Russian-Belarusian potash dispute grows with arrests, oil supply cuts

VANCOUVER – Belarus’ move to arrest the head of Russian potash major Uralkali (LSE: USKA) on suspicion of corruption and abuse of power erased all hope that the latest spat between Belarus and Russia would fade away and allow the perturbed potash market to regain some balance.

Instead, it looks like Moscow and Minsk are settling into a long battle over the fertilizer ingredient – and global potash companies small to large will have to weather the resulting price storm.

Belarusian authorities arrested Vladislav Baumgertner in Minsk hours after Baumgertner met with Belarus’ prime minister. The meeting followed Uralkali’s surprise announcement in late July that it was exiting its long-term marketing partnership with Belarus’ state-owned potash firm, Belaruskali. That partnership, known as the Belarusian Potash Co. (BPC), controlled more than 40% of the world’s potash market and had long acted in concert with North American potash cartel Canpotex to support and stabilize potash prices.

In leaving BPC Uralkali is choosing volume over price: Russia wants to use its significant production capacity to flood the market with attractively priced potash and attract new customers. The Russian producer, which already controls 20% of the world potash market, predicted its move could easily cause global potash prices to fall 25%.

At this point, though, it has been Uralkali’s share price that has lost more than 25% since the company left the cartel. Potash prices have been slower to react, having lost about $20 per tonne in recent weeks to slide just below US$400 per tonne.

Price predictions from here all point down, though no one expects prices to plummet overnight because it will take time for Uralkali to ramp up output and negotiate new sales contracts. Patricia Mohr, vice-president and commodity market specialist at Bank of Nova Scotia, sees potash dipping to the $350-per-tonne level over the next six months.

As for the charges against Baumgertner, Russia is not pleased.

Belarus said Baumgertner would be held for two months, though investigators could prolong the detention if needed. If convicted of corruption and abuse of powers, he faces up to 10 years in jail.

The abuse of power charge stems from Belarus’ contention that Baumgertner manipulated decisions at BPC in favor of Uralkali, costing Belarus $100 million. And Baumgertner is not the only Uralkali exec facing charges – Belarus has issued arrest warrants for four other Uralkali execs, all accused of scheming to cut Belaruskali out of decision-making at BPC.

Russia quickly demanded that Baumgertner be released.

“It is impermissible to detain a person on his way home after he came for talks at the invitation of the Belarusian government,” Russian Deputy Foreign Minister Grigory Karasin told Interfax news.

But there’s a touch of irony in that comment, in that in Russia most major business disputes include someone going to jail, being put on trial, or fleeing the country. In 2008 BP chairman Bob Dudley, at the time BP’s representative in Russia, fled the country when problems with his visa happened to surface during fraught negotiations with BP’s business partners. More generally the list of Russians who have fled or been arrested in conjunction with big business deals is very lengthy.

The idea is simply that having someone in jail creates leverage in negotiations. In exchange for Baumgertner, Belarus may want any number of things, including the right to sell potash to China.

However, it turns out two can play that game.

Two days after Baumgertner’s arrest, Russia ordered its oil firms to cut volumes to Belarus by roughly a quarter. Belarus is completely dependent on Russian oil to feed its two refineries, which supply the domestic market.

Trade disputes between the countries have affected oil deliveries in the past, causing knock-on supply disruptions for European countries, including Germany and Poland, that get some of their Russian oil from pipelines that cross Belarus.

The company that operates those pipelines, Transneft, said environmental concerns were behind the volume cuts. The company says it needs to replace 700 km of old pipeline. Oil traders, however, say the order came out of the blue.

Moscow and Minsk are like siblings – they have a close relationship and rely on one another in many ways, but also regularly descend into rows. Several times those rows have driven Russia to impose trade and financial sanctions on Belarus, clearly the more vulnerable sibling.

And potash is a key vulnerability for Belarus. The country carries a heavy debt load and potash exports account for roughly 20% of Belarus’ budget.

Then there are the junior potash companies, who have also been left vulnerable because of a diplomatic dispute on the other side of the globe.

Potash projects often bear high capital costs, a burden made bearable only if potash prices remain elevated. With prices now expected to fall and mining market conditions in general very tight, analysts predict that few if any junior potash developers looking for project financing will succeed.

Many already saw their share prices slashed following Uralkali’s news. Karnalyte Resources’ (TSX: KRN) share price plummeted 46% on July 31, the day Uralkali announced its withdrawal from BPC, losing $2.61 to close at $3.04. Since then KRN shares have slid another 36% to close below $2 on Aug 28. Karnalyte is working to build a solution mine at its Wynyard project in eastern Saskatchewan.

Encanto Potash (TSXV: EPO), which is also advancing potash properties in Saskatchewan, has seen its share price fall some 40% since late July.

Majors are also feeling the pain. Potash Corp. of Saskatchewan (TSX: POT) fell 23% in two trading days following Uralkali’s news and has traded sideways near the $31-mark since.