【Henan, China】EU Bans Russian Diamonds: Will China’s Henan Province Benefit?

Following the outbreak of the Russia-Ukraine conflict, the European Union has imposed multiple rounds of sanctions on Russia. Recently, five EU member states jointly proposed a ban on imports of Russian diamonds. According to data from the U.S. Treasury Department, Russia accounts for about 30% of the world’s rough diamond production, making it the largest diamond producer globally. In 2021, diamond exports brought Russia $4.5 billion in revenue, ranking among Russia’s top ten non-energy exports. Alrosa is Russia’s largest diamond mining and processing company, accounting for 90% of the country’s output. The company’s 2021 financial report disclosed annual sales of $4.16 billion and a net profit of $943 million. From an ownership structure perspective, the Russian federal government and local governments of diamond-mining regions hold significant shares in Alrosa.

After the conflict began, the U.S. government immediately imposed economic sanctions on Alrosa. However, this initial U.S. sanction showed leniency: it only banned the direct import of Russian rough diamonds. In reality, Alrosa primarily exports unprocessed rough diamonds, most of which are sent to India for cutting and polishing. Thus, India became a middleman. Alrosa’s rough diamonds are routed through India, processed into finished products, and then continue to be exported to markets like Europe and the Middle East. After a brief impact, by late August, Alrosa had largely recovered, with monthly diamond sales exceeding $250 million. The early U.S. sanctions were effective but not fatal. Now, Poland, Ireland, Estonia, Latvia, and Lithuania have jointly proposed a complete ban on imports of diamonds from Russia, aiming to deliver a decisive blow.

Russia has not commented, but Belgium is the first to express anxiety. This is because Belgium is a trading hub for diamonds in Europe. Antwerp, Belgium’s second-largest city, is Europe’s second-largest port, the world’s fourth-largest port, and the world’s largest diamond processing and trading center. Since the 13th century, with its excellent processing technology and sound management systems, Antwerp has become a global diamond trading hub. Even facing competition, over 70% of the world’s diamonds are still traded there. For a long time, the preferred destination for Russian diamonds has been Antwerp, Belgium. If the EU completely bans Russian diamonds, Antwerp’s diamond business will inevitably suffer.

To avoid losses, Belgium has been lobbying the EU to exclude Russian diamonds from the sanctions list. The question is, will the ban pass? So far, the EU has imposed seven rounds of sanctions on Russia. However, since its outbreak in February, the Russia-Ukraine conflict shows no immediate end, and Russia shows no intention of stopping. The EU is already in a difficult position, and an eighth round of sanctions seems inevitable. At this point, the “trump cards” of banning oil and natural gas have already been played, leaving the EU with few options left. The diamond industry, with $4.5 billion in annual exports, is a decent bargaining chip. Belgium’s concerns are reasonable but not entirely persuasive. The reason is simple: diamonds are not daily necessities; EU citizens can live without them. Moreover, to sanction Russia, the EU has even banned essential energy sources like oil and gas, so what are diamonds?

Even if Belgium agrees, the ban may not necessarily be implemented. This is because for the EU to implement a new round of sanctions, it must obtain the consent of all member states. Currently, some member states are unwilling to impose additional sanctions on Russia. For example, Germany, the EU’s locomotive, has consistently opposed stricter economic sanctions against Russia. Hungary shares Germany’s stance and has demanded the EU cancel all sanctions. The EU is indeed not a monolithic bloc.

Let’s explore a hypothetical scenario: if the EU bans Russian diamonds, Belgium and Russia will inevitably suffer losses. Who will benefit? The answer is China’s Henan Province. First, some industry background: in recent years, the supply of natural diamonds has been relatively tight. Data shows that global production of natural rough diamonds has been declining year by year since 2018. Over the next decade, production is expected to compound at a decline of 1%-2%. On one hand, natural diamond reserves are inherently limited. Currently, proven and economically viable diamond reserves are about 2.5 billion carats. At an annual mining rate of 100 million carats, they would be exhausted in 25 years. On the other hand, diamond mines are concentrated in the hands of a few major companies, and these oligopolies intentionally control output to maintain high prices and artificially create scarcity. In this context, if Russian diamonds are banned, global diamond supply would decrease by 30%. According to analysis by the Minister of Minerals and Energy of Botswana, a major diamond-producing country, this 30% gap is likely to be filled by non-natural resources (lab-grown diamonds).

What are lab-grown diamonds? Also known as synthetic diamonds, they are essentially synthetic diamonds, crystals manufactured in laboratories or factories through specific technologies and processes, identical to natural diamonds in appearance, chemical composition, and crystal structure. Lab-grown diamonds have no difference from natural diamonds in chemical composition, hardness, refractive index, and dispersion, but their price is about two-thirds cheaper. With their high cost-performance ratio, lab-grown diamonds have become the best substitute for natural diamonds. This, of course, presents an opportunity for Henan, the “world factory” for lab-grown diamonds. In 1963, China’s first synthetic diamond was produced at the Zhengzhou Research Institute for Abrasives & Grinding. Two years later, China’s first “hinged six-sided top press” was successfully developed in Zhengzhou. It can be said that in China, Henan has always led the development of the lab-grown diamond industry. Currently, Henan has formed a diamond industrial cluster integrating R&D, large-scale production, and sales of synthetic diamond products.

Zhecheng County in Shangqiu, Henan, an inconspicuous small county, is even known as the “Diamond Capital of China.” It produces an annual output of 6 billion carats of diamond micropowder, 1.5 billion carats of diamond single crystals, and 4 million carats of lab-grown diamonds. According to Bain & Company’s “2020 Global Diamond Industry Report,” in 2016, the retail price of finished lab-grown diamonds was about 80% of that of finished natural diamonds. Currently, the retail price of finished lab-grown diamonds has dropped to about 30% of that of finished natural diamonds. The major cost of lab-grown diamonds lies mainly in machine costs. With breakthroughs and improvements in machine equipment technology, the production cost of lab-grown diamonds is expected to decrease further.