The business of Blood Diamonds: A historical perspective

The only traceable flow of smuggled diamonds into Arab hands ran from Christian traders of West Africa to Lebanon, then across the ceasefire line into Israel in defiance of the Arab League embargo against the Zionist state. Nonetheless De Beers hired a Lebanese storekeeper who put together a gang of thugs and petty criminals to ambush convoys of smugglers, steal their diamonds, and collect a reward of one third their value.
Despite this, rising nationalism and more smuggling made the company's position increasingly difficult. Eventually its holdings were opened to state-licensed miners and buyers. After the outbreak of civil war in Lebanon in 1975, the established Lebanese traders in Sierra Leone were joined by more Shi'a and by an influx of Israeli smugglers, eager to find a way, independent of De Beers, to feed Israel's enormous diamond-cutting business. For a time Sierra Leone became a scene of coup and countercoup in which Israel, South Africa, Iran, and the US manipulated clients. For De Beers the problems were complicated by developments in other alluvial producers whose rising output threatened the system by which it had long controlled the market.
Historically De Beers acted as buyer of last resort. With cooperation from the major producers, it took off the market surplus rough stones, including smuggled material, and then resold to selective cutters when particular subsets of the market began to heat up.
The key to control was the company's ability to carry a stockpile of several billion dollars "worth" - which also enabled it to dump selected types at strategic times to undermine any producer who tried to strike out on its own. Most major cutters were content to participate: the arrangement offered the security of steadily rising prices; and they could profit indirectly from the De Beers effort to convince the buying public that diamonds were "forever." But throughout the 1980s and into the 1990s, this strategy became harder to implement.
For a long time the diamond market had been a duopoly. De Beers purchased Soviet stones to commingle with others in a market-rigging ploy from which both sides profited. But in 1991 the Soviet Union disappeared, replaced by a Russia chronically short of foreign exchange and eager to establish itself as a major gemstone cutting and polishing centre. New producing frontiers opened in Australia and then Canada, in neither of which De Beers held significant direct ownership interest.
Alluvial mining spread farther in Central and West Africa, much of it in areas controlled by rebel movements and regional warlords who were harder to deal with than corrupt or thuggish governments. Meanwhile the world economy shifted from a generally inflationary post-World War II to a low- or zero-inflationary post-Cold War environment. In that context the De Beers stockpile ceased to be a good investment and became a drag on the company's share price. Just when things looked blackest, along came the uproar over conflict diamonds.
In 1998 the UN imposed sanctions on purchase of diamonds from the UNITA guerrilla movement in Angola. Hitherto all diamonds from Angola were to be accompanied by government-issued certificates of origin. This had the happy effect of creating work for skilled forgers and an opportunity for corrupt functionaries to commingle UNITA's with official stones. Citing difficulties of separating real from fake certificates, De Beers shut down all its buying in Angola. A short time later the UN imposed sanctions on Sierra Leone's gemstones, too. Congo Kinshasa, wracked by civil war, was next. Ambitious NGOs kept up the pressure while the diamond trade scrambled to placate consumer countries.
The campaign had an important public sponsor. When the Canadian government heard the word "diamonds," its eyes began to sparkle, thanks to the conviction that Canada might soon account for 15-25 percent of the world's supply of gem-quality diamonds, all, of course, certifiable as "conflict free." In some ways it was a replay of the Apartheid era, when Canadian (and Australian) gold-mining firms led demands to embargo South African gold, while the Canadian government, whose Maple Leaf gold coin was the main international competitor to South Africa's Krugerrand, heartily seconded the motion.
The last pockets of resistance to controls on conflict diamonds crumbled when, in 2002, the world learned that behind the traffic in "the world's most precious gemstone" stood the intensely ascetic Osama bin Laden. Apparently al-Qaeda had not simply been profiting from the traffic, but had rushed, after 9/11, to convert its assets into more easily hidden forms, including rough diamonds. Soon the UN demanded the ban not just of "conflict diamonds" but of all "illicit" stones. Member states and the diamond industry began negotiating conventions to shut out of the market not the 3 percent of the world's gemstones that came from conflict-ridden areas of Africa but the 15-30 percent (depending on the definition) that bypassed official marketing agencies. Smiling broadly in the wings was De Beers.
To the extent that the bans actually worked, their immediate impact was to open space for De Beers to unload onto the market identical stones from its own stockpile. That stockpile, long a drag on its finances, shot up in value, the shares of the company along with it. The drive to eliminate stones that had bypassed formal government monopolies (which almost always marketed through De Beers) enhanced the company's power. The changes in international rules came, quite conveniently, while De Beers was drastically revising its marketing strategy.
Instead of just specializing in the control of rough stones to the wholesale market, it decided to sell cut and polished ones to the retail trade. Instead of spending money to advertise diamonds for the market as a whole, it decided to promote its own brand name. It began to microprint diamonds for retail with its own logo and ID numbers as a supposed guarantee that the stones were "conflict free." The claim was bogus - once cut, there is no way to confirm a stone's origin.
But it gave De Beers an edge over competitors, few of whom would ever handle a "conflict diamond" but even fewer of whom would to be able to convey the same assurance. The logo also soothed a market spooked by the spread of sophisticated fakes, synthetics, or simulates. Not least, by downplaying the market stockpile business, De Beers hoped to ease its long-difficult relations with the United States, whose antitrust laws were a constant threat. These changes in commercial strategy were firmly cemented into place once the "al-Qaeda"-meets-conflict-diamonds tale grabbed the spotlight.
(To be continued…)