On Thursday, Statistics Botswana released second quarter Gross Domestic Product figures showing that the economy expanded by 5.6 percent over the period, helped by diamond trading activities, as global industry demand continued to warm up.

In fact, Bank of Botswana data also released on Thursday indicates that Debswana sold P41.4 billion worth of rough diamonds between January and August this year, eclipsing the P38.1 billion in sales over the whole of 2021.

The rebound has been due to the reopening of the global economy from the COVID-19 restrictions, but more importantly, Russia’s invasion of Ukraine in February which has driven both demand and prices of diamonds this year.

Russia’s Alrosa and De Beers, which coowns Debswana with the Government of Botswana, are the world’s first and second largest producers of rough diamonds respectively. In the wake of the invasion, the global diamond industry, led by Western countries, slapped sanctions on Russian diamonds, boosting demand for stones from producers such as De Beers and countries such as Botswana.

As with most things, however, nothing lasts forever. The Finance ministry is increasingly concerned that as the war in Ukraine drags on, several factors could turn the honeymoon experienced this year into a nightmare for local diamonds, and with it, risks to the local economy that depends on the stones.

In fact, the threat to diamonds has been classified as one of the main risks to the country’s fiscal outlook, according to the recently released Budget Strategy Paper, the annual blueprint developed as part of the budget process. “While the sanctions imposed on Russia’s diamond industry by the USA and European countries have the potential to boost global diamond prices and demand for Botswana’s diamonds, there remains a considerable degree of risk that could arise from the repercussions of the conflict,” the Paper reads.

“Spill-over effects from the conflict in Ukraine have constrained consumer spending in the United States and major European economies triggering potential recessions.” However, the key risk is around traceability, or the ability to ensure that sanctioned diamonds are kept out of the global industry.

While the West has sanctioned Russian diamonds, Russia still enjoys revenues from the stones as they flow uninterrupted through Russo-neutral cutting and polishing centres such as India and China, which control more than 90% of the midstream market.

Once these stones have left the cutting and polishing centres where they also mix with production from other countries, the diamonds no longer are classified as Russian and are further manufactured into jewellery and sold in the US, the world’s single largest market for diamond jewellery.

Although major retailers such as Tiffany and Signet have moved to block Russian diamonds from filtering into their jewellery lines, the stones from Moscow are generally the smaller, lower-value ones in the market whose provenance is more difficult to ascertain.

“There are risks associated with traceability issues requiring complex separation of natural diamond supply chains into ‘conflict’ and ‘non-conflict’ diamonds, while high prices could potentially shift demand towards synthetic diamonds,” the Finance Ministry says.

“These factors, combined with the slowdown in China as a result of COVID-19 related lockdowns, could affect global demand for rough diamonds and growth in mineral revenues, constraining the much-needed fiscal space to restore fiscal buffers to pre-COVID-19 crisis levels.”

The danger of driving the diamond industry into the hands of synthetics is not only due to high prices. From as early as May, when evidence emerged that Russian diamonds were still finding their way into the market, industry analysts warned that ethical consumers, particularly millennials who are an increasingly important part of the diamond market, could either be turned off natural diamonds completely or turn to synthetic diamonds whose sources are easier to establish. In June, the Kimberley Process, a United Nations-backed diamond industry watchdog, deadlocked over whether to even debate sanctions on Russia, a move which would have compelled Russo-neutral centres like India and China to turn away Moscow’s stones.

Instead, the task of making a distinction with Russia’s stones and protecting the industry from far-reaching reputational damage has fallen to individual players. Besides jewellers such as Tiffany and Signet, De Beers has ramped up its traceability initiatives, expanding its Tracr programme which uses blockchain to provide diamond provenance to retailers.

More recently, the diamond giant expanded the traceability to consumers, under an initiative known as Code of Origin. Using a customised code provided with each piece of diamond jewellery, buyers will be able to load the number onto a website and track the source of the diamond and what the community impact of those diamonds is in that particular country. The impact includes buyers viewing how sustainably the diamonds are extracted in terms of the climate change objectives and the work being done to empower women, the youth and similar groups.

“This is a programme around the telling of the story of the De Beers’ journey, the countries where we operate, the people and making sure that story goes through and answers the questions that consumers such as millennials may want to know,” De Beers’ executive vice president Diamond Trading, Paul Rowley told Mmegi recently.

The Finance ministry director of macro-economic policy, Batane Matekane says the risk to diamonds is being managed and the threat of losing market to synthetics has long been mitigated.

“As a major shareholder in De Beers and Debswana, we have long assessed the risk and gotten prepared for it,” he told Mmegi recently.

“You will note that De Beers is the biggest investor in synthetics and has gone ahead of the entire industry to do synthetics so that should the market try to go into that space, we can meet the challenge.

“However, the situation in diamonds is a risk for us because we are reliant on these mineral revenues.”

Four years ago, De Beers invested millions of dollars in boosting its capacity to produce synthetics, building up to be the industry leader in order to occupy a position where the diamond giant could influence prices and trends in the sector. The strategic move was done with the full cooperation of the Government of Botswana, a 15% shareholder in De Beers and a co-equity partner in Debswana.

Despite the safety net, the potential souring of the industry in the short term concerns fiscal authorities. “We see this risk as something that we need to worry about and prepare for it accordingly because if we don’t otherwise, this economy will have to find other alternative sources of revenue, which may be painful because the other space we have control over is tax and we don’t want to go that route at this stage,” Matekane told