MOSCOW — Alrosa, Russia's dominant diamond miner and the world's largest producer after De Beers, reports in just released financial statements that its diamond sales jumped 29% in 2004 to reach Rb77.95 billion ($2.8 billion). But the company has also disclosed that its diamond inventories -- unsold stocks of both rough and polished -- grew almost three times as fast to reach Rb9.19 billion in value ($331 million). In 2003, Alrosa valued its diamond stockpile at Rb5.25 billion ($178 million).

Although recently permitted by the Russian government to disclose carat volumes, Alrosa management has told The Russia Journal it "is not obliged to do so". No average carat value for the company's sales has been released.

Alrosa's annual financial statement, the company's seventh according to International Financial Reporting Standards, discloses that the company's quota from the Russian government for export of rough allows shipments at a carat volume equivalent to a value of $1.45 billion. The volume is fixed for five years up to 2008. De Beers remains the principal buyer of Alrosa exports, but its take is falling, and if a European Commission order is implemented unchanged, it must fall by an annual $500 million in value over the next five years.

The one-year export quota maximum for Alrosa's new Nyurba mine was equivalent to $93 million in value in 2004. The 2005 quota for Nyurba has been delayed by the government; company officials say their application is for a higher volume and value. Nyurba's output this year is expected to reach $512 million, company documents suggest.

However, Alrosa executives say that the sales figures for exports for last year show that actual shipments abroad fell below the allowable quota. Total diamond exports were Rb34.92 billion ($1.3 billion) in 2004, and included exports of polished goods from associated manufacturing plants. The rough diamond export quota for the same period allowed Rb42.82 billion ($1.5 billion), or 23% more than the sales than actually occurred, according to the financial report for the year. The difference appears to reflect the reported increase in stockpiling.

A company source explained what happened as "due to the following factors: an increase in the overall price of diamonds; an increase in the physical volume of trading stocks in carats (this was planned and reflected in our eurobonds offering circular); changes in the quality of stocked diamonds (we increased the share of high

grade diamonds and sold out the Indian range of diamonds)."

According to the company source, one reason for the fact that export volume was below the quota maximum was "heavy demand for rough diamonds from domestic polishers." According to the financial report, the ratio of export to domestic diamond sales by Alrosa remained constant in 2003 and 2004, with export value at 49.6% of total sales value in each year.

Release of the IFRS report, with auditor's notes by PriceWaterhouseCoopers, is the latest move by Alrosa to bring its reporting in line with international standards. The report also notes that pre-tax profit more than doubled from 2003 to 2004, hitting Rb19.9 billion ($717 million). After-tax profit was Rb12.1 billion ($437 million).

The report also indicates that a new debt issue of Euro-commercial paper (ECP), for no longer than a year, and for up to $300 million in value, has been launched this year. Company executives explain that the ECP programme "has a special task -- short-term financing of Alrosa's seasonal requirements, in particular, the purchase and shipment of goods to Yakutia from the mainland." $200 million of this has already been raised at a lower rate of interest than Alrosa's banks would demand. ECP, said a company source, "is a relatively simple transaction once you have already placed Eurobonds, and done the bulk of the work [for Eurobonds] with regard to disclosure."

On March 3, President Vladimir Putin signed an order lifting state secrecy designations from data on carats of Alrosa's mine production, reserves, mine recovery rates, export quotas, sales, domestic consumption, and company stocks. Exempt from this order, and still secret, are data on the carat volume and value of the state diamond stockpiles managed by Gokhran, an agency of the Finance Ministry. Recently, a Finance Ministry note was issued implementing the presidential decree.

However, Andrei Gusenkov, spokesman for Alrosa, says: "The finance ministry's note offers a legal possibility to publish data. But it's not an obligation. At the moment, Alrosa has no plans to publish information on reserves as well as on production and sales in carats."

In the past, when Alrosa sought export secured loans from international banks, the company arranged for carat data on its mines to be made available. This was done indirectly through estimates prepared by a Belgian geologist, Luc Rombouts. In October 2004, when Alrosa's Luxembourg affiliate offered Eurobonds to investors, the company provided letters from the Ministry of Natural Resources and Finance Ministry in Moscow. These certified that Alrosa's diamond reserves were enough "to enable Alrosa to extract over the next 25 years…[at] an annual average volume of diamonds at least as great as that extracted during 2003." The average carat size and quality of the rough was also certified as "not materially lower" than diamonds produced in 2003.

According to the October 2004 Circular, the regulations were about to change. Referring to last year's amendments of the state secrecy law – which paved the way for the March 3 presidential decree – Alrosa declared: "we believe that this liberalisation trend will create certain opportunities for our business. Based on discussions with officials of the Government of Russia, we believe that the Government of Russia will implement further diamond market liberalization reforms, and we intend to pursue additional opportunities resulting from such market reforms…"

Although the government officials, with whom Alrosa had been speaking, have told the company it can release carat data, Gusenkov told The Russia Journal: "the policy of Alrosa is determined by its shareholders indeed." On the other hand, "Alrosa doesn't have any particular decisions from its owners regarding the data declassification." He added that "it's possible that we would provide these data to certain investors within the framework of certain projects, but at the moment there is no need for that."

For the time being, there is no sign that the government disagrees with Alrosa on data disclosure. However, there are more serious pressures on the company from the government. At the start of this month, for example, i n a public statement issued by the Accounting Chamber, Russia's state auditor, Alrosa was accused of under-valuing or under-pricing the rough it exported abroad in 2004 and the first half of 2005 by about $600 million, leading to lost tax revenues of Rb1.6 billion ($56 million). The statement goes significantly further than a press report of the Chamber's audit, which was leaked to the press a week earlier.

In the Moscow press leak, initial findings by the Accounting Chamber were reportedly "corrected", and the Chamber's report cited for having found no infringements of a "systemic character". On July 5, Alrosa spokesman Andrei Gusenkov followed by telling Mineweb that problems identified in the report, prepared by auditor Victor Kosourov, were " caused by imperfection in the current legislation. The commercial practice of Alrosa does not contradict the legal norms. However, the conflict of regulations regulating the legislation leads to [critical] remarks during the checks. In this connection, the company management and members of the board have agreed on joint steps directed at overcoming the existing legal conflicts."

In the statement then issued by Chamber spokesman Andrei Belayev, the Chamber report directed the Russian Government to "the necessity for the differentiation of powers between the Russian Federation and Republic of Sakha(Yakutia) on use of state property." Comparing export and market prices, the Chamber concluded that the "list prices of the

rough diamonds, approved by the Ministry of

Finance, were considerably below market." The Chamber estimated the discrepancy in 2004 at about $400 million, and another $200 million in the first half of this year.

The Russian government has a regular system for testing market prices by auctioning small lots of diamonds through the Finance Ministry agency, Almazjuvelirexport. The results have generally come in with prices that are up to 30% higher than the export price-book agreed between Alrosa and De Beers's Diamond Trading Company. Valery Rudakov, once the most influential diamond policy-maker in the Russian government, used to identify this discrepancy to attack both De Beers and the Alrosa management for acting in cahoots. De Beers and Alrosa have replied that prices at the small-lot auctions are bound to be higher than long-term export sales. Other Russian diamanatires believe that both sets of prices have been rigged to provide off-book favours, and to discriminate against domestic cutters who have been obliged to pay more.

A source close to Alrosa believes the pressure n the company from the federal government will grow in the next few months. And he predicts that resistance by Sakha President Vyacheslkav Shtirov to implementing the federal management, marketing, capital, and related reforms could lead to his dismissal later this year. Last December, Shtirov promised at a meeting with President Vladimir Putin that he would not drag his feet on the reform measures. But, according to the source, he has reneged.