Belaruskali v Uralkali: Between Politics and Criminality

On Monday, Belarusian authorities arrested the general director of Russian potash company Uralkali. Vladislav Baumgertner, who came to Minsk to negotiate with Prime Minster Mikhail Myasnikovich.

About a month ago, Uralkali stopped cooperation with Belaruskali and started selling potash at lower prices and taking away Belaruskali's customers. By this action, Uralkali changed the situation on the global potash market and weakened the positions of Belaruskali, the national Belarusian potash company.

Belaruskali, meanwhile, is amongst the three biggest taxpayers to the state budget, so it is no wonder that Minsk resorted to radical measures and launched a wide-scale campaign against major Russian oligarch Suleiman Kerimov. Kerimov is the majority shareholder of Uralkali and its main decision-maker.

Moscow responded with measures which could create a new trade war between Belarus and Russia - by cutting oil shipments and threatening to reduce Belarusian food import. Minsk still insists the affair is primarily criminal. It demonstratively sent arrest warrants to Interpol and promised to capture Kerimov themselves.

A Five-Billion Dollar Bribe?

In 2005, state-owned Belaruskali and private Uralkali founded the Belarusian Potash Company to sell their products together. In this way they could control up to 40 percent of the global potash market. The partners influenced prices and reaped more profits as a result of their cooperation.

But then Uralkali changed hands and the new owner of Uralkali, Suleiman Kerimov, continued enhancing his business. In 2011, he bought the second Russian potash company, Silvinit. The next target was Belaruskali. Kerimov had to cut a deal with President Lukashenka.

Yet his efforts were futile. The Belarusian leader sometimes outrightly refused to sell Belaruskali and sometimes demanded a price of $30bn which Kerimov was not willing to pay. In October 2012, Alexander Lukashenka said, "some Russian oligarchs" had offered to pay him a bribe of $5bn if he agreed to sell the national potash company for $10bn. Most likely, this alleged proposal came from Kerimov.

Uralkali's effective owner had a lot of opportunities to put pressure on Belarus. First, Uralkali could extract potash cheaper than its Belarusian counterpart. Second, Uralkali could put his people in key positions in the Belarusian Potash Company and take control over its trading personnel. This meant that Minsk had to believe what the Uralkali people said.

Belarus Strikes Back?

As a result, Kerimov could both negotiate with Lukashenka and gradually undermine Belaruskali's stature in global markets. The Russian producer started to sell potash without the mediation of the Belarusian Potash Company (BKK). Last year, Uralkali sold only 20% of its produce through the Belarusian Potash Company.

Belarusian media published numerous examples of other abuses, as well. Thus, in July, Russian management annuled a contract between BKK and an Indian company which, according to Belarusian officials, caused $90m losses for Belaruskali. The Russian head manager of BKK Petrov redirected the ships to export Russian potash instead of Belarusian. Recently, Minsk revealed the story of a billion dollar loan taken by Uralkali and guaranteed by the BKK, i.e., potentially making the Belarusian government responsible for repayment if Uralkali itself failed to do it.

The Belarusian side itself was no vegetarian in this capitalist feeding frenzy, paying back in kind, only its potential to influence the situation were much smaller. Thus, while Uralkali single-handedly gave discounts to Chinese buyers, Belaruskali granted preferential conditions to Brazil. In December 2012, Lukashenka issued a presidential edict to the effect that Belaruskali and the Belarusian Potash Company no longer had a monopoly on exporting Belarusian potash.

The edict appears to be a proportional response to Uralkali's policy to sell potash outside the agreed scheme. Yet there is here another point to make. When the Belarusian side noticed that Uralkali was trading potash not through the Belarusian Potash Company but on its own (in violation of the agreement), Minsk did not resort to legal measures. Instead, it decided to break the agreement itself. Post-Soviet business is still not about law; it is about force and might.

Kerimov's team insist that Uralkali recently left the agreement on selling potash through the BKK because of Lukashenka's decision to revoke Belaruskali's monopoly. Uralkali's move caused a kind of earthquake for the entire branch, and with its market capitalisation fell by $20bn, prices plunged. The Russian Izvestia daily compared the situation with “Saudi Arabia deciding to leave OPEC.”

Uralkali is the only world's potash producer which can survive such fall

In this way, through Uralkali Kerimov was given a clear opportunity to build up his potash empire further. As the Russian media proudly noted, Uralkali is the world's only potash producer which could survive such a fall. For Uralkali, production costs are only $62 a tonne while for Belaruskali they are about twice higher, and for other North American and European companies production costs are $100-200 a tonne. Under these conditions, Kerimov has a chance to buy not only Belaruskali, but begin to seek further acquistions as well. The Belarusian potash company, however, has been hit especially hard - its market capitalisation fell by 60-80 percent, while the same losses of Uralkali amounted only to 20-30 percent.

Whom to Blame for the Uralkali Affair in Belarus?

Essentially, Uralkali has pursued its own natural interests in this story, yet such an undermining of Belaruskali's position in order to buy it have hardly any relation to civilised free market rules. Moreover, the behaviour of Russian side would be punishable in most Western countries as a combination of wide-scale fraud, abuse of office, and fraud.

The Belarusian government has blamed Russian business practices, Kerimov and his managers. State media recalled the wild years of Russian capitalism in the 1990s when criminal businessmen bought up even strategic enterprises for a nickel after undermining their positions and putting their own people into the administration. Yet state journalists were silent when it came to discussing the people who let Kerimov's team conduct business in Belarus for years and nearly took away the most profitable of Belarus' national corporations.

The current Belarusian head of state should be the first to explain how this was all possible as he has personally decided Belaruskali's fate for all these years. He brought Belaruskali (then 35 per cent of the global market) into an alliance with the then much smaller Uralkali (then 13 per cent of global market) in 2005.

The consequence was not the expansion of Belaruskali into Russia, but the threat of Belarusian potash being stolen through dubious manipulations. In addition, the Belarusian government did not invest anything into the training of its own specialists to sell potash if something went wrong in their cooperation with the Russians, and undertook next to no measures to establish its own trading network.

At the moment, we can only guess how adventurous the policies of the Belarusian government have become in recent years from anecdotes leaked to the media. For example, how top Belarusian officials celebrate their meetings with “serious investors” from firms worth $20,000. The non-transparent nature of the Belarusian state ensures that decisions of even a national dimension are taken according to the will of a handful of insiders and hardly any outsider can calculate their consequences.

Such affairs show the failure of the current regime not only to develop the country but even to ensure that national assets remain intact. The Uralkali affair is the biggest indicator of this phenomenon, but it is definitely not the only one.

Siarhei Bohdan is an associate analyst at the Ostrogorski Centre.

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