In the end of 2009, French bank Societe Generale released the report entitled “The Worst Debt Scenario” where it promised a terrible crash for the world economy within the nearest two years. The Frenchmen explained that all the “anti-recessionary measures” taken by the current governments were simply used to disburden private liabilities onto the backs of national budgets. Government debts and their ratios to GNPs became too great even for the richest countries. In the nearest two years the government debt of Great Britain will grow up to make 105% of its GNP, the same goes true for the United States and the Eurozone countries - up to 125%, as well as Japan - up to 270%. But these are only government debts.
 
If we take aggregate debts the situation will look much worse. Thus, the leading consumer of diamonds, the United States, has the following layout: its Treasury’s liabilities amount to $16 trillion; its corporate sector’s liabilities run at that much again; the debts of states and municipalities weigh $8 trillion; the household debts are over $13 trillion; the health insurance and retirement fund liabilities unsecured by reserves reach about $30 trillion. All in all it makes $80 trillion. The Americans should spend from $3 up to $5 trillion a year just to service this debt pyramid. Right now to service these debts the United States is shelling out one third of its GNP.
 
California as the most advanced state of America is displaying an ahead-of-time scenario of successive events: a technical default followed by introduction of monetary substitutes and job cuts plus beggarly survival.
 
Similar to the United States great financial problems are also harassing other industrial nations (only Germany may be considered as relatively well-off kept afloat by its powerful and competitive mechanical engineering, chemical industry and a number of other advanced industries).
 
So, a crash of the former financial system followed by hyperinflation turning to barter trade and transformation of the West into a semblance of the USSR in 1991 may not be a totally fantastic scenario. According to the Assay Chamber and Guild of Jewellers of Russia, consumption of jewelry during acute crisis periods in Russia decreased 3-4 times. In the mid-1980s, the USSR jewelry industry on the peak of its performance processed about 60 tons of gold earmarked only for internal consumption.
 
In 1990, the country’s gold consumption was 40 tons. After free prices were introduced in January 1992, demand slumped to its bottom. In 1993-1995, approximately 10 tons of gold products were made legally. About that amount of jewelry was derived from the secondary market and also brought in by petty businessmen or “shuttle suitcase traders” from low-grade foreign stocks. It means that from 1989 to 1995 real retail sales in Russia and the CIS went down from 60 to 20 tons or 3 times.
 
According to expert figures in the Program for Developing Rough and Polished Diamond Complex in the Russian Federation in 1995-2000, consumption of diamond jewelry decreased approximately 2 times. It should be taken into consideration that the main symbol of matrimony and love in Russia has always been gold. In the United States and in the West this symbol is typified in diamonds. Even in the worst of time gold wedding bands are a must for a Russian wedding ceremony, while in the West it is a rule to give a diamond ring for engagement.
 
Thus, it would be reasonable to apply a negative multiplier of 3 to estimate an extremely conceivable drop in demand for diamond jewelry in the West from 2008 to 2012. It is possible to expect that (in view of stable Arab consumption and some growth in the BRIC countries) global retail sales as a whole will decrease from $70 to $30 billion by 2012.
 
Of course, the secondary turnover will thrive (hire services, second-hand sales, pawnshop deals) and its first signs are already shrewdly noted by Chaim Even-Zohar (http://www.rough-polished.com/ru/expertise/35003.html?phrase_id=59056). Incidentally, journalists visiting the United States provide visual evidence of “mushrooming outlets offering cash for jewelry” (http://www.reactioner.com/articles/726.html).
 
Demand for newly made diamond jewelry (for which I would use a multiplier of 2) can be estimated at $15 billion in its bottom point. A slump in demand for diamond jewelry in general would mean lower needs for newly made diamond jewelry reduced to approximately $4 billion. This corresponds to the currently held global stocks. In other words, there is a “bad probability” of a short-term ZERO demand for rough diamonds in case of economic panic in 2011-2012 because of possible miscalculations in financial regulation of the crisis on the part of the Federal Reserve System and central banks of the European Union and Japan.
 
It would be appropriate to draw a historical analogue – the collapse of the Russian Empire and experience of the USSR in the 1920s. For the purpose of industrialization the Soviet government low-balled (although in a secret and diffused manner) an enormous amount of diamonds and diamond jewelry confiscated during revolutionary expropriations. The world diamond market reacted adequately: prices slumped bringing up wide-spread moods for speculation. The then diamond syndicate which supervised major diamond output curtailed its mining capacities three times in 1919-1921.
 
However, in the documented history the greatest drop in rough output occurred after the start of the First World War – it went down 5 times! (Vecherina, Levchenko, Nikulin, Tolpezhnikov, Fridman and Cherny. The World Diamond Mining. Moscow, 2000.). During the Second World War diamonds were used in the military industry (for sharpening carbide-tipped tools), therefore the jeweller market needs were overly shaded by military consumption.
 
Incidentally, for ALROSA the worst diamond scenario would mean compression of its segment in the world diamond market down to $500 million a year, that is to 25% of its capacities. In that case about 75% of its workers and engineers would have to be given other jobs outside the company – for instance, within the projects of Southern Yakutia. Taking into account that the Russian lapidary industry is oriented towards domestic rough, Smolensk-based Kristall is capable to accumulate all the segment of “Russian goods” all by itself having an annual output rate of $100 million. Other lapidary firms, including Ruis Diamonds and the entire Yakut cluster, will not be able to find a place in a market rigidly regulated by the Russian state.
 
Everything would go well if the current world crisis were just a prosy business cycle, despite of its bad after-effects. However, its worst result for the global diamond industry may lay in a fundamental change of people’s attitude towards diamonds. Some experts come to a conclusion that the current economic downturn is a “consumption pattern crisis”. This judgment may be fully applied to luxury goods and first of all to diamonds. In fact, it is common knowledge that a number of sign-of-the-times accoutrements of luxury sank into oblivion, as for instance was the case with lacy jabots once worn by grandees, ladies' accessories made of whale fins, or gentlemen's top hats. It would be a pity if diamonds shared the same fate in the nearest years.
 
Vladimir Teslenko for Rough&Polished