Window on Eurasia: Diamonds are Not the Russian North’s Best Friend, Ecologists Warn

Paul Goble

Vienna, February 14 – Lukoil’s plans to use an open pit to mine diamonds in Arkhangelsk has prompted residents and experts there to complain to Moscow and to national and international environmental groups that this will lead to “an ecological” disaster of enormous proportions, the latest chapter in a sad saga of post-Soviet industrial development.

At the end of last week, Barents Observer called attention to what it called “a looming diamond catastrophe” (www.barentsobserver.com/looming-diamond-catastrophe.4883579-116321.html), but many of the details of how the current crisis emerged are to be found only in a report on a regional news agency (http://www.arcticway.ru/index.php?id=130).

After Lukoil announced that it planned to extract diamonds from the Verkhotina field not from an underground mine but from an open pit, Barents Observer reports, local residents wrote a public appeal to Russian President Dmitry Medvedev warning that this shift “would completely destroy the local ecosystem and lead to an irreversible disaster.”

What has especially enraged local residents is that representatives of the Lukoil daughter company that is in charge of this operation solemnly promised during public hearings in 2005 that they would not use pit mines in this area. Now, without any additional hearings, the company has changed course, seeking profit at the expense of the environment.

Moreover, residents of the district say, this decision taken behind closed doors not only “violates their constitutional rights” to a clean environment, but it undermines the enormous efforts Lukoil and the Russian government have made to present themselves as environmentally friendly.

The resident’s complaints appear well-founded. The diamond field Lukoil wants to develop is within a protected wildlife reserve, and its development could lead to the destruction of several unique natural eco-systems. The residents say they will “fight to the end,” and they have been joined by Russian and international environmental protection groups.

This story begins in 1993 when Lukoil and its Arkhangelskgeoldobycha subsidiary set up a joint venture with the international diamond giant De Beers and its Canadian daughter company, the Archangel Diamond Corporation. Under the terms of that accord, the foreign firm was to finance prospecting and the Russian firm to give it a license if diamonds were found.

But after the Canadian firm determined that the field had some 67 million karets of diamonds worth five billion US dollars, Lukoil unilaterally refused to give it the promised license. ADA responded by bringing suit in various courts seeking five billion US dollars in compensation.

In April 2008, Russian Prime Minister Vladimir Putin hosted a meeting between the head of De Beers and Russian officials. As a result of his intervention, the former dropped it suits, and the latter according to a Putin promise was to obtain 49.9 percent of the field for an additional 225 million US dollars.

Then, in January 2009, ADC’s board in responses to worsening economic conditions and the company’s dire straits – it declared bankruptcy 11 months later -- backed out of that deal. That left Putin in an unfavorable position, ArcticWay reports, and because he “does not like to lose, especially to foreigners” led to Lukoil’s next move.

The Russian oil giant tried to make a deal with the Russian diamond major, Alrosa, but that too fell through, prompting Lukoil, which could no longer hope to find “’naïve Chukchi youths’ among foreign investors” to change its plans about mining in the ways that have sparked environmental concern and regional outrage.

“Perhaps,” ArcticWay’s Aleksey Petrov writes, “the oil company still had hopes of achieving something from its diamond dealings but more probably it simply is seeking to give the impression that everything is in order” and will shift its investments “into more real and profitable directions.”

The Arkhangelsk protests may push it in that direction, but however this case works out, one that highlights both the rush for profits at the expense of the environment and good business practices, this small story highlights the reality that in Russia today, diamonds are far from the North’s best friends.