EDITOR: | August 29th, 2013 | 1 Comment

Uralkali boss arrest sparks potash ‘Cold War’

| August 29, 2013 | 1 Comment

belaruskaliThe dispute between Russia and Belarus over potash holds the cards for the future of the potash fertilizer market and its implications are wrought with geopolitical risk that could spark a trade war – if not worse. The circumstances behind the arrest of Uralkali CEO, Vladimir Baumgartner have all the makings of a John Le Carré spy novel. Baumgartner was arrested on August 26 after talks with Belarusian Prime Minister Mikhail Myasnikovich at the airport in Minsk. The authorities accuse him of having damaged Belarus’s economy after he opted out of the potash consortium with Belarusian state owned potash produced Belaruskali. The Russian government reacted immediately to the arrest, turning the issue away from OAO Uralkali and its shareholders to a dispute between Moscow and Minsk. Russian President Putin himself has warned of serious diplomatic consequences should Baumgartner not be released promptly.

Belarusian authorities pulled quite a caper, apparently bypassing the very acute Russian intelligence. In fact, Baumgartner was literally lured into a trap. On August 26, Baumgartner flew to Minsk at the invitation of Belarus’s Prime Minister Mikhail Myasnikovich, who met him at the airport for a meeting that evidently did not go in Belaruskali’s way. The meeting was designed to persuade Baumgartner to restore the Uralkali-Belaruskali alliance. Instead, the one-hour conversation proved to be less than “constructive” leading to criminal charges and an immediate arrest. This suggests that no less than the authoritarian Belarusian President Alexander Lukashenko got involved.

Baumgartner faces up to ten years in prison after having been charged with fraud against Belarus to the tune of USD$ 100 million. If the charges stick, companies such as K+S AG in Germany, whose shares plummeted in the wake of Uralkali’s BPC breakup, could also add its own lawsuit; however, Belarus, faces a number of European Union sanctions for human rights violations, and it would be difficult for the EU and K+S to pursue a eventual case. The ‘arrest of company executive’ technique has actually been fined tuned in Russia and it is more of a ‘kidnapping’ in its dynamics. It is used to obtain certain concessions after the breakup of negotiations as part of government pressure mechanisms on key industries. Belarus will probably demand, if not a restoration of the BPC mechanism, something that approaches it, such as a guaranteed slice of the market in key export markets such as China. The Belarus-Uralkali dispute has officially turned into a turf war and the Belarusians have captured the potash ‘Godfather’.

Belaruskali is one of the few profitable companies in Belarus, providing the bulk of hard currency for the country, whose economy remains dominated by state enterprises. Essentially, potash and Uralkali (because of the BPC pricing mechanism) is crucial for the Belarusian state budget. Until a few weeks ago, BPC controlled almost half of the world market for potash. The alliance is broken and has led to the former partners – and increasingly their governments – to become enemies. Taking a cue from the OPEC playbook, Russia has already deployed its diplomatic weapon of choice: oil. The state-owned pipeline company Transneft announced that it would cut oil supplies to Belarus to cut by 400 000 tonnes, or about a quarter of September deliveries.

The official reason for the cuts is maintenance; Transneft excused itself noting that it has to replace 700 miles of old pipelines in order to avert possible threats to the environment. How considerate! In fact, the unexpected cuts are the first signs of a trade war. The reduction in oil supplies through the raw power of Russia is not the first pinprick against Minsk. Russia also threatened to stop importing Belarusian dairy products, which would have serious consequences for the Belarusian economy. Nevertheless, while the diplomatic saga continues what is clear is that Uralkali’s plans to change the potash business will not proceed as smoothly as it had expected. A month ago, Uralkali’s departure from the BPC price mechanism represented a revolution in the industry; until then the potash business world was controlled by a few large corporations that were keener about price control through supply quotas than they were on good old fashioned market competition. The BPC breakup is estimated to have cost potash investors some USD$ 20 billion in market value. In fact, Uralkali shares were among the biggest losers taking Russian oligarch, Suleiman Kerimov, Uralkali’s largest shareholder, by surprise. He was forced to sell some of his most prized personal assets such as shares in his prized soccer team.

The Baumgartner debacle and the sharp drop in Uralkali’s value beg the question of why Uralkali instigated the price war in the first place. The most logical explanation is that Uralkali wanted to lower potash share prices to make it easier to take out, and absorb, some competitors (K+S AG in particular) while also deterring newcomers from entering the lucrative potash business – newcomers such as BHP Billiton, which actually decided to remain in the potash game, announcing it would continue to invest in its Jansen Mine project in Saskatchewan; Uralkali, whose main customers are in China, also feared Chinese plans to develop potash deposits in neighboring Laos. For its part, Belaruskali, in need of hard currency, has long been interested in finding buyers for the company, holding frequent meetings with potential buyers from Russia and Singapore. The strong reaction from the Belarusian government to Uralkali’s moves has only shown how valuable potash can be. The situation remains interesting as some buyers may start to come out to ‘kick the tires’ at Belaruskali. In the rest of the world, the arrest of Uralkali’s CEO means that potash prices will not be dropping as fast or as low as some had predicted on when BPC was dissolved.


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