Mint Explainer: How delayed EU sanctions bring relief to Indian diamond industry

The postponement provides breathing space for major importers such as India and followed persistent lobbying efforts by Indian diamond companies and major players like DeBeers.

Mint delves into the intricacies of the proposed sanctions on Russian diamond imports by the EU and the implications for India’s diamond trade.

Why did the EU decide to impose sanctions?

On December 6, 2023, the Group of Seven (G7) leaders agreed to implement import restrictions on non-industrial diamonds from Russia, originally set to start on 1 January, 2024. These curbs were part of the EU's 12th sanctions package aimed at cutting off a significant revenue stream for Russia, estimated at EUR 4 billion annually, with about EUR 1.5 billion stemming from imports into the EU.

The sanctions, following the war in Ukraine, specifically target diamonds controlled by Russia's state monopoly, Alrosa. Previously, Russian diamonds could be processed in third countries, such as India, and then legally re-enter the G7 markets. To close this loophole, the new measures include stringent certification and tracing requirements to verify the origin of diamonds, effectively excluding Russian diamonds from international trade routes.

What does the deferring of sanctions mean?

The EU has provided a reprieve for Russian diamond importers, including India, by extending the deadline for compliance with their sanctions package to 1 March 2025. Initially, rough diamonds weighing one carat or more were slated for import bans from 1 March 2024 to 31 August 2024. Stricter restrictions were set to take effect from 1 September 2024, lowering the weight threshold to 0.5 carats, significantly impacting India.

This extension, known as a 'sunshine period,' allows industry stakeholders additional time to implement a comprehensive traceability scheme for imported rough and polished natural diamonds.

The EU also refined its import ban on Russian diamonds to include exemptions to minimise disruptions in the diamond trade. For instance, diamonds already within EU borders or located in third countries (excluding Russia) prior to the ban's enforcement are exempted. Additionally, diamonds that have been polished or manufactured in third countries are exempted.

Moreover, the package permits temporary imports or exports of jewellery containing Russian diamonds, facilitating activities such as trade fairs or repair services without violating sanctions. This flexibility aims to support uninterrupted international commerce in the jewellery sector while ensuring compliance with EU regulations.

Why is the deferring of sanctions a relief?

The postponement of sanctions has brought significant relief to the Indian diamond industry, which heavily relies on imports of Russian diamonds. It gives the industry time to adjust to the new regulatory challenges, particularly logistical hurdles, and provides an opportunity for further negotiations with the EU and G7 to find a balanced approach amid the sanctions.

The sanctions have already resulted in delays and financial pressure for Indian companies, significantly impacting the country’s diamond exports, which declined by 27.6% in FY24, according to provisional data from the Gem and Jewellery Export Promotion Council (GJEPC). 

Previously, India sourced about a third of its rough diamonds from Russia, which accounted for about 30% of the global supply. However, supplies from Russia have ceased due to the sanctions, leading Indian diamantaires to predominantly turn to DeBeers' trading arm, Diamond Trading Co., owned by Anglo American, the global mining giant.

Vipul Shah, chairman of GJEPC, expressed relief at the EU's decision, saying, "The EU has shown an understanding of the industry's needs. We are optimistic that continued collaboration with global stakeholders will lead to a more harmonised and stable regulatory environment, ensuring the ongoing prosperity of the diamond sector."

Shah highlighted the profound impact of these sanctions on India. 

"Approximately 1 million people are directly employed in cutting and polishing diamonds. With Russia accounting for about 33 million carats out of the global 120 million, a substantial portion of these jobs—30% to 40%—could be at risk due to potential shortages of raw materials. India, lacking its own diamond mines, depends heavily on imports to meet global demand, especially from G7 countries, which constitute 60% to 65% of diamond consumption."

Ricky Vasandani, CEO of Solitario, a lab-grown diamond company, emphasised that while the delay provides some relief, challenges remain.

"The EU-G7 sanctions will eventually expand to include diamonds as small as 0.5 carats, potentially affecting up to 40% of Russia's diamond output. This could lead to supply shortages and bottlenecks in the global diamond trade. Diversifying supply sources and embracing lab-grown diamonds (LGDs) may be necessary to ensure the industry's long-term viability. India has the capacity to scale up production of LGDs, which could support and maintain stability during this transitional phase."

Traceability scheme: Why is it a bone of contention?

The G7 nations plan to establish diamond traceability centres, known as rough nodes, in Belgium to prevent the sale of Russian-origin diamonds within their member-nations. Beginning 1 September 2024, Indian diamantaires will be required to send their rough diamonds to Belgium for verification, a move that is expected to increase their operational costs significantly.

Mint previously reported on India's stance against the G7's proposal to designate Belgium as the exclusive certification node for diamonds, favouring instead the setting up of a certification node within its territory. This approach aims to simplify the verification process and guarantee that diamonds exported to G7 nations are free from Russian origin. Major diamond processing hubs such as Surat and Mumbai strongly support this initiative.

The Mint report noted that the government has proactively formed a panel comprising officials from the ministries of external affairs and commerce, alongside representatives from the Indian diamond processing industry to negotiate with European authorities on this contentious issue, emphasising the country's commitment to safeguarding its diamond trade interests amid international sanctions.

Who led the negotiations?

The government, particularly the Union Commerce Ministry, has been engaged in negotiations to safeguard India's diamond trade interests. External affairs minister S. Jaishankar highlighted these efforts during a meeting with industry leaders in Surat in April.

"The Indian government has prioritised addressing the ban on imports of Russian-origin unpolished diamonds by the European Union (EU) and G7 nations, as it could severely affect our domestic diamond polishing industry," he said. “Prime Minister Narendra Modi has personally discussed this issue with leaders and sent me to countries like Belgium to engage on these matters."

GJEPC actively participated in the negotiations, proposing alternatives to the idea of making Belgium the sole certification node for diamonds.