Russian withdrawal from potash JV ups the pressure on Belarus

By bne IntelliNews July 31, 2013

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The global potash market took a jolt on July 30, as Russia's Uralkali announced it is to end its partnership with Belarusian state-owned mining giant Belaruskali. However, the impact on cash-strapped Minsk may be even greater.

Only a week ago Belarus President Alexander Lukashenko praised Belarus-Russia cooperation in the potash market. Commenting on the matter he said that creation of Belarus Potash Company, a JV with Uralkali, was "balanced and timely". However, "there remain different approaches and views on the issues," he added.

Uralkali CEO Vladislav Baumgertner illustrated just how deep those differences are when he announced that the company is to end its partnership in BPC. Uralkali will now direct all export sales through its Swiss-based subsidiary Uralkali Trading. Following the announcement, the Russian company's shares plunged by more than 20%, and were suspended at one point.

"Our cooperation with our Belarussian partners within the BPC framework has come to a deadlock," Baumgertner said in statement. The Russian company, which has close connections to the Kremlin, claims Belaruskali has been selling potash on the side, in violation of the pair's JV agreement.

The sides have been discussing the issue since December, when 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," Baumgertner claims. "We have repeatedly informed our Belarussian partners that such actions were unacceptable."

Baumgertner also announced Uralkali is set to prioritise volume over price. The CEO suggested that put together, the changes could have a dramatic effect on the global potash market, leading to a 25% drop in prices. Analysts at Metropol note that the moves have "the potential to transform the previously oligopolistic potash market to a market which is much more competitive," adding: "the end to coordination between Uralkali and Belaruskali on export sales is likely to bring these companies into direct competition on key markets."


That would clearly be bad news for Belarus, whose trade deficit is steering it towards the edge of yet another economic meltdown.

"Obviously price drops for potash have significant implications for Belarus, as they will further pressurize exports lower. However, also note that this will likely slash estimates of the market value of Belaruskali which the Lukashenko government has very much seen as its golden goose - with valuations of as much as $25bn put on the company in the past, which is around 40% of GDP," Tim Ash at Standard Bank suggests.

Lukashenko has long held Belaruskali as a reliable source of cash to help cover the regular fiscal scrapes Minsk falls into, as well as a last gasp emergency route. However, with the forecast collapse of potash prices, the cashflow it produces and its value are both set to drop.

That's a bigger issue than simply leveraging as much cash as possible out of suitors for the asset however. Belaruskali has played a central role of leverage in securing help to keep the country's head above water as it bounces from crisis to crisis.

Minsk is on the edge of yet another economic meltdown. The National Bank of Belarus (NBB) has been hiking money market rates and raising foreign currency reserve requirements as it battles twin crises in the country's balance of payments and within the banking sector. A drop in exports of 18% year on year in the first quarter has seen reserves dwindling and the current account sliding to a deficit of 17% of GDP.

Russia and China's lust for the highly profitable and strategic company has helped allow Lukashenko to use them as alternative sources of cash to the West, which insists on political concessions the president finds unacceptable.

"The rupture in relations with Uralkali also has implications for broader geopolitical relations, given that it is a prominent Russian company, which has received backing from the Russian state in the past," Ash notes.

The Kremlin is well practiced at leveraging its economic clout to get its way in CIS, and has proved numerous times that its patience is almost inexhaustible as it waits for the likes of Belarus and Ukraine to shoot themselves in the foot.

Last time Belarus found itself in hot water in 2010-2011 it spent months persuading Moscow to offer a rescue via the EurAsEC Anti-Crisis Fund. At the same time, Minsk agreed to sell the remaining stakes in its oil pipeline network, handing Russia full control of a major transit route into European markets. In April, Minsk drew the fifth of six tranches of a $3bn loan.

Any approach to Moscow for yet another helping hand to deal with the current growing crisis would likely be long and tricky, and involve handing over more assets. Belaruskali remains the jewel in the crown, and Uralkali was reportedly in talks to buy a large stake in recent years. China and India are also known to be very interested in the company.

However, the wily Lukashenko knows only too well the huge leverage that interest hands him. Once a deal is done, his power to play Russia, the EU and China off against one another would be greatly reduced.

Beijing is another holder of huge cash piles that plays hardball. While it has been happy to move closer to many CIS countries to tap their natural resource base to feed its factories, Belarus has few raw materials to offer, apart from potash.

Lukashenko's mid-July visit to China resulted in decrees on "partnership," but as is common, no actual direct investment or handouts. Sensing the troubles in Minsk, Chinese authorities are now demanding an enlargement of the Belarusian-Chinese industrial park (a $30bn bridgehead into Europe), the construction of a logging park using Belarusian money, as well as the right to use its subsoil.

The visit provided "more evidence that the authorities in Belarus are facing tightening [foreign currency] liquidity conditions as they face a hump in debt service in July," Ash noted at the time. "Meanwhile, talks with the Chinese continue, as they are presumably looking to secure cheap foreign financing with less strings attached than for Russian/IMF monies."

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