- Russian diamonds and seafood legally circumvent sanctions due to ‘country of origin’ loophole.
- Once a Russian product is “substantially transformed” in another country, it can circumvent Western bans.
- Industry experts told Insider this has fueled an unprecedented push for supply chain traceability.
Despite the Biden administration’s ban on Russian seafood and diamonds, both products continue to make their way into the United States — legally.
The simple sanctions workaround is through a policy called “substantial transformation” – a trade rule that states that once a product is significantly modified in another country, it can claim that region as its place of origin. – which experts say created a “major loophole” in US sanctions strategy following Russia’s invasion of Ukraine.
Take fish sticks, for example. Once the pollock is caught in Russia, it is sent to a factory in China to be made into a stick. Once it has undergone this processing, it is no longer legally considered a Russian seafood, meaning US sanctions no longer apply.
The same goes for diamonds. About 30% of the total volume of diamonds produced in the world come from Russian mines. Many of these rough diamonds end up in India, the world’s largest diamond producer, where they are cut and polished. Once this transformation is done, the diamonds are labeled as Indian instead of Russian.
That means Biden’s ban on Russian diamonds was “essentially worthless from day one,” Marty Hurwitz, CEO of The MVEye, a jewelry industry market research firm, told Insider. .
“With this loophole in place, we really can’t effectively ban all Russian seafood,” added Dr. Marla Valentine, Oceana’s Illegal Fishing and Transparency Campaign Manager. “Just Russian seafood that is not processed overseas, which is a very small amount.”
How the loophole is forcing retailers to take control of their supply chains
Instead of taking advantage of the loophole, major jewelry retailers like Tiffany and Signet have opted to go beyond the law and ban purchases of Russian-mined diamonds altogether. This means that thousands of sellers are now required to disclose where their diamonds are mined, or risk losing business from the two biggest buyers in the industry.
Last week, a bipartisan group of 11 members of Congress penned a letter urging the Biden administration to “reconsider” the home country loophole, arguing it generated “profit for the Russian government.”
A similar discussion took place between lawmakers and attorneys during a watchdog hearing held last week by the Water, Oceans and Wildlife Subcommittee.
“Despite the good intentions of dealing an economic blow to Russia after its unprovoked invasion of Ukraine, this ban will not work without full traceability of seafood products and real information on the origin of the catch,” he said. said Sally Yozell, director of environmental safety at Stimson. Center, a nonpartisan research organization in Washington, DC, said in testimony.
In the end, this loophole greatly mitigated the impact of some US sanctions. But due to high consumer standards, many retailers have chosen to go further than the legal requirement by requiring a level of transparency from suppliers that has never been seen before.
“The diamond industry is on the slippery slope of legitimacy,” Martin Rapaport, founder and chairman of the Rapaport Group, told Insider. “The key issue here, which underlies everything, is the need to identify your supply chain. That’s what it’s all about. Everything points in the same direction.”
It all depends on the buyers and what they are willing to pay
According to Rapaport, there are currently three types of diamonds in the global supply chain: “good diamonds” whose origin is known outside of Russia, “bad diamonds” – or illegal gemstones mined by a company sanctioned – and the others are “unknown”. .”
A diamond of unknown origins has probably traveled hand-to-hand for years. It may have been mined in Russia, polished and cut in India, shipped to Belgium and sold in stores in New York, all the while being mixed with thousands of other unknown diamonds along the way.
It’s a convoluted supply chain by design. Until very recently, the value of a diamond depended on its appearance and quality, not on its origin.
Today, Russia’s war against Ukraine proves a theory that has long been flouted by the jewelry industry: buyers are willing to pay up to 15% more for a “good diamond”, the route was traced from the mine to the market, estimated MVEye.
“Basically it’s all about the money. People will pay more for diamonds if they know the source,” Rapaport said. “Therefore, people will start documenting and auditing and providing more source information.”