On June 24, 2024, the European Union (EU) announced the postponement of stricter sanctions on the import of Russian diamonds until March 2025. These deferred sanctions has had significant implications, particularly for the Indian diamond industry, which imports over 30% of its rough diamonds from Russia for cutting and polishing.
The deferred sanctions have provided temporary relief to the sector, allowing it more time to adapt to the impending regulatory changes. However, the ramifications of this decision extend beyond India, affecting both the European and global diamond markets.
The Context of EU Sanctions on Russian Diamonds
The EU’s decision to impose sanctions on Russian diamonds stems from the broader geopolitical tensions following the war in Ukraine. On December 6, 2023, the Group of Seven (G7) leaders agreed to implement import restrictions on non-industrial diamonds from Russia, initially set to commence on January 1, 2024. These measures were part of the EU’s 12th sanctions package aimed at curbing a significant revenue stream for Russia, estimated at EUR 4 billion annually, with about EUR 1.5 billion generated from imports into the EU.
The sanctions target diamonds controlled by Russia’s state monopoly, Alrosa. Previously, Russian diamonds could be processed in third countries, such as India, and then legally re-enter the G7 markets. The new sanctions aim to close this loophole by introducing stringent certification and tracing requirements to verify the origin of diamonds, effectively excluding Russian diamonds from international trade routes.
Implications of Deferred Sanctions on India
The postponement of the sanctions to March 2025 provides a crucial window for the diamond industry, especially for major importers like India. Initially, rough diamonds weighing one carat or more were to be banned from import starting March 1, 2024, with stricter restrictions lowering the weight threshold to 0.5 carats from September 1, 2024. This deferred sanctions decision allows industry stakeholders additional time to implement a comprehensive traceability scheme for imported rough and polished natural diamonds.
The EU’s refined import ban on Russian diamonds includes exemptions to minimize trade disruptions. Diamonds already within EU borders or located in third countries before the ban’s enforcement are exempted, as are diamonds polished or manufactured in third countries. Additionally, the package permits temporary imports or exports of jewelry containing Russian diamonds for activities such as trade fairs or repair services, supporting uninterrupted international commerce in the jewelry sector.
Benefits to Europe
For Europe, the deferred sanctions also provides several advantages. European diamond markets, particularly in countries like Belgium, which is a global hub for diamond trading, would have faced significant disruptions had the sanctions been implemented immediately. Antwerp, the world’s leading diamond trading center, relies heavily on the import and processing of rough diamonds, including those from Russia. By postponing the sanctions, the EU has allowed its diamond industry to adjust gradually, mitigating potential economic shocks and job losses.
Moreover, the deferred sanctions offers European regulators and businesses additional time to develop and implement effective traceability systems for diamonds. This is crucial for maintaining consumer confidence and ensuring compliance with international standards aimed at preventing the trade in conflict diamonds. The time gained can be used to refine and perfect the certification processes, thereby avoiding rushed implementations that could lead to loopholes or inefficiencies.
Relief for the Indian Diamond Industry
The postponement has been a significant relief for the Indian diamond industry, which heavily relies on Russian diamond imports. It allows the industry time to adjust to the new regulatory challenges and logistical hurdles, providing an opportunity for further negotiations with the EU and G7 to find a balanced approach amid the sanctions.
The sanctions have already caused delays and financial pressure for Indian companies, significantly impacting the country’s diamond exports, which declined by 27.6% in FY24, according to provisional data from the Gem and Jewellery Export Promotion Council (GJEPC). Previously, India sourced about a third of its rough diamonds from Russia, accounting for about 30% of the global supply. With the sanctions, Indian diamantaires have predominantly turned to DeBeers’ trading arm, Diamond Trading Co., owned by Anglo American, the global mining giant.
The Challenge of Traceability
A significant aspect of the sanctions is the requirement for a traceability scheme to verify the origin of diamonds. The G7 nations plan to establish diamond traceability centers, known as rough nodes, in Belgium to prevent the sale of Russian-origin diamonds within their member nations. Beginning September 1, 2024, Indian diamantaires will be required to send their rough diamonds to Belgium for verification, significantly increasing their operational costs.
India has opposed the G7’s proposal to designate Belgium as the exclusive certification node for diamonds, instead advocating for a certification node within its territory. This approach aims to simplify the verification process and ensure that diamonds exported to G7 nations are free from Russian origin. Major diamond processing hubs such as Surat and Mumbai strongly support this initiative.
The deferred sanctions will allow India to continue negotiating for a more favorable arrangement. Setting up a certification node within India would reduce costs and streamline the verification process, ensuring that Indian diamonds can continue to access the lucrative G7 markets without undue burden. This period of negotiation and adjustment is crucial for maintaining the competitiveness of India’s diamond industry on the global stage.
Economic and Social Impacts for India
The diamond industry is a significant contributor to India’s economy, employing approximately one million people directly in cutting and polishing diamonds. With Russia accounting for about 33 million carats out of the global 120 million, a substantial portion of these jobs could be at risk due to potential shortages of raw materials. India, lacking its own diamond mines, depends heavily on imports to meet global demand, especially from G7 countries, which constitute 60% to 65% of diamond consumption.
The deferred sanctions decision helps safeguard these jobs in the short term. It provides the Indian government and industry players with a window to explore alternative sources of rough diamonds and to ramp up the production of lab-grown diamonds (LGDs) as a viable substitute. The Indian diamond industry has the capacity to scale up LGD production, which could support and maintain stability during this transitional phase.
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Economic and Social Impacts for Europe
In Europe, the diamond industry is not just an economic sector but also a cultural and historical one. Antwerp’s diamond district, for example, is a vital part of Belgium’s economy, employing thousands and contributing significantly to the nation’s GDP. The postponement of sanctions thus helps to protect these economic interests and allows for a more measured transition to new regulatory standards.
The delay also benefits the broader European jewelry sector, which relies on a steady supply of polished diamonds for manufacturing and retail. By avoiding abrupt disruptions in the supply chain, the EU ensures that jewelry businesses can continue to operate smoothly, maintaining consumer confidence and market stability.
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The Way Forward For India
The Indian government, in collaboration with industry stakeholders, must use this period effectively to address the long-term challenges posed by the sanctions. This involves securing alternative sources of rough diamonds, investing in the growth of the lab-grown diamond sector, and ensuring that the proposed certification and traceability mechanisms are robust and efficient.
Furthermore, ongoing diplomatic efforts are crucial. The Indian government has already demonstrated proactive engagement with European authorities to negotiate a more favorable outcome for its diamond industry. Continuing these efforts will be essential to secure a sustainable and balanced regulatory environment that protects India’s economic interests while complying with international standards.
The way forward For Europe
For Europe, the focus should be on developing and implementing a comprehensive and foolproof traceability system for diamonds. The establishment of rough nodes in Belgium is a step in the right direction, but it must be complemented by robust oversight and transparent processes to ensure that no Russian-origin diamonds slip through the cracks.
Additionally, European regulators and industry players should continue to engage with their international counterparts to harmonize standards and practices. This collaborative approach will help in maintaining the integrity of the global diamond trade and in upholding consumer trust.
