Putin Sway Over Lukashenko Bolstered as Potash Bet Backfires

Belarus is poised to become more reliant on Russia after President Aleksandr Lukashenko’s hard line on sales of potash, the country’s main natural resource, shattered an alliance that helped set the crop nutrient’s price.

Lukashenko, who has ruled since 1994, faces the prospect of dropping export revenue as potash prices plunge. That raises uncertainty about funding once the final payment from a Russian-led $3 billion bailout loan is made this year. The cash is tied to policy measures, including state asset sales.

The east European country is part of a customs union that Russian President Vladimir Putin has championed to strengthen economic ties among former Soviet republics. Lukashenko sold its natural gas pipelines to OAO Gazprom after disputes over energy prices, leaving state potash company Belaruskali as the nation’s most valuable asset. Lukashenko says it’s worth $36 billion.

“Russia wants to get its hands on key assets in Belarus,” said Joerg Forbrig, a senior program officer at the German Marshall Fund of the United States in Berlin. “If share prices of potash companies are plummeting, this makes it easier for Russians to take over Belarusian producers.”

Belarus’s dollar-denominated debt due in 2015 declined for a ninth day, increasing the yield 10 basis points to 9.62 percent as of 1:39 p.m. in Moscow. The yield has jumped 149 basis points, or 1.49 percentage points, from the July 29 close after OAO Uralkali, part owned by billionaire Suleiman Kerimov, broke off cooperation with its Belarusian competitor.

Export Driver

The country, which lies between Poland and Russia, earned $2.7 billion selling potash abroad last year, or 5.9 percent of total exports. Belaruskali is its most profitable company.

Financing talks with the International Monetary Fund have stalled over what Belarus says are political demands, as it waits for a final $440 million payment from the Russian-led facility this year. The country is now looking to China, the world’s biggest potash consumer, for a loan to boost its foreign currency reserves, central bank chairman Nadezhda Ermakova said July 19.

Potash prices may “easily” drop by a quarter, which would increase Belarus’s trade deficit by about 40 percent, according to Michael Ganske, head of emerging-market debt at Rogge Global Partners in London. The company has $56 billion under management.

‘Strong Grip’

“At some stage the system will change, but that would have to happen without Lukashenko,” Ganske said yesterday by e-mail. Lukashenko has a “strong grip on all institutions,” allowing him ride out economic crises such as a 2011 currency devaluation that sent inflation above 100 percent, he said.

Uralkali, the world’s largest potash producer, said it decided to end output restrictions that underpinned global prices and suspend exports through Minsk-based Belarusian Potash Co., a venture it established with Belaruskali in 2005. BPC had controlled about 40 percent of global exports.

Both companies are racing to buyers to shore up orders, with Uralkali betting Russia’s rail links to China will secure its access to the world’s biggest consumer of the nutrient. Belarus, which is landlocked, is looking to Brazil.

Belaruskali plans to build ports in Brazil, which consumes about 20 percent of its exports, Director General Valery Kiriyenko said in an interview July 31. In April, the company bought 30 percent of Lithuania’s Klaipeda port terminal, which handles more than 90 percent of its exports.

China Investment

China has also shown interest in Belarus, building a $5 billion city in the forests near Minsk, the capital. The manufacturing hub is designed to house as many as 155,000 people, according to Chinese and Belarusian officials.

It may take as long as nine months for Belaruskali to organize a new trading structure, Elena Sakhnova, an analyst at VTB Capital in Moscow, said by phone yesterday. While profitability may fall next year, revenue may recover to $3 billion from $2.7 billion in 2012, thanks to low costs comparable with Uralkali’s, she said.

Ties between Putin, 60, and Lukashenko, 58, haven’t always been warm. They have sparred over prices for exported Russian fuel, leading to a brief shut-off in oil supplies in January 2007. Still, Russia has provided its smaller neighbor with discounted natural gas and crude for years, seeing the nation of 9.5 million as a loyal political ally.

Bigger Fish

Belarus has embraced a Russian-led customs union and common economic space with Kazakhstan. The closer integration has boosted trade, while volumes between Russia and Ukraine, which opted against joining, dropped in the first quarter, Putin said July 27 in a meeting with Ukrainian President Viktor Yanukovych in Kiev.

Lukashenko skipped that meeting. He also showed a sense of one-upsmanship after Putin claimed to have caught a 21-kilogram (46 pounds) pike during a vacation last month. Putin’s boast was lampooned on social networks, with professional anglers saying the weight appeared exaggerated.

“I personally pulled out a 57-kilogram catfish,” Lukashenko said in televised comments this week. The catch, he said, came from the Pripyat river, which was contaminated in the 1986 Chernobyl nuclear disaster.

Russia may come to the rescue again as the Belarusian ruble comes under pressure, Jacob Nell and Alina Slyusarchuk, economists at Morgan Stanley, said in a research report. Belarus’s $8 billion reserves equal two months of imports.

Ruble Weakening

“The failure to agree to any significant privatizations since 2011 and the collapse of the potash marketing arrangements suggest that reaching agreement with Russia may be complex,” they said.

Uralkali says the decision to break with the alliance was motivated by business interests.

“There is no politics in our decision to abandon the BPC joint venture,” Vladislav Baumgertner, Uralkali’s chief executive officer, said in an interview in Moscow on July 31. “We just didn’t want to lose money after the actual cooperation with Belaruskali in international trading collapsed once they started shipping some volumes outside BPC.”

The decision was “unilateral” and without warning, Belaruskali said in a statement July 31. Uralkali sold about 20 percent of its exports through the joint venture in 2012 and the first half of this year, with the rest going through its own trading unit, Belaruskali said. Uralkali’s press office declined to comment.

U.S. Sanctions

American sanctions against the Belarusian state holding company that manages Belaruskali have closed some markets to potash from Belarus or sold by BPC, while the U.S. accounted for as much as 5 percent of Uralkali’s sales last year.

Cooperation with Belarus reached “a deadlock” after Lukashenko canceled BPC’s exclusive right to ship the nation’s potash abroad in December, Uralkali said July 30.

“It’s hard to say why Belarus was pushing to the split of the partnership, as the cooperation was a win-win for both parties,” said VTB Capital’s Sakhnova. “Maybe Lukashenko was just seeking more freedom for his country’s most valuable asset.”