Two weeks ago, when the US Treasury Department announced sweeping sanctions on Russia in response to its invasion of Ukraine, it mostly spared the luxury sector.

The one exception: companies were restricted in their financial dealings with Alrosa, the world’s largest diamond company, and its chief executive, Sergey Ivanov.

Alrosa diamonds account for almost 30 percent of all raw stones sold around the world. Major Western jewellery companies that manufacture their products in-house, including Signet Jewelers and Tiffany & Co., buy their raw diamonds from Alrosa, as do global jewellery retailers like China’s Chow Sang Sang.

The sanctions against the Russian diamonds now have the diamond trade at the centre of the war, and could send jewellery companies reeling. Alrosa mined over 32 million carats in 2021 and pulled in sales that topped $4 billion.

“Their diamonds are everywhere in the market,” said Edahn Golan, an Israel-based diamond analyst and researcher.

Western businesses can still buy Alrosa stones under the sanctions, which apply mainly to financial transactions, such as extensions of credit and loan guarantees.

But the jewellery industry will certainly feel the impact — and soon. For starters, sanctions against Russian banks will make it difficult to procure diamonds from the country. The wholesale diamond industry will likely soon see “weeks, maybe months of delays,” said Paul Zimnisky, a diamond analyst. In a few months’ time, those issues will reach retailers.

“You can technically still do business, but not if no banks will transfer money,” said Tiffany Stevens, chief executive of Jewelers Vigilance Committee, an American advocacy group.

Beyond the sanctions, there’s also anxiety the jewellery industry is feeling regarding the humanitarian crisis, and whether shoppers will feel they can ethically buy Russian diamonds.

Much of the world reacted with horror to Vladimir Putin’s military quest, which has resulted in civilian casualties and a massive refugee crisis. Russian spirits are being flushed down drains and shoppers have called on fashion brands big and small to halt trade with Russia.

Richemont, Kering, LMVH, Chanel, Nike and Zara have all paused trade with the country, though most brands have cited logistical difficulties rather than moral outrage.

Diamonds are a less obvious connection to Russia in the minds of consumers, but public opinion can shift fast. Conflict diamonds mined in war zones under brutal conditions were not widely known to the public until activists began a campaign in the late 1990s. Within a few years, they were banned across much of the industry.

Cutting out a major supplier of diamonds, however, would be tricky, especially considering the jewellery industry has roared back to life, thanks to post-pandemic demand.

“The prices of diamonds and gold have skyrocketed, and it’s the strongest business people have had in 40 years, said Stevens.

Shock to the System

Western sanctions are hitting Alrosa, which some say is considered more ethical than mining competitors in an industry that has never quite escaped its “blood diamond” reputation, regardless of some measures to fix its conflict zones.

“From an ethics perspective, [Alrosa is] in the forefront of the industry: worker unions hold a share in the company and they are paid above average,” said Golan. “The company also invests in developing provenance systems for tracking diamonds. In short, it’s doing the right thing.”

A third of Alrosa is also owned by Sakha, the Russian republic where much of the local population work in the diamond industry, Zimnisky added.

But the Russian government also owns 33 percent of Alrosa, putting its stones in the hot seat. One jewellery industry editor, Annabel Davidson of Vanity Fair, asked her followers on Instagram whether it might be fair to credit the company’s diamonds in funding Putin’s war.

The sanctions against Russian diamonds won’t hit jewellery companies right away. Big brands will likely have three to five months’ worth of stock, said Zimnisky.

But the underbelly of the diamond trade, where cutters and polishers from all over the world travel to Moscow to view and purchase the raw stones, will see the effects immediately with Russia’s airspace closed. With nearly all Russia’s banks under sanctions, transactions will be halted too.

“The sanctions and restrictions on the banks are indirectly impacting the diamond trade and that’s intentional,” Zimnisky said.

Brands can sidestep Western sanctions on Russian banks by working with partners in countries that haven’t sanctioned Russia, like India or Israel. But Stevens of the JVC recommended jewellery brands monitor their supply chain as closely as possible so that they don’t run into any trouble.

“I assume this is just the beginning,” said Stevens. “If I were running a business, I’d be thinking long-term and doing a risk profile. You want to be checking your vendors and who you are buying from, and setting up an anti-money laundering program as a conduit to do business.”

A Fear of Diamond Boycotts

Jewellery companies that have worked hard to create transparency within the supply chain may end up suffering the most. In 2019, Tiffany & Co. introduced diamond traceability, where stones that are .8 carats or larger come with information like country origin and craftsmanship journey. This initiative has given peace of mind to shoppers looking to avoid conflict diamonds, but that Russian tag could now become a liability.

Tiffany did not respond to BoF’s request for comment.

“The biggest impact for the industry will be if consumers become reluctant to buy Russian diamonds in protest,” Zimnisky said. “It’s a problem because so many jewellers’ inventory is Russian diamonds and three-quarters of diamond consumers come from the West and Japan, so there’s significant implications here.”

Last week, Jewelers of America, a trade association, published an industry-wide memo for jewellers to stop “buying or selling diamonds, precious metals and/or precious gemstones of Russian or Belorussian origin” because of the “serious ethical, reputational, and legal risks.” In an email to BoF, a spokesperson for Alrosa said it was doing its “best to mitigate the effect of the current events on its customers.”

Much of the industry is likely having such conversations now about whether they need to stop buying Russian diamonds and what a new plan of distribution would look like. There is some buffer time as the industry is now in a slow period, coming off of the holiday season, followed by the Chinese New Year and Valentine’s Day. But if the war continues to escalate, decisions will have to be made.

Some jewellery brands have already decided to draw a line in the sand. Brilliant Earth, the e-commerce diamond giant, announced on Twitter on Feb. 26 that it was pulling all of its Russian diamonds from the website. So far, it’s the only jewellery company to take such action.

“Taking this proactive step was the right thing to do, as a company and for our industry,” Beth Gerstein, co-founder and chief executive of Brilliant Earth told BoF in an email. “We stand with the people of Ukraine and hope for a peaceful and swift resolution. We hope others in our industry will join us.”