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Identifier
Created
Classification
Origin
04YEREVAN1662
2004-07-28 12:27:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Yerevan
Cable title:  

ARMENIA TRIES TO SQUEEZE VALUE FROM DIAMONDS

Tags:   ECON  ETRD  EINV  EIND  AM  RU 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
						UNCLAS SECTION 01 OF 02 YEREVAN 001662 

SIPDIS

SENSITIVE

STATE FOR EUR/CACEN FOR SIDEREAS, EUR/ACE FOR LONGI

E.O. 12958: N/A
TAGS: ECON ETRD EINV EIND AM RU
SUBJECT: ARMENIA TRIES TO SQUEEZE VALUE FROM DIAMONDS

UNCLAS SECTION 01 OF 02 YEREVAN 001662

SIPDIS

SENSITIVE

STATE FOR EUR/CACEN FOR SIDEREAS, EUR/ACE FOR LONGI

E.O. 12958: N/A
TAGS: ECON ETRD EINV EIND AM RU
SUBJECT: ARMENIA TRIES TO SQUEEZE VALUE FROM DIAMONDS


1. (U) Sensitive but unclassified. Please protect
accordingly.

--------------
SUMMARY
--------------


2. (U) While constituting only 5 percent of GDP, Armenia's
rapidly expanding diamond cutting industry attracts both
strong domestic attention and significant foreign
investment. Precious and simple to transport, diamonds
overcome Armenia's closed borders and high transport costs.
A history of diamond cutting, low wages, and a preferential
quota arrangement with Russia fueled early growth in the
diamond sector. Increases in diamond production have caused
a sharp, albeit specious, increase in Armenia's trade
numbers, and have proved a handy source of foreign currency.
On the other hand, the industry brings almost no tax revenue
to government coffers. The government is looking to a new
strategy to encourage diamond polishers to sell their
diamonds and thus take their profits in Armenia. Investment
by the diamond industry's heavy hitters suggests that
wholesale diamond sales could have a future in Armenia,
which would transform the industry from an expanding source
of jobs to a strong growth sector. End Summary.

--------------
DIAMOND CUTTING HERALDS GROWTH IN EXPORTS...
--------------


3. (U) Strong growth in the diamond cutting industry has
greatly expanded Armenia's external economy, despite having
little effect on its domestic books. Since 1998 exports of
diamonds have increased seven fold to nearly USD 378 million
in 2003 (imports of raw diamonds expanded from USD 45
million to USD 343 million over the same period). Exports
of diamonds accounted for 53.5 percent of all exports and
the continuing expansion of the inward processing diamond
industry pushed up overall exports and imports markedly,
causing trade to increase by 35 percent in dollar terms in

2003.

--------------
...BUT NOT GDP
--------------


4. (U) Despite large effects on Armenia's trade statistics,
diamond processing barely leaves a mark on Armenia's GDP, or

for that matter, tax revenues. The value added in diamond
polishing is low, from 5 to 10 percent, and most diamonds
are processed in Armenia and sold on low, cost-plus terms to
parent companies abroad. The diamond industry brings only a
couple million dollars per year in profit tax revenue, and
no VAT revenue as diamonds are exempted as an export
industry. Because Armenia captures so little of a diamond's
value added in Armenia, the sector's value to the Armenian
economy is in effect limited to the 5,500 jobs it provides,
with average monthly wages of USD 300.

--------------
SQUEEZING VALUE FROM A DIAMOND
--------------


5. (SBU) According to Gagik Mkrtchian, Head of the
Department of Gems and Jewelry at the Ministry of Trade and
Economic Development, the government is seeking to capture
more of the industry's value-added by encouraging wholesale
sales of loose diamonds in country. According to Mkrtchian,
his office has submitted a plan to create a diamond sales
center in Armenia that could be one-stop-shop for wholesale
buyers, providing a forum for the diamond factories to
exhibit diamonds and for buyers to secure necessary export
and Kimberley process documentation. While Mkrtchian's
plans are still abstract, Armenia's largest diamond factory
has put the same idea into bricks and mortar. On a recent
visit to the Shoghakn factory, owned by the world's largest
private diamond manufacturer, Lev Leviyev, the factory
manager showed the Ambassador a new building that has been
finished as a showroom for wholesale buyers. The manager
said they intend to bring sales of wholesale diamonds to
Armenia, operating from the factory showroom. According to
Mkrtchian, sales of finished loose diamonds could capture up
to 30 percent of the diamond's value added in Armenia.
While having little effect on the company's balance sheets,
moving sales to Armenia could have a great effect on
Armenia's books. While sales would be exempt for VAT tax
(diamonds are exempt until set into jewelry) any sales here
would be revenues recorded in Armenia on which the Armenian
incorporated subsidiary would have to pay profit tax.

--------------
BIG PRODUCERS LOOK BEYOND RUSSIAN SUPPLIES
--------------


6. (SBU) As the diamond sector expands in Armenia and the
industry's largest players expand their operations here, the
case for bringing sales here grows stronger. The ultimate
sustainability of Armenia's diamond sector depends on its
diamond firms becoming global players and less dependant on
waning Russian supply. No factor is more important to the
success of a diamond factory than ensuring a consistent
supply of raw diamonds. Of Armenia's 50 diamond-polishing
factories, few are large players who can secure supply lines
worldwide. The Aslanian family, partnered with the
prestigious diamond firm Rosy Blue, operates a diamond
factory in Lori province supplied from Belgium with high
quality diamonds from around the world. Lev Leviyev, an
Israeli (also a Russian citizen) billionaire from
Uzbekistan, procures diamonds for his Shoghakn plant from
various mines in Africa. The Diamond Company of Armenia,
owned by the British Ferfano Company, sources its production
of 8,000 carats per month from De Beers.

--------------
SMALL PRODUCERS LOOK THREATENED
--------------


7. (SBU) Armenia's smaller producers depend on a
preferential quota agreement with Alrosa, the Russian
diamond supplier. Each year the Russian government permits
export of up to 400,000 carats of rough diamonds to Armenia,
which are distributed among Armenia's operating diamond
factories. The actual number of diamonds received from
Russia is much smaller. In 2003 Armenian factories received
only 130,000 carats of raw diamonds from Russia, and they
have received 100,000 carats in the first six months of

2004. Shoghakn's general manager insists that Russian
supply is increasingly less important as prices are rising
and the quotas are unfulfilled. Mkrtchian added that many
of the smaller factories are now idle, and prospects for the
future of Russian supply are not good. As Russia moves to
accede to the WTO, Mkrtchian reminded us, it must end
preferential supply arrangements and Alrosa's quota system.
Mkrtchian concluded that the future of Armenia's diamond
industry depends on the leadership of the large diamond
producers.

--------------
COMMENT
--------------


8. (SBU) As the preferential supply of Russian diamonds
wanes, the future of Armenia's diamond sector depends on the
ability of the GOAM to encourage the big producers to expand
their Armenian operations and to consolidate efforts to
bring buyers to Armenia. The prospect of onward sales
present tempting rewards for tax revenue, and Armenia has
(rightly) chosen to tread lightly on the industry, exempting
diamond producers from the VAT hassles that burden other
exporters. Diamond companies can easily shift production
among their factories, and continued diamond-friendly tax
policy will encourage the big producers to expand and open
wholesale operations in Armenia.
ORDWAY