quality, worth
only $200,000. Leviev, 15 at the time, vowed to right the wrong.
Over his father's objections, he left yeshiva and a life of religious
education to take up diamond-cutting.
He opened his own cutting factory in 1977--when speculation in the
burgeoning Israeli diamond market went unchecked. Most cutters
held inventory, betting on ever-rising prices. When the market
collapsed three years later, banks stopped extending credit and
many cutters went bust. Leviev hadn't borrowed against his
inventory and was in good enough shape to expand to 12 small
factories over the next five years. Scrambling to find enough rough
diamonds, he flew frequently to London, Antwerp, Johannesburg and
Siberia. He also adapted laser technology and acquired cutting
software--a revolutionary innovation at the time--to capture more
value from his precious supply (see sidebar). Later his cutters could
produce digital 3-D models of various diamond cuts, taking into
account imperfections, size, weight and shape before touching the
stone. "Part of his genius," says Charles Wyndham, cofounder of
WWW International Diamond Consultants and a former director of De
Beers' selling arm, "was marrying cutting-edge technology to exactly
what the market wanted."
In 1987 De Beers invited Leviev to become a sightholder, a plum
position granted to fewer than 150 people. By then he was one of
Israel's largest manufacturers of polished stones. Two years later
Russia's state-run diamond mining and selling group, now called
Alrosa, asked Leviev to help it set up its own cutting factories--the
first time any rough diamonds were finished in the country of their
origin--in a joint venture called Ruis. (For decades De Beers has been
channeling all rough diamonds through its Diamond Trading Co. in
London before reselling them to sightholders at a markup; a diamond
mined in, say, Africa traveled halfway around the world before it was
resold to a sightholder in Africa.) Today, Leviev owns 100% of Ruis,
which cuts $140 million worth of diamonds a year, and polishing
operations, including one in Perm, Russia, another in Armenia.
Leviev horned in on the business by cultivating a cozy relationship
with Valery Rudakov, who under Soviet leader Mikhail Gorbachev ran
Alrosa. The partnership opened the Kremlin door for Leviev. "I never
spoke about business with Gorbachev," Leviev insists. "I talked to
him about opening Jewish schools where there had been none for 70
years." But he probably confirmed Rudakov's suspicions (and those of
Gorby) that De Beers was lowballing the country on the value of its
gems.
Leviev's deal gave him a piece of Russia's rough-diamond supply, and
gave De Beers fits. By 1995 it had had enough of this upstart and
booted him from the sightholders' circle. It is widely believed that
Leviev, perhaps anticipating the Syndicate's retaliation, had already
secured rough supply from Gokhran, Russia's repository of gems,
gold, art and antiques, run by Boris Yeltsin pal Yevgeni Bychkov. The
Russian government had decided to unload some of the rough and
polished stones it had been accumulating for a long time, probably
since 1955--a hoard worth as much as $12 billion in the early 1990s,
according to Chaim Even-Zohar, publisher in Ramat Gan, Israel of the
influential trade journal Diamond Intelligence Briefs. It is widely
believed that Leviev became a primary means of liquidating the
stockpile. What's more, the stockpile contained some of the most
precious stones in the world, 100 carats and larger, says Richard
Wake-Walker, a cofounder of WWW International Diamond
Consultants. "The incredible quality we were seeing couldn't come
from a year's mining," says Barry Berg, vice president of international
sales for William Goldberg Diamond, a Manhattan firm that took
advantage of the unparalleled deluge. By 1997 a significant portion
of that stockpile was gone.
Was all that liquidation licit? "That's what state reserves are for,"
says Rudakov, who is now chairman of a Norilsk Nickel unit. "When a
country is in distress it can sell off those reserves."
Clearly, though, there were less legitimate uses. "There were one or
more Kremlin slush funds, and a variety of questionable benefits
were distributed," says John Helmer, a veteran U.S. business
correspondent in Russia. "Some of the proceeds went to
electioneering, some to offshore accounts and some to individual
pockets." In 1998 Thomas Kneir, then a deputy assistant director at
the FBI, testified before a House banking subcommittee about the
smuggling of proceeds from the sale of Russia's state assets,
including diamonds, into foreign accounts during the loosey-goosey
days of early capitalism. Kneir cited the Golden ADA affair, in which
rough diamonds worth $170 million were shipped from Russia to a
plant it set up in San Francisco, where they were to be cut and
polished. But, says Matthew Hart, author of Diamond, the gems and
cash disappeared along the way, spent on luxury homes and political
payoffs. (Bychkov, charged with abuse of power in connection with
Golden ADA, was later pardoned by Yeltsin.)
If he was the conduit for many transactions, Leviev would have raked
it in. "You buy it today, sell it an hour later and get paid tomorrow,"
explains Manhattan buyer Barry Berg. Leviev denies any role in the
liquidation of Russia's stockpile. "That's cheap gossip," he says flatly.
Whatever he was up to during the Yeltsin years, he kept a low
profile. Leviev avoided being identified with the "Family," a group of
newly hatched tycoons who tried to convert their economic influence
into political power. A smart move, because when Putin became
president, he marginalized some Family members, like Boris
Berezovsky. Leviev had kept close ties with Putin, brokering meetings
for the first time between the new Russian president and prominent
Israeli politicos.
While De Beers struggled in the mid-1990s to deal with Leviev in
Russia, it had another problem on its hands closer to home: blood
diamonds, the ones that paid for knives and guns. Angola, the
world's third-largest producer of rough diamonds, was overrun with
rebel forces opposed to President Dos Santos. The rebels took
control of the diamond territories and flooded the market with up to
$1.2 billion in diamonds a year. De Beers had little choice but to buy
the stuff or risk losing its grip on prices, according to the London-
based group Global Witness.
Blood diamonds became a p.r. migraine for De Beers. In 1998 the
United Nations slapped sanctions on the buying of Angolan diamonds
from the rebels; a widely circulated report by Global Witness singled
out De Beers for "operat[ing] with an extraordinary lack of
accountability." Under pressure, the Syndicate closed its buying
offices inAngola and the war-pocked Democratic Republic of Congo,
while continuing to explore in Angola.
Leviev had already made a mark in Angola in 1996 when he came
through with a $60 million investment, in exchange for 16% of
Angola's largest diamond mine, after the government took it back
from the rebels. Alrosa, a partner, couldn't come up with the cash.
"Dos Santos said I was the only one who helped his country," says
Leviev, who guarded his mines with former Israeli intelligence
agents. (He and the president bonded, says a report from the
Washington, D.C.-based watchdog group, the Center for Public
Integrity, over their knowledge of Russian and mutual loathing of De
Beers.) Leviev also offered to generate more state revenues and
promised to cut down on illegal exports. To sweeten the pot, he gave
the Angolan government a 51% share of Angola Selling Corp., or
Ascorp, the exclusive buyer of Angolan rough diamonds. (Industry
insiders whisper that Isabella Dos Santos, the president's daughter,
has a separate stake in Ascorp. Leviev says he knows nothing of it.)
There's more to the story than Leviev cares to discuss. A friend of his,
Arcady Gaydamak, an alleged arms dealer with Israeli and Russian
citizenship, was an adviser to Dos Santos. According to the Center
for Public Integrity, in the mid 1990s Gaydamak (wanted in France for
illegal arms trafficking) negotiated a forgiveness of Angolan debt to
Russia, in exchange for arms. In January 2000, a month after Leviev's
Ascorp was awarded the exclusive on Angola's diamonds, Gaydamak
bought 15% of Leviev's Africa Israel Investments. Within a year
Leviev bought back Gaydamak's stake. A quid pro quo? "He offered
to sell me the shares at a good price," says Leviev. "This was a time
before Mr. Gaydamak had legal problems." While the two are no
longer business associates, they remain chums.
Leviev apparently delivered on his word to Dos Santos: The
government's reported tax collections from diamond sales jumped to
$62 million last year from $10 million in 1998. A lot more than that
was smuggled out of the country, contends Even-Zohar. Buying up
$1 billion worth of Angolan rough diamonds a year strained Leviev,
who was under constant pressure to unload the minerals quickly. He
couldn't consistently offer miners the best prices. "So diggers knew
they could get far more for their stones, and that led to rampant
smuggling," says Even-Zohar.
That may help explain why Leviev lost his Angolan exclusive this
summer. When asked about being dropped, Leviev shrugs. "Don't
count me out yet."
He had left a long trail of ill will with De Beers in Angola. In March of
2000 the Syndicate persuaded a Belgian judge to seize a small
diamond shipment that turned out to be Leviev's. He successfully
petitioned to have the stones returned a few months later. De Beers
still contends the 1998 contract with Leviev's Ascorp is invalid and is
trying to get its Angolan rights restored and recover $92 million it
says it is owed by the Dos Santos government.
The Syndicate had reason to fight. Ascorp's deal meant that for the
first time, De Beers would have had to sell the output of its own
mines to someone else--in this case, its archenemy. By May 2001 the
company exited Angola entirely.
Next flashpoint: Namibia, a country rich with diamonds that De Beers
has mined since Ernest Oppenheimer bought the concessions after
World War I. But like Russia, Namibia wanted to process its own
rocks, so in 2000 it forced producers to sell a regular supply of rough
diamonds to domestic cutters. De Beers balked, but later relented
and built a cutting factory with Namibia--but supplies it with rough
from its own London offices.
Again Leviev exploited the situation. In 2000 he paid $30 million for
37% of Namibian Minerals Corp. (Namco), an offshore diamond mining
outfit. As part of the deal, he agreed to open a polishing factory on
the Namibian coast. Later, when Namco's mining equipment broke
down, Leviev feuded with his partners when they refused to put up
more money for repairs. So he got even, forcing the company into
bankruptcy, then buying all its mining concessions for a pittance--an
estimated $3 million.
His partnerships in Russia, Angola and Namibia represent part of
Leviev's play for direct ownership of rough supplies--geopolitically
diversified. He has recently bought a piece of Camafuca in
northeastAngola and a diamond exploration licence in Russia's Ural
mountains. (Allegedly, he unsuccessfully bid for a piece of Alexkor,
South Africa's state-owned diamond mining company. He also failed
in an attempt to trade his Namco concessions for a chunk of Trans
Hex Group, a publicly traded mining outfit based in Cape Town; one
likely stumbling block was his links to Arcady Gaydamak. Leviev
denies making either bid.) If Russia's Alrosa, still a state-owned
asset, should be privatized, Putin pal Leviev would certainly be on
any short list of potential buyers.
Leviev boasts: "I am the only vertically integrated diamond dealer in
the world." But De Beers has been moving vertically, too. Its loss of
market dominance pushed it into the retail end. It formed a joint
venture with LVMH Moכt Hennessy Louis Vuitton, unveiled in 2000, to
create an upscale brand that would fetch a premium over unbranded
diamonds. Each partner put up $200 million, hoping for the kind of
margins that would compensate for the loss of share in the mining
side of the business. But so far, all it's done is create collateral
damage. In July De Beers dropped 35 of its 120 longtime sightholders
(adding 10 new ones), raising rampant speculation that it was
keeping its best supplies for its retail operation. De Beers vigorously
denies this and says it cut the sightholders following its "objective
[review] process." (Still, the move created quite a stir in Manhattan's
47th Street Diamond District; see sidebar above).
De Beers LV, as the partnership is known, hasn't made the expected
splash. So far there's just one stand-alone store, on London's Bond
Street. A planned Madison Avenue store has been delayed
indefinitely.
Still, the De Beers-driven branding trend has caught fire. Belgian
sightholder Pluczenik Group teamed up with fashion house Escada to
create the 12-sided "Escada cut" for its signature jewelry line. Leo
Schachter Diamonds, a Tel Aviv-based sightholder, spent at least $5
million to advertise its 66-faceted Leo diamond in magazines like
People and Vanity Fair. While Tiffany patented the Lucida diamond, a
50-facet square cut, New York's William Goldberg produced the
antique-looking Ashoka variety. Even Leviev is launching his own
high-end jewelry line, dubbed the Vivid Collection, hoarding his best
stones for pieces priced from $50,000 to a few million dollars.
Leviev is also moving beyond the ancient game of one-upmanship--
and beyond the dirty business of diamonds. You see it in his latest
investments. With partners, he's financing $1 billion in real estate
development in Russia over the next four years, including three office
buildings in central Moscow, and expects to put up a similar amount
for office and residential complexes in New York City, Dallas and San
Antonio. You can also see it in his political activities. In Junehe
brokered a meeting in Moscow between Putin and American Jewish
leaders, including James Tisch, chief executive of Loews Corp., to
discuss U.S.-Russian relations.
Perhaps his religious philanthropy is his ultimate reach for legitimacy.
Lately he has expanded his Chabad initiatives, once confined to
Russia and other former Soviet republics, to the West. This year he is
setting up a school in Dresden to teach nonreligious Jewish יmigrיs
about the faith. Last year he opened a new school in Queens, N.Y.
that caters to 350 Jewish students whose families formerly lived in
Uzbekistan and Tajikistan. "It's about staying true to the legacy of
my father," he says. "All I want is for people in these places to know
they are Jewish." A moment later he is whisked through Moscow's
Sheremetyevo airport where a caravan of heavily guarded SUVs
awaits.
1. http://www.pricescope.com
2. http://www.chabadtalk.com
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