The EconomistSeptember 14th 2019 Business 672 Henry Oppenheimer, then chairman of De
Beers, travelled to Moscow and convinced
the authorities there to sell Yakutian dia-
monds secretly through a “single channel”
operated by his firm. That practice contin-
ued in one form or another until 2009,
when the euruled that it violated the bloc’s
competition rules. Since then Alrosa has
been signing long-term contracts directly
with gem wholesalers and retailers.
Mr Ivanov, who took over in 2017, has
pressed on with this process, which leaves
more money with the company by cutting
out the middlemen. More sensible still, on
his watch Alrosa is at last getting rid of
pointless Soviet-era appendages. The com-
pany was “a small country”, he quips, with
its own energy firms, farms, hotels and an
airline. Last year it sold some of these as-
sets for 31bn roubles ($463m). Mr Ivanov
has also improved financial transparency
and environmental standards. And when a
flood at Alrosa’s flagship Mirny mine killed
eight miners shortly after he arrived, he
tightened safety protocols.
Rich pickings
These changes pleased outside investors,
who have owned a third of the company’s
shares since its listing in 2013. So has Al-
rosa’s generous dividend policy: last year it
paid out all its free cashflow to share-
holders. The Russian federal government,
which owns or holds sway over the other
two-thirds (some of which is held by Yaku-
tia’s regional and local governments), has
allowed Mr Ivanov to go about his busi-
ness. It helps that Alrosa has avoided West-
ern sanctions like those placed on Russian
oil and metals firms. Last year it reopened
its office in America, which had been shut
since 2016 for “organisational reasons”. In
2018 revenue and gross operating profit
rose by 9% and 23%, respectively, recoup-ing the previous year’s losses, caused in
large part by Mirna’s shutdown after the ac-
cident. Alrosa’s market capitalisation
swelled by two-fifths between late 2017 and
the start of this year, to 770bn roubles.
Mr Ivanov’s clean-up was long overdue.
At last, says Boris Krasnojenov of Alfa-
Bank, a Russian lender, “we know what Al-
rosa is: a pure producer of natural rough di-
amonds.” Yet like other such producers, the
company faces challenges. Diamonds are a
precious commodity—but a commodity
nonetheless, and so subject to price
swings. A surplus of gems this year has de-
pressed prices, which are down by 6% so
far this year for rough stones. Polishers and
traders in India are finding it harder to get
credit as their economy sputters and the
rupee loses value against the dollar. All this
has weighed on miners. Alrosa’s sales in
the year to July were a third lower than in
the same period in 2018; its share price has
dropped by a quarter this year. De Beers has
stumbled, too.
Another threat comes from lab-grown
stones. Last year America’s Federal TradeCommission declared that they are, in fact,
diamonds. Although they currently repre-
sent just 2-3% of diamond sales, consul-
tants at Bain reckon that production is ris-
ing by 15-20% an year. At this rate
synthetics could shave 5-10% from demand
for natural diamonds by 2030. Last year the
boss of Dominion Diamond, another large
miner, left to start a synthetic-diamond
company. Trendsetters have embraced
them. Meghan Markle donned a pair of
synthetic-diamond earrings in her first of-
ficial royal appearance of 2019. Perhaps
seeing the writing on the wall, De Beers has
launched its own line of lab-grown jewel-
lery, called Lightbox.
Mr Ivanov has no such plans. Here, too,
he believes that provenance matters—and
that for many buyers the lab will never
truly displace the lithosphere. Future gen-
erations of buyers, Alrosa hopes, will view
Russia’s diamonds as they see its caviar,
vodka or ballet: timeless and pure. It is bet-
ting that investors reach the same conclu-
sion about its business model. 7Brilliant prospectingSource: Company reportsRough-diamond production, carats m2018 20190246810Alrosa De Beers Rio TintoPitted against the labP
orsche’s allureto car buyers is built
on the growl and scream of its internal-
combustion engines. That is why the firm
elected not to build the Taycan, its brand-
new all-electric model, at a spacious fresh
site but instead cram production into a plot
at its headquarters in Stuttgart, hemmed in
on all sides by suburban housing. Its boss,
Oliver Blume, explains that building the
Taycan next to the 911 will reassure custom-
ers that the new car will embody a sporting
image to compare with the model that
made Porsche famous.
Making a success of electrification is as
vital to Porsche as it is to Volkswagen
Group, its parent company, which also
launched the id.3, the first of a range of
electric vehicles, at the Frankfurt motor
show, which opened on September 10th. In
some ways, Porsche is a tiny cog in Volks-
wagen’s machine. It made 253,000 cars in
2018, out of 10.9m vehicles at vwas a whole.
And it will sell 20,000 Taycans a year, com-
pared with millions of idcars. But it makes
so much money for vwthat some investors
and analysts suggest only spinning it off
would recognise its true value.
Porsche is vw’s high-revving engine. In
2018 it accounted for 10% of the group’s rev-
enues and a staggering 30% of profits, al-
most what Audi, vw’s premium marque,FRANKFURT AND STUTTGART
Volkswagen’s sports-car brand leaves
the rest of the group in its dustPorscheProfit motor
1