‘Potash Crisis’ Exposes Faults in Belarus’s Economy

    The Wall Street Journal
    By The Wall Street Journal

    By Lukas I. Alpert

    A view shows waste heaps at the Belaruskali potash mine near the town of Soligorsk on March 17.

    MOSCOW—The decision by Russia’sUralkaliURALL +12.40% to drop out of a long-standing sales partnership effectively ended a global pricing cartel and shook potash markets to their core, but the most damaging fallout may be felt by the company’s former partner, Belarus, which could see its hard-fought currency stabilization efforts put further at risk.

    Belarus earned $3.2 billion in potash exports last year, which amounted to 7.1% of the country’s total export earnings. If potash prices tumble 25% to $300 per ton by the end of the year, as forecast by Uralkali, it would cost Belarus $900 million, or about 1.8% of its overall exports.

    While the direct impact wouldn’t be devastating on its own, the “potash crisis” exposes serious fault lines in Belarus’s current economic situation. The Belarussian ruble has depreciated 3.6% against the dollar since May 1 and has dropped 7% in the last year. The country also suffers from low reserves and a widening account defici,t giving it few ways to turn, said Morgan StanleyMS -0.25%’s Jacob Nell.

    “We see the recent collapse of the potash marketing arrangement and the likely negative impact for the Belarus economy as a trigger for investors to re-price Belarus credit wider,” he wrote in a note to clients.

    Another contributing factor is that the state-run potash miner, Belaruskali—which had for eight years sold its fertilizer in partnership with Uralkali through the Belorusian Potash Co., or BPC—“is one of the most important sources of tax revenue and foreign exchange for Belarus,” said Irina Tochitskaya of the IPM Research Center in Minsk.

    Belaruskali has been largely silent in response to Uralkali’s surprise move on Tuesday to cease working with BPC, which was one of two global potash marketing groups that had for years set identical prices in the $22 billion market for the fertilizer ingredient. Belaruskali has said they were caught off guard by the move, and were working at coming up with a new strategy.

    In deciding to go on its own, Uralkali said it would pursue a high-volume, low-price strategy, turning the market, which had relied on limiting supply and keeping prices high, on its head and plunging potash mining stocks across the globe.

    The decision comes just two years after Belarus was saved from an economic free fall that saw its currency depreciate 65% against the dollar in 2011, when Russia agreed to give it a 10-year, $3 billion stabilization loan. Among the many conditions was that Belarus move to privatize some of its government-run companies, most notably Belaruskali, which President Alexander Lukashenko valued at $20 billion to $30 billion. Several Russian billionaires engaged in talks about buying the Belarussian state assets, but so far none have been sold.

    That has strained relations between the two countries, and while Belarus’s economy has stabilized, it is likely to need additional financing as its export levels are falling and its external accounts have started deteriorating again.

    “We expect a Russian deal eventually. But 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, and it may come after loss of reserves and a sharp weakening in the Belarussian ruble, not before,” Mr. Nell said.

    Ms. Tochitskaya said that this will likely cause the value of Belaruskali to decline further, which will leave Belarus with less negotiating room in the future.

    “A fall in capitalization of Belaruskali is a serious problem. Belarus sees this venture as the family silver. A share of it could be sold in the event of a really serious problem in the economy, but falling capitalization reduces the price of both the company and its shares, ” she said.

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