The EU appears set on including prohibitions on the sale of Russian diamonds in its upcoming 12th package of sanctions against Moscow over its invasion of Ukraine. 

The move, aimed at exerting pressure on Russia's economy and depriving it of financial resources to wage its war, is certain to have an effect on Armenia's important and growing diamond-cutting industry. 

Whether that effect is negative or positive will depend on how the EU will manage the difficult task of tracing cut diamonds to their rough origins in Russia's mines. 

Helpful or harmful?

The proposed sanctions, adopted by the European Commission and awaiting approval from the EU's 27 member states, will apply to diamonds of Russian origin that are cut in third countries, according to the AFP, which viewed a copy of the document.

Starting January 1, the ban would apply to "non-industrial natural and synthetic diamonds as well as diamond jewellery" while the import ban on Russian diamonds cut or polished in third countries would be phased in between March and September, AFP said.

The bans will affect Armenia's diamond-cutting industry, which gets a large proportion of its raw gems from Russia. They are purchased by the Armenian state company Hay-Almast, which was established in 2021 chiefly to enable bulk procurements from Russia's Alrosa, which is one of the world's largest suppliers of rough diamonds. 

"The whole idea behind creating Hay-Almast was to consolidate domestic demand and procurement of Russian rough diamonds, as Alrosa doesn't do small orders," said Hay-Almast director Tigran Khachatryan. 

Khachatryan told Eurasianet that EU sanctions would definitely have an impact on Armenia's diamond-cutting industry, but he found it difficult to speculate how.

At first glance it's hard to imagine that impact being anything other than harmful, since, according to Khachatryan, Hay-Almast buys 30-40 percent of its rough diamonds from Russia (the rest coming from various other countries, including in Africa).

Armenia's diamond-cutting industry has grown by leaps and bounds in recent years, attracting major foreign investors like India's KGK Diamonds. And with that growth has come a growing need for Russian raw diamonds. 

Armenia's total export of cut diamonds in 2022 totalled $418 million according to Armenian Customs Service statistics. That's four times the number for 2021. Growth has continued this year, though not quite at the same pace: $240 million of cut diamonds were sold in the first six months of 2023. (Cut diamonds ranked third among Armenia's exports for that period, coming in behind gold at $281 million and re-exported cars at $311 million.)

But some are pinning hopes on the prospect that Armenian diamonds of Russian origin will not be identified as such. 

"The new EU sanctions could have various kinds of effects on the Armenian diamond industry," a source in the Armenian government told Eurasianet on condition of anonymity. 

"The whole issue is how strictly the movements of Russian rough diamonds around the world will be monitored and how it will be determined whether a diamond cut in Armenia or some other country is of Russian origin or not."

In this context, the export/re-export supply chain will be a factor. Most Armenian cut diamonds of Russian origin are first sold to the United Arab Emirates and then find their way around the world from there.  

Banking on re-exports

Armenia has already seen economic growth from booming re-exports over the last two years.

Since the start of Russia's full-scale invasion of Ukraine early last year, Armenia's trade with Russia has grown severalfold thanks precisely to re-exports of goods like cars and household items that Western producers had supplied directly to Russia before the war. 

Finance Minister Vahe Hovhannisyan recently acknowledged the central role played by re-export in the overall structure of Armenia-Russia trade. He said that while exports to Russia were up 215 percent for the first half of 2023 compared to the same period last year, re-export accounted for 187 percentage points of this growth while exports of Armenian products accounted for just 28 percentage points. 

Sanctions enforcement difficulties

As the AFP noted, the origin of diamonds can easily be obscured by mixing them with stones from other sources. And they change weight and appearance as they are cut and polished. 

This, coupled with the gems' small size, means it will be exceedingly difficult to enforce sanctions against their circulation. 

In the absence of a sophisticated tracking system, a diamond that is mined in Russia, cut and polished in Armenia, and exported to the UAE will be hard to trace to its origin, experts say.

So if, as seems likely, enforcement is weak, it's possible to imagine a boon for the Armenian diamond-cutting industry. As other markets close to Russian rough diamonds, more of them could enter Armenia, whose exports of cut diamonds would consequently go up. 

One could imagine this developing into a scheme resembling the one under which India purchases Russian oil, refines it, and then sells the resulting fuels onward to Europe.  

"Purely theoretically, we could see a growth in supplies of Russian rough diamonds to Armenia for processing and sale to other countries. But we must be careful, as this could be seen as another attempt by Armenia to help Russia evade sanctions," economist Armen Ktoyan said in an interview with Eurasianet. 

Ktoyan further noted that, while the diamond processing industry is showing impressive growth, Armenian businesses are not seeing much of the profit. 

"Most of the profit goes to international companies involved in moving and selling this product on global markets. So one should think long and hard before betting on growth in the inflow of Russian rough diamonds and making new investments in this sphere," he said. 

Mitigating risks

Meanwhile some in Armenia are focused on the risks posed by the sanctions and see a need to diversify the country's rough diamond importers. Doing so would protect the diamond-cutting industry from a rapid decline should there at some point be a total (and enforceable) ban on Russian rough diamonds. 

The industry already experienced a sharp drop in raw materials in the mid-2000s. At that time production and exports took a dive both because of stronger global competition and because of a strengthening of the Armenian currency, the dram, against the dollar and euro, which drove up the cost of exports

Tigran Khachatryan, the director of the state raw diamond procurement company, says Hay-Almast has been talking for several months now with a potential new supplier. 

He refused to say who it is but expressed optimism that a deal will be reached. 

"We are halfway there in our talks with the new supplier. We hope to have a result soon," he said.