Scandal Erupts Between Russia And Belarus Following Arrest Of Uralkali CEO, Nationalization Threat

Less than a month ago, potash stocks around the world cratered overnight following news that Russian potash producer OAO Uralkali announced its decision to break up a 'marketing venture' that controlled around 43% of global potash exports in the process ending the cartel that many US fertilized companies enjoyed for years. The end of the cartel was also a big hit for former partner Belarusian Potash Company (BPS) and the host nation Belarus, a country of 9.5 million people, where revenue from its potash industry accounts for almost 20 percent of the budget.

Everyone, Goldman Sachs, included were confounded by the move: "Following the July 29 meeting of the Board of Directors, Uralkali has decided to stop its export sales through Belarusian Potash Company (BPC)  and direct all export volumes through Uralkali Trading owing to breach of discipline by Belaruskali, which has made a number of deliveries outside BPC. Uralkali is moving from a ‘price over volumes’ strategy to a ‘volumes over price strategy’ and targets 10.5MMT in 2013 and 13MMT in 2014. Such behavior by Belaruskali in a structurally oversupplied potash industry should push for stricter competition for end customers and result in a significant swift decline in pricing... " What was most surprising is that Uralkali would voluntarily engage in this move, knowing full well that the Belarus government would retaliate. The only question is how severely. Turns out the answer is "very."

Earlier today, Belarus accused top executives at Russian producer OAO Uralkali of a criminal scheme, threatening to embroil both governments in a conflict that could cause broader economic and political damage.

Bloomberg reports:

Belarus officials detained Uralkali Chief Executive Officer Vladislav Baumgertner after inviting him to Minsk for talks. He’s still chairman of Belarusian Potash Co., the joint venture with state-owned Belaruskali that the Russian company said July 30 it was withdrawing from.

 

Baumgertner was charged with abusing his office at the venture and could face as many as 10 years in prison if found guilty, Pavel Traulko, a spokesman for Belarus’s Investigative Committee, said yesterday by phone.

 

Belarus officials have issued warrants for the arrest of four more Uralkali executives, accusing them along with Baumgertner of a scheme to cut Belaruskali out of decision-making at the venture, causing damages and losses of about $100 million.

The Russian response to the unprecedented arrest was swift:

Baumgertner’s arrest “crosses every line,” Russian First Deputy Prime Minister Igor Shuvalov told reporters yesterday. Russian Prime Minister Dmitry Medvedev ordered the government to resolve the situation with Belarus, Shuvalov said. The move is “inappropriate and not like a partner’s.”

 

Uralkali issued a statement denying the allegations against Baumgertner. The act was an “outrageous provocation,” Alexander Babinsky, a company spokesman, said by phone. The CEO traveled to Minsk at the invitation of Belarusian Prime Minister Mikhail Myasnikovich and was detained at the airport after their talks, he said.

 

“This will make it difficult for the two to get back together in any kind of trading venture,” Boris Krasnojenov, an analyst at Renaissance Capital in Moscow, said by phone. “Belarus may be pushing Uralkali to split markets between them after the breakup of the venture.”

However, instead of backing off, Belarus, which has little option but to press on or else see its government revenues crater, merely escalated further, and as Interfax reported, the Belarus’ Investigative Committee has announced it is considering seizing the assets of Russian company Uralkali after Monday’s arrest of its chief executive.

Of course, at the end of the day, Russia will win for one simple reason: it controls the energy. Belarus has a history of economic and political disputes with its much larger neighbor. Russian crude oil imports were briefly cut off in 2011 after the countries failed to agree on price. Belarus folded.

Belarus will fold again, however in the process it will merely embolden Putin even more: a Russian president who recently has been attacked by opponents across the globe, who constantly overestimate their leverage. And the last thing Putin needs, now that he is involved in a conflict that may escalate to involve both Europe and the US, is more aggressive thoughts, and an even bigger sense of invincibility.

As for those buying potash stocks on hopes the conflict between Uralkali and Belarus will force a return to the status quo, make sure you don't get physical delivery of all that fertilizer.