Ben Aris in Moscow -

Did Russia just screw Belarus? In August, Uralkali, Russia's biggest producer of the pink mineral fertiliser potash, suddenly pulled out of an eight-year sales partnership with Belarus' state-owned Belaruskali and shook the global fertiliser market to its core. The collapse of the cartel will probably cut the cost of potash in half, and as one of Belarus' biggest money earners could tip the already wobbly economy over the edge.

Potash is seen as an essential fertiliser in many countries - especially China and Brazil - that can double crop yields and protect against disease. The Uralkali-Belaruskali partnership, known as the Belarusian Potash Company (BPC), exported millions of tonnes of the stuff around the world and the two companies together controlled just over two-fifths of the global supply, giving it considerable pricing clout.

But like any cartel it was prone to cheating and relations between the two sides became increasingly tense. As the Belarusian economy has slid towards the abyss, Belaruskali has been selling potash on the side to make a little extra cash. And last December Belarusian President Alexander Lukashenko cancelled BPC's exclusive right to export Belarusian potash.

"Following the issue of the decree, Belaruskali has made a number of deliveries outside BPC," Uralkali CEO Vladislav Baumgertner claimed. "We have repeatedly informed our Belarusian partners that such actions were unacceptable."

But the Russians have been doing the same; in July, Uralkali signed an independent agreement to supply China with 500,000 tonnes of potash, cutting the Belarusians out of the deal completely.

Commoditisation

The consequences of the break-up will have far reaching consequences for the sector. First of all the price of potash is likely to tumble by a quarter, turning what was an oligopolistic market into a straightforward commodity.

Belarus earned $3.2bn from potash exports last year, which made up 7.1% of its total exports. As Belarus' exports have already taken a beating thanks to the economic slowdowns in both Russia and the EU, a fall in potash prices to $300 a tonne by year-end that's being forecast by Uralkali will shave nearly $1bn off Belarus' export revenues, something the country can ill afford at the moment. In the first quarter of this year, Belarus was already running a $2.4bn trade deficit, or 17% of GDP, compared with a small surplus in the same period a year earlier.

Certainly the Belarusians are hopping mad. Belaruskali CEO Valery Kiriyenko has vowed never to talk to Uralkali again. "I will never cooperate with Uralkali... after what they had done," Kiriyenko said on August 18 shortly after the bust-up was announced. "Maybe under another ownership... No way under the current policy."

The price of potash played a key role in the dispute. China was BPC's biggest customer, but stockpiled potash last year and has failed to sign a new deal for the second half of this year, hoping to force the price down below $400 a tonne.

Baumgertner told bne in an interview in May that Uralkali would not drop its prices and simply scale back production if China didn't agree to its prices. However, the game has changed now. Uralkali is now saying that it will follow a high-volume, low-price strategy. After the acquisition of potash producer Silvinit in December 2010 and several new deposits under development that will bring total production to 14m tonnes a year out of total global demand for 60m tonnes, the Russian producer clearly thinks it can simply steamroll the competition.

If Uralkali really goes through with its threat to radically shake up the whole potash business, then the new lower price levels will not only wound Belaruskali badly, it will also make several large potash deposits under development, mostly in Canada's Saskatchewan province, economically unfeasible. Shares in some of the other leading world producers like Canada's Potash Corporate have already tumbled on the news. Uralkali's own shares fell by a quarter. "Their new sales strategy shocked me. It also affected the consumer. Why is the market dead? There is no bottom price. Why should we buy today if tomorrow somebody will offer a lower price?" Belaruskali's Kiriyenko said.

Politics could also be playing a role in the row. Russia stepped in and bailed Minsk out in 2011 after a financial crisis saw the Belarusian ruble devalue by 65%. Moscow gave Minsk a $3bn loan under the auspices of the EurAsEC Anti-Crisis Fund, but extracted promises for some major privatisations, including the sale of Belaruskali. Moscow is mad that President Lukashenko valued the company at about $25bn - equivalent to about 40% of the country's annual GDP - which is way beyond Russian estimates of its worth, essentially scuppering any takeover deal.

Russia has been throwing its weight about in the region recently, starting a trade war with Ukraine in August among other things, as it grows impatient with its former vassal states to play ball. One of the consequences of the break-up of BPS and subsequent crisis is that Minsk could become more desperate for cash just as the capitalization of Belaruskali has shrunk dramatically.

All said and done, Lukashenko would probably prefer to swallow his pride and go cap in hand to the International Monetary Fund for help before he contemplates selling what he regards as the family silver to the Russians. Still, he has been backed into a tight corner now.