Tighter Sanctions on Russian Diamonds Are Likely Coming, JVC Warns

New regulations could block the pathway that allows diamonds cut and polished outside of Russia to enter the United States.

Michelle Graff michelle.graff@nationaljeweler.com

On Feb. 24, the one-year anniversary of Russia’s invasion of Ukraine, leaders of the G7 nations announced their ongoing support for Ukraine and their intentions to make it more difficult for Russia to continue to fund the war. Limiting Russia’s ability to profit from its diamonds is one of the areas G7 leaders likely will address.

New York—Leaders of the Group of Seven recently announced they will be working together to tighten restrictions on diamonds coming out of Russia, both rough and polished.

The Group of Seven, or G7, is an informal, intergovernmental group comprised of seven industrialized democracies: the United States, Canada, France, Germany, Italy, Japan, and the United Kingdom.

In a statement issued Friday—the one-year anniversary of Russia’s invasion of Ukraine—G7 leaders called on Russia to put a stop to the war in Ukraine, which has killed thousands of Ukrainians, forced millions more to flee, and led to the destructions of homes, hospitals, schools, critical infrastructure, and historic cities across the country.

“We condemn Russia’s illegal, unjustifiable, and unprovoked war, disregard for the Charter of the United Nations and indifference to the impacts that its war is having on people worldwide,” they said.

“We salute the heroism of the Ukrainian people in their brave resistance. We commit to intensifying our diplomatic, financial, and military support for Ukraine, to increasing the costs to Russia and those supporting its war effort, and to continuing to counter the negative impacts of the war on the rest of the world, particularly on the most vulnerable people.”

In the statement, diamonds are mentioned specifically as a product Russia is using to help fund the war, and one of the revenue streams G7 nations are looking to restrict.

“Given the significant revenues that Russia extracts from the export of diamonds, we will work collectively on further measures on Russian diamonds, including rough and polished ones, working closely to engage key partners,” they said.

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In a member alert circulated Monday, the Jewelers Vigilance Committee said the forthcoming sanctions are likely to address the issue of “substantial transformation,” which allows diamonds from Russia to enter the U.S. if they are cut and polished in another country—which many of them are—despite President Joe Biden’s March 2022 executive order banning their import.

The substantial transformation pathway dates to a 1940 Court of Customs and Patent Appeals ruling in United States v. Gibson-Thomsen Co. Inc., a case about toothbrushes and hairbrushes that had their handles/bases made in Japan but their bristles added in the U.S.

According to the ruling, a product undergoes a substantial transformation if via further manufacturing, it becomes a new product with “a new name, character and use.” The product is then considered to originate from the country where the transformative manufacturing took place.

In 2019, U.S. Customs and Border Patrol (CPB) extended the concept of substantial transformation to the cutting and polishing of diamonds.

“This is not going to be an immediate [change] but this is an indication the U.S. government is working on this issue … it is a priority.” — Sara Yood, Jewelers Vigilance Committee

The diamonds in question in that case were mined in Botswana, evaluated in the U.S., sawn and blocked in China, and cut and polished in India. CBP ruled the cutting and polishing was the substantial transformation in the process—the significant step that ultimately changed the character of the rough diamonds—and so the diamonds’ country of origin was India.

JVC Deputy General Counsel Sara Yood said the intent behind the G7 statement is to tighten up the substantial transformation pathway for these goods without damaging substantial transformation, a useful interpretation of the law that’s used across industries, as a concept.

It also will help clear up confusion in the U.S., the world’s largest market for diamonds, where tight sanctions on Russian diamonds have been in place for almost a year.

“The U.S. market has been looking for clarity on this issue for 10 months. On the government level, they’ve also been trying to give us clarity for 10 months,” Yood said.

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The process of creating and implementing any new regulations is expected to take a few months.

The European Union is a non-enumerated member of the G7 and one of its member countries, Belgium—home to the diamond trading hub of Antwerp—has been resistant to restricting the flow of Russian diamonds, thereby potentially complicating negotiations.

Yood said in the U.S., there also will be a phase-in period for any new regulations.

“This is not going to be an immediate [change] but this is an indication the U.S. government is working on this issue and the G7 is working on this issue, and that it’s a priority,” she said.

In the meantime, JVC recommends suppliers abroad that are still purchasing diamonds from Alrosa begin segregating those goods so they don’t reach the U.S. market.

It also recommends companies “be prepared” to make customs declarations that their diamonds aren’t from Russia, though it is not immediately clear how U.S. Customs will approach country of origin declarations for diamonds.

In addition, JVC urges U.S. businesses to evaluate their supply chains. They need to know where their products originate and, if they need to adjust sourcing, how it can be done.

Yood said utilizing existing anti-money laundering (AML) and know your customer (KYC) protocol is a great framework to start with, as is referencing the OECD due diligence guidance created for sourcing metals from high risk and conflict-affected areas.

JVC CEO and General Counsel Tiffany Stevens said the organization will work with the U.S. State Department and other government partners to ensure the industry fully understands its responsibilities regarding any new regulations.

“In the meantime, JVC will continue to educate the trade on its role in ensuring that U.S. dollars do not go to fund the ongoing unjustified war in Ukraine,” she said.

Sanction developments, including the latest news from the G7 nations, will be the topic of discussion at the JVC’s upcoming annual luncheon, scheduled for Friday, March 17, at the InterContinental Barclay hotel in New York.

Ambassador James O’Brien will be the keynote speaker at the event.

O’Brien has served as the Biden administration’s head of Office Sanctions Coordination since April 2022 and prior to that, served as the special envoy for hostage affairs under President Barack Obama.

He can speak to any and all developments regarding sanctions on Russian diamonds.

For more information on the luncheon, visit the JVC website.