Diamonds Aren't Forever

By SCOTT MACLEOD LUANDA

THEY ARE CALLED GARIMPEIROS, A Portuguese word for a prospector or trafficker in illegal treasure. Lured by the promise of quick wealth, an estimated 50,000 Angolans, Zairians, South Africans, Belgians and even a few Americans have surged into Angola's remote Lunda Norte province. From the air, they look like a colony of ants tunneling aimlessly into sunbaked moonscape. On the ground, the diggers, shirtless, sometimes laboring with a pistol in one hand and a shovel in the other, are scrambling to get rich.

The primitive mining is illegal and dangerous, but the garimpeiros have ample reason to ignore the hazards: rarely in history have ordinary people managed to gain access to a place where gems are seemingly as plentiful as pebbles on a beach. "They scoop out the gravels, put them in a sieve, take them down to the river, wash them and then pick out the diamonds," explains Peter Gallegos, an official of the diamond firm De Beers. "It is a complete and uncontrolled bonanza."

The diamond rush may be a dream come true for the garimpeiros, but it has turned into a nightmare for De Beers. The South African group, through its London-based cartel, the Central Selling Organization, controls 80% of the world's rough-diamond trade. In the past 17 months, largely illicit diamonds from Angola and elsewhere have been flooding the market, threatening to provoke a price collapse and forcing De Beers to spend so far upwards of $200 million to keep the gems out of circulation by buying them up.

Worse for De Beers, the glut comes amid growing evidence of big-time diamond smuggling out of the former Soviet Union. As a result, not since 1982, when speculators dumped their diamond stockpiles, has De Beers' legendary grip on the diamond market seemed so shaky.

The immediate cause of the problem is beyond De Beers' control: political instability in some of the planet's richest diamond regions. Although the Angolan drought made alluvial-plain diamonds easier to find, Angola's rush was triggered mainly by the chaotic aftermath of civil war. Thousands of demobilized soldiers with no job prospects began scratching around for easy money. Legislation enacted in November permitting Angolans to trade in uncut diamonds was intended to soak up rough stones that people had illegally hoarded down through the years. Instead, because the move made it vastly easier to unload illegally dug diamonds, it further spurred the stampede to Lunda Norte. Cafunfo, a town of 5,000 on the Cuango River, mushroomed to 50,000 people, who live mainly in corrugated-iron shacks. "It's like the Wild West," says Gallegos, who visited the region recently. "The law of the gun prevails."

In the former Soviet Union, fourth in diamond production, smuggling is on the rise in part because of the breakdown of law and order that accompanied communism's collapse. For years it was an open secret that communist Party and KGB officials pilfered diamonds from mine operations in Yakutia. Now that the old communists have fallen on hard times, millions of dollars' worth of their ill-gotten diamonds appear to be making their way into Western salesrooms. According to Mikhail Gurtovoi, the head of a Russian government anticorruption unit, large batches of illegally acquired Russian diamonds are turning up in Belgium.

Can De Beers cope? "As long as you have cartels, there will be cheating, whether it is diamonds or oil," says Steve Oke, an analyst with the British brokerage house Smith New Court. "The question is whether they can contain the cheating." Although industry analysts believe De Beers will weather the crisis because it has deep pockets and rich affiliates, investors are not convinced. When the company abruptly announced the likelihood of a 25% dividend cut in August, its stock fell nearly 15% and triggered a minicrash on the Johannesburg Stock Exchange.

De Beers hopes that the new Angolan government that will emerge from last week's elections will see the wisdom of stanching the illegal trade. The main cause for concern remains Russia, because its huge diamond production coincides with deteriorating economic conditions. Russian production in 1991 was an estimated 13 million carats, compared with Angola's 1.5 million. "Angola is like a wasp," says Oke, "but Russia is like a bear stomping around."

Last month Harry Oppenheimer, 83, whose family built South Africa's De Beers and Anglo American mining empire, came out of retirement and paid a visit to Moscow -- a sign that De Beers is worried and leaving nothing to chance. The company made its fortune on the back of the slogan "A diamond is forever." Now it must put its money where its mouth is to make good on the promise.

With reporting by Barry Hillenbrand/London and Ann M. Simmons/Moscow