“Potash conflict”: Minsk wins on the information front but suffers financial losses

Arrested in Minsk, Uralkali CEO Vladislav Baumgertner remains in the KGB detention center in Belarus.

Belarus’ secret services will benefit the most from the potash conflict, as well as Uralkali and those who want to consolidate a large batch of Uralkali’s shares. Most likely, Belarus will bear all the costs of the redistribution of assets and costs between global potash market players and among the ruling groups in Russia.

Last week, the price of potash fertilizers continued to decline, falling to USD 320 per ton. However there were no major transactions: buyers are waiting for a bigger slump in prices. At least a few greenfield projects to develop potash deposits have been suspended (Chile, Canada). In other words, Uralkali’s strategy announced at the time of the breakup with the Belarusian Potash Company (BPC), “volumes first, prices next”, has become a reality. Provided that Uralkali’s production costs are the lowest, implementation of the strategy should result in Uralkali gaining a greater share in the global potash market, i.e. it will improve the company’s positions in the long run.

Meanwhile, in the short and medium term, Uralkali’s position is deteriorating: its shares continued devaluing when Baumgertner was left in custody. The company’s reloans, the charges against its main owner, Mr. Kerimov, brought by Belarus, as well as the information about Kerimov selling stars from his football club, have affected Uralkali’s shares depreciation. This creates opportunities for Kerimov or another owner (for example, Sechin) to consolidate a large Uralkali stake. .

All in all, Uralkali’s strategy has been fairly successful, but it may not be Kerimov who will benefit from its outcomes.

Last week, Alexander Lukashenko signed two decrees, one of which established the JSC (instead of CJSC) Belarusian Potash Company. The company will take over the exclusive right to sell Belarusian potash fertilizers. The second decree released Belaruskali from potash export duty payments to the budget. Currently it is not clear how the ‘new’ BPC will be managed, but since there was no information about relieving Mr Vakulchik fromhis duties to supervise the Belarusian potash industry, most likely, the main beneficiaries from the potash market re-division in Belarus will be the power structures (‘Viktor Lukashenko’s group’). In the meantime, Belaruskali has suffered losses due to falling potash prices. Baumgertner’s arrest has secured a downward trend in prices on the potash market, which may result in losses for Belarus (and Belaruskali) – of up to USD 500 million a year. It also creates additional uncertainty regarding the repayment of a USD 1 billion loan, issued to Belaruskali in 2011 and prolonged in 2012 by Russia’s Sberbank (which was used by the Belarus’ National Bank to replenish its foreign exchange reserves).

Belarus failed in its negotiations over Russian oil supply to Belarus in Q4 2013. If Russia insists on its decision to reduce oil supply via pipelines, Belarus’ oil supply will, de facto, be reduced by 40% by the year-end. Other threats, among them relating to Belarus’s dairy supply to Russia, have been postponed for a week. These measures, if implemented simultaneously, may leave Belarus without USD 200- 300 million in export revenues per month. In addition, the way things are currently developing, Belarus may lose the opportunity to sign an oil supply contract for 2014 and agreements will be signed quarterly, which will strengthen Belarus’ dependence on the Kremlin’s favours.

However, these threats may not become a reality. Potentially, Baumgertner’s lawyers may dare to ask to release their client on bail if he pays all the damages claimed by Belarus (about USD 100 million). If a compromise is reached, Belarus’ losses will be limited to the reduced value of potash exports volume.

Nevertheless, Belarus receives information bonuses in any case. If the conflict deteriorates, the inevitable devaluation can be attributed to Russia. If a compromise is achieved, Belarus will regain Russia’s regular ‘support’ and will present it as her victory in the confrontation.

Thus, Belarus’ and Belaruskali’s export earnings will fall in any case, but the economic difficulties can be attributed to Russian oligarchs.