Lukashenko's Potash Hole Grows Deeper

UNCLAS SECTION 01 OF 02 MINSK 000652 SIPDIS 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