The Rise and Fall of Diamonds

by Edward Jay Epstein

  The mine itself, which looked like any open-pit mine in South Africa, was far less deep than they had calculated. This meant that less ore had actually been taken from this mine since 1960 than De Beers had assumed, further deepening the mystery of how the Russians produced vast quantities of gem diamonds.

  The Oppenheimer party was next taken for a whirlwind tour of the treatment plant itself. They were "astounded," as Hawthorne put it, to find that the Russians did not use water to separate the ore from the diamonds. In all the other diamond mines in the world, centrifugal baths are used to remove the non- diamondiferous material. An engineer explained that because it is too cold during the Siberian winters to prevent water from freezing, the ore at Mirny was first crushed by machines to a standard size and was fed through a battery of X-ray sorting machines. As a kimberlite geologist experienced with pipe mines in South Africa, Hawthorne found this explanation difficult to understand. In the De Beers diamond mines, more than 99 percent of the non-diamondiferous ore was washed away by the centrifugal baths, and thus only a minute fraction of the ore had to be processed through the X-ray machines. If they separated all the ore from the mine by X-ray machines, the separations would require over a thousand Sortex machines and millions of volts of electricity.

  Hawthorne subsequently told me that he had not seen any of the Sortex machines or any evidence of power lines at the mine site. Moreover, judging from such standard mining parameters as the surface area of the open pit, the depth of the excavation, the height of the waste dumps, and the capacity of the earth-moving equipment and other machinery, he found it difficult to account for the vast quantity of diamonds that the Soviet Union had sold to De Beers. In 1978 alone, it delivered Some 2.5 million carats of gem diamonds-almost one-quarter of the world's supply.

  The enigma of the Russian diamonds became all the more perplexing when De Beers received fragmented reports about Russian advances in high-pressure physics. Even though the specifics of the Russians' progress remained clouded in secrecy, it had become readily apparent to everyone in the diamond industry by the mid-1960s that Russian scientists had developed the technology for mass-producing synthetic diamonds for industrial purposes. Russian factories, located mainly in Kiev in the Ukraine, began to churn out a wide variety of diamond grit and other abrasives, which were offered for sale to European dealers; at international conferences, Russian technicians claimed that they had developed synthetic diamonds ten times larger than had been produced in the West.

  In 1966, Henry Meyer, an English mineralogist attended a conference on crystallography in Moscow with Dr. Kathleen Lonsdale, one of England's foremost crystallographers, and a member of the Soviet Academy of Science. During the meeting, a Russian scientist told of the enormous progress the Russians had made in the field of high-pressure physics-including the construction of a hydraulic press some ten stories high-and offered to show the English scientists some crystals that had been produced in the laboratory. That afternoon, both Dr. Lonsdale and Dr. Meyer accompanied him to a research facility on the outskirts of Moscow where he produced a tray of some half dozen small, white gem diamonds, all perfectly shaped and weighing approximately a quarter of a carat apiece.

  Dr. Meyer, who specialized in analyzing the mineral inclusions in diamonds, closely examined the stones. They were not like any gem diamonds he had ever seen. The Russian scientist then explained that all these gems had been synthesized from carbon in a hydraulic press. He boasted that manufacturing gems was no longer a scientific problem in the Soviet Union but an economic one. Both English visitors were astounded at this casual disclosure. No laboratory in the West had come even close to synthesizing a gem diamond. (The General Electric breakthrough occurred later.)

  In Johannesburg, De Beers' scientists soon heard of the Russian breakthrough, but they assumed that Meyer and Lonsdale had merely witnessed a laboratory experiment in crystal-growing, rather than any sort of new invention of technology.

  The following year, however, there was further confirmation. Professor Bakul, the director of the Soviet Synthetic Research Institute in Kiev, recruited Joseph Bonroy, one of the finest craftsmen in Antwerp, to cut and polish some highly unusual Russian diamonds. Bonroy, who specialized in sawing distorted and difficult-shaped stones, found these diamonds particularly difficult to penetrate. He saw that they were gem crystals of excellent purity and nearly ideal octahedron shape, but as he studied them, he found that they all tended to have very unorthodox sawing directions.

  To assist Bonroy, Professor Bakul explained that all the diamonds, which weighed about one-half carat and were slightly tinted, had been synthetically manufactured In Kiev, He asked the Belgian cutter to keep secret the fact that the Russians had manufactured gem diamonds, since, as Bonroy later put it, "the hypersensitive diamond market would be rocked by news such as this."

  Bonroy found the solution to cutting the synthetic gems. When he completed the work, and polished and buffed the synthetic diamonds, they looked exactly like gem diamonds. Bonroy kept the secret of the Russian diamonds for four years. Then, in April 1971, he was asked to speak at a symposium in Kiev on the problems of cutting synthetic diamonds. Bonroy, concerned about the future of the diamond industry, asked Bakul whether the Soviet Union intended to mass-produce these synthetic gems.

  The professor pondered the question for a moment and replied that the Russians still found it economically unfeasible to synthesize gem-quality diamonds. It was, however, not clear from his answer what the conditions were under which the Russians would use this technology to manufacture diamonds.

  Even though the mysteries surrounding Russian diamonds were never fully resolved, De Beers succeeded in absorbing the constantly expanding production. Although at one point in the mid-1970s, it had to reduce its own production of diamonds from Namibia to accommodate Moscow's, De Beers gradually developed new markets for diamond jewelry in both Asia and America.

  The De Beers arrangement with the Soviet Union was only for uncut diamonds. The Russians had always reserved a small percentage of its production from Siberia for its own Jewelry manufacturing. In the late 1960s, these Russian-cut jewels began to appear in ever-increasing number in the grading halls of Antwerp. Cut and polished in Russian factories in Moscow, Kiev and Sverdlovsk, the diamonds were called "silver bears," and had some extraordinary features. To begin with, most silver bears were almost exactly the same size in girth, and weighed approximately two-tenths of a carat each. Moreover, each of them had the same octahedron shape, and they were nearly identically faceted and polished. It was almost as if, as one Belgian trader observed, the silver bears had all been cut from the same pattern.

  Initially, diamond experts in the West were baffled by the inordinate regularity of the silver bears. How could miniature diamonds that could fit on the tip of a pencil point be so identically matched in size, shape and cut?

  Louis Asscher, one of the renowned master cutters of Europe, attempted to resolve the question by microscopically examining a sample of silver bears. He had a lifelong experience with diamonds; his father, the third generation of the House of Asscher in Amsterdam, had re-cut the crown jewels for the British royal family in 1907, and he himself had invented and popularized the Asscher cut (the "brilliant cut" of a triangular diamond). When he studied the silver bears, he found that they all contained a similar striation mark on certain facets. He concluded that this tell-tale mark came from a machine, and he suggested that the Russians had invented an automated diamond-cutting machine that accounted for the silver bears.

  A number of master cutters in Antwerp took issue with Asscher. They found that the Russian cut on the silver bear was "too good, too regular, too perfect," as one of them put it, to be anything but the work of skilled human hands. The Antwerp experts theorized that the Russians had imposed draconian standards on their diamond cutters, and diamonds that failed to meet these criteria were simply ground to dust and used for industrial purposes. They recognized that in order to achieve such uniform diamo
nds, the Russians would have to sacrifice a considerable portion of the average "yield"-the weight of the finished gem-but they assumed this was a cost that the Russians were willing to pay in return for standardization.

  As the Russians vastly stepped up their export of silver bears to Europe, the concern over Russian cutting techniques was replaced with a much more urgent one about their marketing objectives. The Russian diamond-trading organization opened up offices in rapid succession in 1969 in Antwerp, Zurich and Frankfurt. Italy began offering large discounts to American manufacturers, who needed a uniform product for their inexpensive assembly-line jewelry. In addition, reports reaching western Europe asserted that the Russians were training thousands of new diamond cutters at a center in Kostrana, some 180 miles north of Moscow.

  The Russian trading organization itself conspicuously avoided releasing any meaningful data on the volume of its exports of polished diamonds to Europe. By 1970, however, diamond dealers in Antwerp reckoned that the Russians were putting at least a half million silver bears on the market each year. Manufacturers in Tel Aviv, as well as Antwerp, became increasingly apprehensive about these Russian diamonds. What they had first considered a novelty now seemed a threat to the very existence of their respective cutting centers.

  The Soviet Union already was selling polished diamonds. For example, one New York dealer, Fred Knobloch, told me that he had been invited to Moscow on several occasions to buy cut diamonds by Russ Almaz, the Russian diamond-trading company. In Moscow, he described being escorted to a glass skyscraper at 29 Kalinin Prospect, where he was ushered into an austerely furnished room full of diamond buyers from Asian and European countries. A Russian official then emptied a canister of some 1,500 small polished diamonds, all under a carat in size. The official explained that the rules were the same as those insisted upon in London by De Beers, there was to be no bargaining, and cash had to be paid in advance of delivery. When Knobloch agreed to buy the lot of diamonds on the Russian terms, the Russian official said-ill perfect Yiddish-"Mazel und Brucha," literally: "Good luck and blessings," the same phrase that is used to conclude a deal on 47th Street in New York, Tel Aviv or Antwerp. A few feet away, at another table, he heard another Russian official saying "Mazel und Brucha" to a Japanese buyer. He realized then that the Russians were as capable as De Beers in conducting an international diamond business-right down to giving the traditional Jewish blessings.

  In its public statements, De Beers desperately attempted to calm these fears in the trade. In its 1971 issue of the International Diamond Annual, it went to considerable lengths to explain: There has been no indication that the Russian authorities have the slightest intention of "dumping" their polished goods on Western markets. On the contrary, the Russian authorities appear to accept that the industry they have been at great pains to develop and establish would founder if the market for diamonds in the Western world were undermined or were not held in strong hands.

  In their private deliberations, however, De Beers' executives were far less certain as to whose "strong hands" the Russians wanted controlling the diamond trade. They certainly did not want to afford the Russians the opportunity of establishing direct relations with the American, Belgian, and Japanese wholesalers. If the Russians succeeded in bypassing the diamond distribution chain that De Beers had ingeniously devised over a half century, they obviously would be one step closer to taking over the diamond cartel from Dc Beers. The silver bear offensive raised a more immediate problem: the excess of silver bears had to be drained from the market and brought under control. De Beers therefore strongly encouraged a number of its own dealers to buy silver bears directly from the Russians and then, when market conditions were tight, redistribute them through their own marketing channels. The chief operative in this endeavor was Joseph Goldfinger, De Beers' man in Tel Aviv.

  Goldfinger had been born in Lithuania, and studied to be a rabbi at the Yeshiva before emigrating to Palestine in the mid-1930s. When the diamond industry began in Natanya during the Second World War, he trained as a cutter, and then began dealing in both uncut and cut diamonds. In 1949, he was invited by De Beers to attend their sight in London, and quickly proved himself to be both resourceful and dependable. Because the Israeli industry was expanding at a breakneck pace, De Beers needed a distributor in Israel who could shrewdly apportion its supply of melee diamonds among the hundreds of small manufacturers scattered around Tel Aviv. Goldfinger, who had demonstrated that he had both the requisite energy and judgment, was given a "dealer's sight" in 1962, which meant that he received diamonds not only for manufacturing himself, but also for redistributing to other Israeli dealers. By 1973, he was receiving up to $20 million worth of diamonds in his box at the London sights, and he had become De Beers' third largest client.

  With this enormous sight from De Beers, Goldfinger became known as "Mr. Diamond" in Israel. He became heavily involved in every phase of the Israeli diamond industry and built up a network of wholesalers of polished diamonds that extended from Tel Aviv to Hong Kong and Tokyo. When the silver bear crisis arose, Goldfinger was logically the man that De Beers turned to: Not only did he have the vast experience in marketing small polished diamonds but he had a very strong interest in preventing the Russians from making inroads into this market.

  The original plan, in 1973, was for Goldfinger to go to Moscow and to buy from Russ Almaz the selections of silver bears most in demand by American and Japanese manufacturers. Together with the uncut diamonds that De Beers was itself buying from the Russians, these purchases of polished diamonds would help reduce the Russian exports to Europe to manageable proportions.

  The Soviet Union, however, in deference to Arab demands for a boycott against Israel, preferred not to deal directly with Goldfinger. Instead, it was arranged that I. Hennig, the broker next to De Beers on Charterhouse Street, would buy the diamonds in Moscow for Goldfinger's account, and turn them over to Goldfinger in London. In early 1974, representatives of I. Hennig traveled to Moscow and were lavishly entertained by Dolnitsov, the head of AmRuz. The London brokers purchased substantial quantities of the silver bears for Goldfinger's account, effectively withdrawing them from the market. On a subsequent trip to Moscow, the brokers were surprised to find that Dolnitsov had been replaced by a more dour official. No explanation for the change was offered. The arrangement remained intact, though, and the brokers were able to arrange delivery of some $2 million worth of silver bears a month. These preemptive buys succeeded in stabilizing the polished diamond market.

  Even as De Beers extends its alliance with the Russians, it remains extremely vulnerable to any Russian policy change. For example, in 1980, the Russian trading company slashed its price without warning on its silver bears in Antwerp by 15 percent. To prevent prices from failing, De Beers compensated by distributing fewer such diamonds to its own customers. Like the Goldfinger preemptive buyout, this was, however, only a temporary expedient. If Russia continues to expand its own production of both uncut diamonds and silver bears, De Beers will be unable to stockpile or sell the increment-- or maintain the diamond invention.

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  The American Conspiracy

  Since the diamond invention was a mechanism for restraining competition in diamonds, it was in conflict with the anti-trust laws in the United States. The Sherman Anti-Trust Act states unambiguously that "any combination or conspiracy in restraint of trade" is a criminal offense in the United States punishable by fines and prison sentences. The Justice Department first became aware of the extent of the conspiracy to stifle competition in the diamond trade in the early 1940s, when the FBI conducted a series of interviews with American diamond dealers concerning their wartime supplies. It learned that De Beers systematically restricted production, fixed prices, and allocated markets, all actionable offenses under federal antitrust law. Even De Beers' largest clients confirmed these operations. Harry Winston, for example, acknowledged to federal investigators that it was "a most vicious system," and characterized De Beers as "
an outstanding monopolistic concern."

  In 1945 the Justice Department at last filed an antitrust case against De Beers and its associates. The court found that despite the evidence, it lacked jurisdiction. Since De Beers was a South African corporation that distributed its diamonds in London, and that the title for these diamonds changed hands outside the United States, the judge ruled that De Beers could not be held accountable under the laws of the United States. The Justice Department thus had to abandon the 1945 conspiracy case against De Beers.

  The legality of the diamond invention depended on De Beers maintaining a proper distance from its American customers. Yet the continued effectiveness of the invention required that it exert a measure of control, albeit invisible, over the crucial American market. This tension between the laws of the United States and the requisites of an international cartel forced refinements in the system.

  Some came abruptly. For example, in the fall of 1973, the owner of a well-known diamond firm in New York City found that Monty Charles, at De Beers' Diamond Trading Company in London, would not accept any overseas calls from him. Before the war, his father had dealt directly with Sir Ernest Oppenheimer, and for twenty years or so he had always discussed by phone with Monty Charles the diamonds his firm needed for the coming year. Never before had Monty Charles refused to come to the telephone. Finally, after days of placing transatlantic calls, and arguing with the soft-spoken operator at Number Two Charterhouse Street, he was put through. Without giving the owner any opportunity to talk about diamonds, Monty Charles warned him, "This is the last time that I or anyone else here will speak to you. Do not, under any circumstances, call here again."