THE government is on the cusp of signing an estimated US$1.4bn three-year sale purchase agreement with Russia’s diamond producer and a Swiss firm that will result in the state securitising precious stones for fuel supplies, the Business Times has established.
Since the start of the year, Zimbabwe has been battling erratic fuel supplies, rolling power outages and a weakening domestic currency. Compounded by a drought and a cyclone that ravaged some areas in the eastern highlands, the economy is expected to shrink by 6.5% this year.
The government has already instituted a new pricing framework for fuel that reflects costs, including those resulting from changes in import prices and exchange rate fluctuations.
The framework also ensures that the local pump price remains comparable to regional peers, and has been going up almost every week. Information at hand shows that the government is finalising a sale purchase contract with a Swiss firm, Tatneft, which will provide diesel in exchange for diamonds from the Zimbabwe Consolidated Diamond Company (ZCDC).
The deal, sources said, is expected to be signed by the end of this month.
“The deal is expected to come into effect in 2020 and the diesel supplies will run for a period of three years,” a source familiar with the developments said. The world’s largest diamond producer, Alrosa of Russia, will receive diamonds from the ZCDC every month with an estimated value of US$40m, insiders have said.
The Russian firm, sources said, will also estimate the value of the gems and inform the buyer and the seller accordingly.
“Due to fluctuations on the global market, Tafneft will have the liberty to reduce the value of the diamonds by 30%. The diesel will be supplied via the Port of Beira,” a source said. “Under this arrangement, Tatneft is expected to deliver high quality diesel 50 ppm [parts per million] after Alrosa pays for the commodity 30 days after delivery. The Reserve Bank of Zimbabwe is expected to sign this contract on behalf of Zimbabwe.”
Contacted for comment, Finance Ministry spokesperson Clive Mphambela referred questions to the Energy Ministry. Energy and Power Development minister Fortune Chasi said: “I am sorry, I wasn’t part of the delegation that went to Russia, I was in Mozambique so I cannot comment on that. But if you try after two days, I might help you.”
The cabinet will meet today following President Emmerson Mnangagwa’s return from the United Arab Emirates. Questions sent to Alrosa and RBZ governor John Mangudya were not responded to at the time of going to print.
Zimbabwe has been battling a fuel crisis for one year now, which has manifested in queues at service stations. Diesel shortage has hampered industry as it has become an alternative source of energy to power generators in the wake of the electricity cuts that sometimes last for 18 hours.
This is not the first time that Zimbabwe has resorted to barter to resolve the fuel crisis. At the turn of the millennium, Libya bailed out Zimbabwe with fuel in return for beef and agricultural products such as coffee and tobacco. The government sees diamond output rising this year following a proposal by Finance Minister Mthuli Ncube to reduce royalty on the precious stones to 10%, from 15%, of gross revenue to reduce the cost of extracting deep- seated kimberlitic gems.
Zimbabwe is targeting to ramp up diamond production from 3.2m carats to 6m carats by the end of 2023 after the country launched a diamond mining policy recently. In March this year, the Russian state-controlled miner, Alrosa, announced that it would assess the quality of Zimbabwe’s diamond reserves over the next six months but would only start mining if it could take a majority stake in such a project. It has partnered ZCDC for diamond mining in Marange.
Zimbabwe has relaxed its indigenisation law as it seeks to attract investment. “Of course we will only be ready to participate in projects in cases where we can have management control and operational control of the assets,” Alrosa chief executive Sergey Ivanov told Reuters.
That would mean a stake of at least 51%, he said, adding that he would be confident of achieving that if it gets to the stage of detailed discussions on how to advance the project. Russia, along with China, has been a political ally of Zimbabwe since the days of its independence war against British rule, and this year Zimbabwe selected Alrosa and China’s Anjin Investments to partner ZCDC.
Alrosa, the biggest diamond producer by volume, as well as Anglo American’s De Beers, the biggest in value terms, both say supply will shrink in the coming years as mines, such as Rio Tinto’s Argyle project, become depleted