Russian diamonds could soon be sanctioned — disrupting the global jewelry market

The seven most advanced economies in the world, the G-7, are discussing imposing sanctions on Russian diamond exports — a complicated measure that could potentially hike prices for the luxury commodity.

Russia’s diamond exports have largely been spared from international sanctions following Moscow’s full-scale invasion of Ukraine in February last year. That’s despite calls to the contrary from Ukraine and some European countries as well as several rounds of measures targeting the Kremlin’s energy exports, banks and oligarchs.

In 2021, Russia raked in roughly $4.7 billion from diamond exports, according to data from the Observatory of Economic Complexity. That made Russia the world’s eighth-largest diamonds exporter. Diamonds are not commonly traded like oil or gold, but they represent a large market that goes beyond jewelry. The stones are also used for drilling, dentistry, computers, among others.

Some countries — such as Belgium, which buys a significant amount of Russian diamonds — want a “global approach” to Russian exports, as opposed to an EU-specific measure, to ensure the sanctions do not disproportionately hurt them.

“The debate has been going on for some time because there is a clear risk that Russia could simply divert its exports to non-participating countries,” Edward Gardner, a commodities economist at Capital Economics, told CNBC via email.

“If sanctions were implemented in [a] way that made circumvention difficult, though, then we could see less Russian supply coming onto the market and higher prices,” he said.

The diamond industry in Europe is concerned about diverting the trade of stones to other markets, such as Dubai, due to the prospect of paying more for the commodity and failing to significantly dent Russia’s revenues from the trade.

As such, the G-7 is having conversations about how to use technology to trace the original source of the stones.

In March, the U.S. and the EU said in a statement that “Russia continues to earn billions of dollars from the diamond trade” and both “remain committed to imposing economic consequences on Russia for its unprovoked war in Ukraine.”

Hans Merket, a Belgium-based researcher on natural resources at the International Peace Information Service, an independent research institute, said sanctions on Russian diamonds were a matter of time. If it is not in the next package, then the one after that, he said.

European Commission President Ursula von der Leyen spoke Tuesday about an 11th package of sanctions against Russia, which is currently being debated among the 27 EU capitals, but she did not mention that diamonds would be featuring in this round.

Instead, the next set of measures will focus “on cracking down on circumvention.”

Among the several rounds of sanctions to date, the EU measures have targeted Russian oil, coal, banks, wealthy individuals and media — to name a few.

Tobias Gehrke, senior policy fellow at the European Council on Foreign Relations, a think tank, told CNBC that there are “a lot of problems” with sanction enforcement.

He said that so far measures against Russia have been “more punishment kind of sanctions.”

“No question Russia will remain able to fund the war for many more years,” Gehrke said, even if diamond sanctions are introduced.

The EU imported around 1.4 billion euros ($1.5 billion) of Russian diamonds in 2022, according to Europe’s statistics office. That was down from 1.8 billion euros in 2021.

Alrosa, a Russian mining and state-owned company, reported sales of rough and polished diamonds in January of 2022 of $325 million and spoke of “strong demand” for the commodity. The company has not published further results since then.

In April last year, the U.S. Treasury expanded previous sanctions on Alrosa. The U.K., Canada and New Zealand also adopted similar measures against one of the world’s largest mining companies.

European ambassadors on Wednesday debated further sanctions on Russia. Poland’s Ambassador to the EU Andrzej Sados said he will ask the executive arm of the EU why the draft proposal does not include diamonds from Russia, according to a spokesperson.