Lukashenko's Potash Hole Grows Deeper

UNCLAS SECTION 01 OF 02 MINSK 000652

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SENSITIVE

SIPDIS

DEPT PASS TO USTR

E.O. 12958: N/A
TAGS: ECON PGOV EMIN ETRD EAGR USTR PHUM BO
SUBJECT: Lukashenko's Potash Hole Grows Deeper

Ref: Minsk 458 (notal)

MINSK 00000652 001.2 OF 002



1. (U) On June 13, Belarus closed all four of its potash mines.
With exports falling due to Lukashenko's insistence on above-market
prices, Belarus no longer had any place to store the potash it was
digging up. The problem began in 2005 when Lukashenko ignored
market reality and ordered the fertilizer export monopoly
Belarusian Potassium Company (BPC, 50 percent owned by the GOB) to
raise the prices for its product by USD 40 per ton (reftel).
China, Belarus' largest potash customer, insisted that prices fall
by USD 20. Yuan Hongchi, Commercial Officer in the Chinese Embassy
in Minsk, confirmed to Econoff on June 19 that Belarus and China
still have not signed a contract on fertilizer sales for 2006.
Belarus also has not concluded contracts for this year with two
other major buyers, India and Pakistan.


2. (SBU) Belaruskaly, the state-owned enterprise that mines all
Belarusian potash, announced on June 12 that it was closing its
four mines, all in Soligorsk, until at least June 25 because its
storage facilities were overflowing. Two of the four mines might
reopen on that day. Since that announcement Belaruskaly and BPC
officials have refused to comment to the press. The Minsk office
of the International Labor Organization told Poloff that Vasily
Korobov, chairman of the Belarusian Independent Trade Union,
visited Belaruskaly on June 13 and confirmed the mines were closed
and that Belaruskaly might be forced to reduce wages. The ILO said
this would be very damaging to the Soligorsk economy, as nearly
every family in the city depends on income from Belaruskaly. On
June 20, the Presidium of the Council of Ministers will meet with
BPC officials to find a solution to this crisis.


GOB: What Problem?
--------------


3. (SBU) While admitting that potash sales have fallen by 25
percent this year, First Deputy Prime Minister Vladimir Semashko
optimistically reported to Lukashenko on June 1 that China would
soon accept BPC's increased price, and that Belaruskaly would
produce a record eight million tons of potash this year (even
though the company reports their maximum capacity is 5.5 million
tons). Semashko argued that it was fair for Belarus to raise
fertilizer prices to USD 205/ton for China, as energy costs are
going up (and energy accounts for 22 percent of the cost of
production),and because some other countries were paying as much
as USD 235/ton. He also claimed that Belaruskaly would open two
more mines to meet "rising demand." Hongchi privately refuted this
optimistic assessment to Econoff. He claimed that the GOB was
asking higher-than-market prices for its potash, and had shown no
flexibility to seek compromise in the last eight months of
negotiations. Hongchi stressed that Chinese buyers would not pay
unrealistic prices, and this year are buying their potash from
Russia. He could not predict if Belarus and China would sign a
potash contract, but said that negotiations are continuing.


Potash Sales Fall by at Least Half
--------------


4. (U) In 2005 BPC exported 7.1 million tons of Belarusian
fertilizer, 2.1 million tons of which went to China. Out of that
amount, Belaruskaly exported 4.289 million tons of potash. China
bought 1.285 million tons, and India bought 727,000 tons. These
two countries were Belarus' largest customers, and do not have
contracts yet for 2006 (no numbers were available for how much
Pakistan purchased). Belarus' other main potash customers were
Brazil (527,000 tons, down 22 percent in 2005),Poland (298,000
tons, down 25 percent in 2005),and the CIS states (129,100 tons).
No information is available on sales to these countries this year.
Before the current troubles, Belaruskaly was Belarus' third largest
exporter, after the Mozyr and Naftan oil refineries (exporting
Russian oil),and potash the country's second largest export.
Potash is Belarus' main natural resource.


Pro-Salt Protest
--------------


5. (U) On June 14, several members of the pro-democracy youth group
Malady Front brought ten kilograms of salt to the entrance of

MINSK 00000652 002.2 OF 002


Belaruskaly and raised a banner saying, "Buy Salt, Save
Belaruskaly." After 15 minutes police arrested three of the youth.
Two minors were released and police charged Aleksey Valabov with
petty hooliganism. Malady Front reportedly staged a demonstration
of support for Valabov in front of the police station on June 15.
Police arrested and charged one minor, Ivan Shyla, with organizing
an unsanctioned demonstration. Shyla claimed police beat a 16-year
old demonstrator, Evgeny Medvedev, who required medical treatment.
This report is not confirmed.


Comment
--------------


6. (SBU) Belaruskaly's problems are a direct result of Lukashenko
meddling with the economy. He ordered the company to increase
exports, told them what price they could charge for their product,
and is preventing them from accepting any lower price.
Unfortunately for Lukashenko and Belarus, Belaruskaly's main
customers are not ready to pay this inflated price. As the summer
agricultural season progresses, Belarus' chances to sign a contract
and sell potash will drop further. If no contract is signed, the
GOB will lose a major source of revenue, plus will probably be
forced to provide hefty subsidies to Belaruskaly to keep its
workers employed and paid.


KROL