Potash politics

CIC's potash stake bodes ill for cartel revival

China Investment Corporation's decision to take a 12.5 per cent stake in Russian potash producer Uralkali makes it less likely that a once powerful Russia-Belarus fertiliser cartel can be revived. A purely financial investor would welcome a return of the producers' alliance. But China, the world's biggest importer of potash, is unlikely to support any move to drive up the cost of the key soil nutrient.

The rare direct Chinese investment in a Russian natural resources company comes amid a flare-up in tensions between the former Soviet republics. Shares of the world's major potash miners tumbled after Russia's Uralkali announced in July that it would abandon its marketing alliance with its big Belarusian rival. Belarus, which depends on potash for about a fifth of government revenue, threw Uralkali's chief executive in jail. Russia then threatened to cut off Belarus' oil supply, before backing down. Uralkali's leading Russian shareholder is now rumoured to be looking for a buyer for his stake. There is still an outside chance that the cartel may reconstitute itself, if and when Moscow and Minsk can hammer out a compromise.

CIC's move to swap some Uralkali bonds it bought from Suleiman Kerimov and some fellow oligarchs into $2 billion worth of shares makes that outcome a little less likely. In theory, the sovereign wealth fund is a financial investor, charged with managing a slice of China's foreign exchange reserves. If investment performance was its only motivation, CIC would prefer to see the cartel back. Potash prices would firm up, Uralkali's shares would pop, and Ding Xuedong, CIC's new chairman, could rest content.

In practice, it's hard to see how the government appointee could back such a move. China is one of the world's biggest importers of potash. Its farmers, and ultimately its consumers, benefit from the cartel's demise. Recent press reports suggesting that China has struck a deal to lease up to three million hectares of Ukrainian farmland - an area the size of Belgium - underscore the strategic importance of agriculture and food security to Beijing.

Russian President Vladimir Putin will have the final say over the cartel's fate. But with Beijing now in control of an eighth of Uralkali's shares, the decision is no longer just a matter of whether he will fight with Belarus over the fate of some oligarchs.