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2 August 2016

Potash Politics

Commodity brings together – and drives apart – oligarchs, Beijing, the Kremlin and Belarus

Oil and gas are often used as a foil for understanding the geopolitics and political economy of Eurasia. However, another much lower-profile commodity – potash, a key component in the fertilizer industry – is arguably better suited to doing so. An analysis of recent developments in the potash market demonstrates shifts in Russian-Belarusian relations, Belarus’ challenges in balancing its foreign policy, the Kremlin’s willingness to use loyal oligarchs even for external aims, and that China’s influence across Eurasia is now firmly established.

The history of the Russian-Belarusian export cartel

In 2005, Russian potash firm Uralkali and its partner, Belarusian state-owned agreed to form an export cartel, known as the Belarusian Potash Company (BPC). BPC would jointly market and sell Uralkali and Belaruskali’s potash and allowed the two companies, responsible for some 40% of global potash supply, to effectively set global prices. Uralkali, then controlled by Dmitry Rybolovev, was able to launch a successful IPO in 2007, while Belarus was able to secure large flows of foreign currency, a major challenge for the country that was under sanctions at the time. In 2010, Rybolovev cashed out, selling his stake to three oligarchs, with the largest stake going to Kerimov. The business remained extremely profitable, but under Kerimov strains between Uralkali and Belaruskali began to emerge. Uralkali felt Belaruskali’s efforts to sell potash independently of BTC to China – which typically sets the global benchmark price for the commodity – as threatening the price of the commodity and withdrew from the cartel on 31 July 2013. Others speculated the move was an attempt by Kerimov to undercut prices in order to boost Uralkali’s market share. The move set off a spate of mutual recriminations, the apex of which was Belarus’ 26 August 2013 arrest of Uralkali’s then-CEO, Vladislav Baumgertner.

In November 2013, another Russian oligarch, Mikhail Prokhorov, bought Kerimov’s stake, while Minsk-born Uralchem boss Dmitri Mazepin bought the 20% stake held by a series of Kerimov associates. The move was widely seen as a Kremlin-managed manoeuvre to moderate tensions. Yet the cartel was not resumed and Uralkali’s share price continued to suffer in the subsequent years. Numerous oligarchs flopped their hand at operating a business in an oligopoly.

Belarus’s balancing act between Russia and China

Belarus seized the opportunity presented by the cartel’s collapse to expand its own market share and become China’s leading supplier. Although the practice affected Belaruskali’s bottom line, it came as Belarus was heavily courting Chinese investment and, although the actual economic benefits of this policy have been widely questioned, it offered Belarus not only the chance to pursue economic opportunities, but to also pursue the development of political ties with China independently of Moscow.

Yet Belarus’ China policy has been frequently questioned lately. Chinese foreign direct investment into Belarus remains negligible compared to that from Russia. Meanwhile the political crisis and war in Ukraine offered Belarus another way to diversify its foreign policy, by acting as a mediator and the host of the Minsk talks. From a political standpoint, this policy was much more successful, with the European Council directly citing Belarus’ “constructive role in the region” in its statement announcing the lifting of sanctions on Belarus this February. However, Belarus’ new found willingness to play nice with the West has not altered its stated three pillars of Chinese-Belarusian relations: mutual cooperation in the international sphere, Chinese loans and investments, and the growth of Belarusian exports to China.

China has also taken its own efforts to demonstrate it values its ties with Belarus, particularly through the potash market. When the Kremlin ordered the sale of Kerimov’s Uralkali stake, it also brought China to the table, allowing the China Investment Corporation, China's sovereign wealth fund, to convert bonds into a 12.5 per cent stake in Uralkali. But by September 2015, China sold the stake back to the company, potentially precipitated by the annual agreement with Belaruskali five months earlier that demonstrated Mink’s willingness to significantly undercut global prices. More recently, the centrality of potash to Chinese-Belarusian relations was evidenced by the signing of a US$1.4bln loan from China to Belarus last month for the development of a new potash project. While Belarus will continue to take what benefits it can from the relationship it will continue to pursue a foreign policy of balancing between Russia, the West and China.

The implications of the latest Uralkali sale

By the beginning of July of this year, it had become clear that that oligarch Mikhail Prokhorov was to sell his 20% stake in potash giant Uralkali, under pressure from the Kremlin, less than three years after oligarch Suleiman Kerimov sold the stake to him, under pressure from the Kremlin. It was reported Prokhorov was being forced to sell all of his Russian assets as a result of a falling out with the Kremlin, potentially a result of his RBC Media Holding’s publication of articles linking President Vladimir Putin to the Panama Papers, as well as releasing details of Putin’s daughter’s marriage. Yet the Kremlin is keenly aware of the adage that in every crisis lies great opportunity.

On July 8, a little-known Belarusian businessman, Dmitri Lobyak, purchased Prokhorov’s Uralkali stake for an undisclosed sum. Lobyak quickly called for the resumption of the Belarus-Russia potash cartel that dominated global markets for the commodity between 2005 and 2013. The recreation of the cartel would have major implications for potash markets, Russian-Belarusian relations as well as China’s attempts to expand its influence in Eurasia.

Lukashenko has also issued statements supportive of the cartel’s resurrection in recent weeks. Yet Belaruskali also reached a deal at the end of June to sell potash to Indian Potash Limited at US$227 per ton, the lowest price for a decade. The deal was of particular note as China had yet to sign an annual agreement with any of the major exporters halfway through the year, which had been depressing sales volumes and causing significant uncertainty across potash markets. Restructuring the cartel before any such agreement would have significantly shifted negotiating power away from the Chinese buyers and towards Belaruskali and Uralkali.

These developments come amid an environment in which Minsk is keen to show that it still tilts towards Moscow, despite its delicate balancing act. Moscow and Minsk do occasionally have tiffs over energy exports, customs measures and defence measures but Lukashenko has proven remarkably adept at keeping these issues contained. Yet now Russia and Belarus’ economies are both once again under significant strain. The dollar value of bilateral trade between the two countries is falling, and certain right wing Russian groups are whipping up fears of a ‘Maidan’ in Belarus. Meanwhile, Moscow is also looking to ensure that Belarus remains firmly in its orbit. The sale of Prokhorov’s Uralkali stake to Lobyak indicates that a resumption of the potash cartel may be the way through which this is pursued. Lobyak is reportedly a high-school classmate of the aforementioned Russian oligarch Dmitry Mazepin. Mazepin is also believed to have full management control of Uralkali, with the Kremlin’s blessing. If anyone can secure resumption of the cartel, Mazepin is likely as strong a candidate as can be found.

The future of a Russian-Belarusian export cartel?

On July 14, China finally agreed to its annual potash import contract, with Belaruskali, at $219 per tonne. The deal is undoubtedly a ‘victory’ for China. It indicates Belarus will not be rapidly return to the cartel without ensuring that it is thoroughly incentivised to do so. Minsk will continue to need the additional foreign currency that earning a higher price ensured by the cartel could provide and it will continue to need to show its tilt to Moscow when pushed. However, it is the collapse of the initial cartel and its subsequent aftermath that means Moscow can no longer merely order Minsk to do so. The new agreement also demonstrates that China’s influence firmly stretches across Eurasia to the point where it is a major factor in the relationship between Russia and Belarus, which are technically in a political and economic union. For Russia it presents a new challenge, with the contract raising the stakes regarding resumed cooperation with Belarus. A new cartel agreement may still be agreed, but it will not be dictated. 

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