Alrosa wins Gem of a ruling against Euro Commission

Alrosa wins appeal of EC ban on diamond sales to De Beers in European Court of First Instance sitting in Luxembourg

Moscow - 

The courtrooms of the pretty little Duchy of Luxembourg have heard some embarrassing testimony in recent years to allegations of Russian wrongdoing in business practice. But the Luxembourgeois Duke knows which side of his bread the butter is on. The corporate registration, accountancy, banking, and legal services, plus the wealth management business, on which the dukedom depends to polish its door-knockers and pay its street-sweepers, aren't about to upset the Russians.

But never before has a bench of European judges, sitting in Luxembourg, ruled so categorically in favour of Russians, as on Wednesday morning in case T-170/06.

According to the court's public statement, in the action brought by Alrosa, the state-owned diamond miner and number-2 producer in the world, an order of the European Commission (EC)  in Brussels to terminate Alrosa's export sales of diamonds to De Beers has been cancelled -- with prejudice.

The irony of the outcome is camouflaged, as the bureaucrats in Brussels get their come-uppance for having infringed the contract freedoms of the Kremlin's property. According to the court's public statement, "the complete prohibition of all commercial relations between the two parties [De Beers and Alrosa] with effect from 2009 is manifestly disproportionate and that only exceptional circumstances, such as, in particular, the existence of a possible collective dominant position, would justify the extinction of the contractual freedom of the parties."

In case Brussels cannot bear to listen, the court's press statement repeats the point drily, if emphatically. "The Court also holds that the Commission merely accepted the commitments proposed by De Beers at face value, without looking for alternative solutions which might have better respected the contractual freedom of the parties." Alrosa had proposed alternatives; they had been ignored.

In a final poke at Euro-democracy -- what insiders know was a disreputable piece of conniving behind the scenes in January 2006 --  the press statement adds: "The Court holds that Alrosa had a right to be heard on the individual commitments proposed by De Beers in the proceedings initiated against the latter company alone. In the circumstances of the present case, Alrosa was not given the opportunity to exercise that right fully." 

The EC investigation of the diamond trade between Alrosa and De Beers began on March 5,  2002. That was when the two companies notified the EC that they had signed a trading agreement the previous December. That pact -- continuing a series of deals which began in great secrecy in 1957 -- provided for a five-year export value of $4 billion, or an average of $800 million per year. The two companies requested  EC clearance, according to the competition rules in force.

After protracted negotiations, while Alrosa executives believed they were agreed with De Beers on a common set of undertakings, De Beers moved on its own to propose zeroing out the trade altogether. That, according to the court's recital of events, occurred in January 2006. "The individual commitments proposed by De Beers provided for a progressive reduction in sales of rough diamonds by Alrosa to De Beers, the value of which was to go down from US$ 600 million in 2006 to US$ 400 million in 2008, and their subsequent discontinuance."

The EC adopted that offer in its ruling on February 22, 2006. Four months later, Alrosa appealed.

A year later, the court has decided that the Commission over-reacted by terminating all trade between Alrosa and De Beers. The text of the judgement says: "...discretion as to the choice of procedure to be followed does not relieve the Commission of the obligation to comply with the principle of proportionality when it decides to make commitments offered under Article 9(1) of Regulation No 1/2003 binding."

The Luxembourg ruling doesn't mince words -- "the Commission cannot, without going beyond the powers conferred on it both by the competition rules of the EC Treaty and by Regulation No 1/2003, adopt on the basis of Article 7(1) of that regulation a decision prohibiting absolutely any future trading relations".

The practical effect of this judgement is to allow Alrosa to negotiate once more to sell to De Beers, if it lacks other buyers at the price on offer.

If the EC had allowed residual trade from 2009 worth $275 million, the court said, "Alrosa would therefore have sold...  only 35% of the quantity of diamonds to De Beers that it had sold to that company in 2004. It would accordingly have been difficult for De Beers to influence the prices set by Alrosa, inasmuch as more than two thirds of the diamonds exported by Alrosa outside the CIS would have been sold at a price determined in negotiation with third parties."

"The Commission is thus forcing an operator which is not directly concerned by the proceedings initiated under Article 82 EC to work towards a change in the structure of the market for the production and supply of rough diamonds. Such a measure exceeds the powers of the Commission under Article 82 EC."

To come to this, after five years of investigation by the EC, is an extraordinary vindication for Alrosa. And curiously, it also helps correct a mistake which Nicky Oppenheimer and his two managing directors, Gary Ralfe until 2006, and Gareth Penny since, made, but have not conceded. For the EC ruling was so restrictive, it left no room for Alrosa and De Beers to agree on diamond projects together, neither on Russian territory -- De Beers' hope -- nor in Africa. When De Beers and Alrosa signed a memorandum of intention, saying they wanted to work  together last September in Cape Town, the EC ruling prevented them from doing so. 

Rubbing salt into the wound inflicted by the ruling on the EC's anti-trust regulators, the Court has ordered the EC to pay Alrosa's multi-million Euro costs of the appeal.

Today's appeal is confirmation of the strategy pursued by former Alrosa chief executive, Alexander Nichiporuk, who was heading the company when the appeal was filed on June 29, 2006. After his replacement in February, this year, the new chief executive, Sergei Vybornov, claimed he wanted to abandon the appeal, seeing no value to the company in the outcome. He has subsequently modified his remark, and has been quoted in the Russian media as saying Alrosa will decide if the resumption of trading with De Beers is in Alrosa's interest.

Before the ruling was issued, Vybornov had said "there is a weight of legal possibilities to continue work with De Beers if it wants to buy diamonds from us."  Alrosa had no official statement immediately after the Luxembourg news was released.

De Beers spokesman Lynette Gould commented: "We need to analyse the Statement from the Court of the First Instance in detail to assess the impact, if any, on our business.  It's too early to comment any further at this stage."

At minimum, according to the guidelines from the ruling, Alrosa ought to be free to sell at least $275 million, and perhaps as much as $400 million in rough per annum, from what would have been the cut-off period, starting January 1, 2009.

The ruling also gives Alrosa's management more time and flexibility in establishing the international marketing system it has been moving towards, both before and after the EC ruling. This factor is a fillip for those Russian diamantaires, inside Alrosa and outside, who believe De Beers intended to use the EC ruling, and its marketing muscle, to put Alrosa at a disadvantage after next year.

If that is what De Beers has been hoping, it has been frustrated, said an influential diamond manufacturer in Russia. However, he believes the ruling may work to De Beers' advantage, even if that wasn't the intention sought by Ralfe, the managing director during the negotiating period, and his successor since last year, Gareth Penny.  

"This decision is more important for De Beers than for Alrosa, as De Beers has had problems in its other markets, and is now in more need of Russia, than Alrosa is in need of De Beers. Alrosa could diversify its sales anyway."

SUBSCRIBE to Mineweb.com's free daily newsletter now.

SHARE THIS ARTICLE

Print story      Email story      Subscribe to free newsletter

Back