After making billions in rough-and-tumble sectors, Suleiman Kerimov may have met his match in potash

September 17, 2013 7:06 pm

Mining: Gone to potash

By Courtney Weaver, Charles Clover Jan Cienski

After making billions in rough-and-tumble sectors, Suleiman Kerimov may have met his match

Hailing from a poor part of southern Russia, Suleiman Kerimov became a billionaire through iron determination and a gargantuan appetite for risks – some of which work out, some of which do not. He crashed a Ferrari Enzo on the French Riviera in 2006, sustaining burns for which he still wears oedema gloves. He poured $450m into Anzhi Makhachkala, a football club in Dagestan that so far has not lived up to his hopes. His highly leveraged investments in western banks almost cost him his fortune amid the collapse of financial markets in 2008, but he made it back. Some say he leads a charmed life while others attribute his good fortune to his solid political connections in the Kremlin. Whatever the case, Mr Kerimov may have gone too far when he – or more accurately his subordinates, according to people familiar with the matter – took onAlexander Lukashenko, the mustachioed president of neighbouring Belarus last July.The dispute between Mr Kerimov’s flagship potash producer, Uralkali, and Belarus has left the company’s chief executive sitting in a Minsk jail. This week there has been mounting speculation that Mr Kerimov will sell his shares in the company. For some observers, the episode serves as a stark reminder of the hazards of doing business in the former Soviet Union.

After making his fortune in the competitive, often lethal, banking and mining sectors, Mr Kerimov decided in 2010 to enter one of the least risky industries in Russia: fertiliser.

Run by two cartels that set the world price of potash, and buoyed by high food prices worldwide, it was a “gentleman’s game”, according to a senior executive of Uralkali, the Russian company that is the world’s largest producer of fertiliser. Mr Kerimov’s stake was estimated at 21 per cent in 2010.

The deal negotiated that year between Uralkali and Belaruskali in neighbouring Belarus made everyone rich, creating a consortium known as Belarus Potash Company. Uralkali got 60 per cent of the production quota and Belaruskali 40 per cent. According to a senior Uralkali executive, it was “very profitable for all producers. Maybe less so for consumers.” But as long as no one cheated, everyone won.

In July, however, this country-club-like world was upended by a messy divorce of Uralkali and Belaruskali, sparking a cross-border war of words, a 25 per cent drop in the world price of potash and, finally, a curious invitation from the Belarusians to Uralkali executives to meet in Minsk. Once there, on August 26, Belarusian authorities arrested Vladislav Baumgertner, Uralkali’s chief executive.

Almost three weeks later, Mr Baumgertner is languishing in prison as the two sides engage in a game of chicken, with the Belarusians trying to force the Russians to reinstate the price-fixing scheme.

“They want the cartel back, that’s it,” says one person close to Uralkali. The Belarusians, for their part, believe the Russians are trying to force them to sell a stake in Belaruskali, a natural acquisition target, amid serious financial problems in Belarus.

Many believe both sides will eventually agree to reinstate the cartel. “There is no one who thinks the relationship won’t be repaired,” says a senior banker with ties to Mr Kerimov. “It is hurting everyone – investors, the industry.” Resolution is merely a “question of price”.

But Uralkali is playing hardball, insisting it has no plans to rejoin the cartel and airing a long list of grievances over the breakdown of relations with the Belarusians. In turn, the Belarusians accuse the Russians of scheming from the beginning to favour Uralkali over Belaruskali.

“Step by step they took over BPC [the joint consortium]. They stole the overseas staff. They were also stealing property and computers and destroying information,” says a Belarusian official. (Uralkali denies this.) This person says BPC officials directed ships from the Latvian port of Klaipeda, where they would have loaded potash produced by Belaruskali, to St Petersburg to load product mined by Uralkali.

According to the Russian side, however, Belarus had “pushed us to the wall”, a person close to Mr Kerimov says. From a 60-40 quota split, Minsk insisted on a 55-45 split. Even after they got it, Mr Lukashenko signed a decree in December allowing Belaruskali to sell potash directly, bypassing BPC – in breach of the cartel’s charter.

Mr Kerimov met Mr Lukashenko in January and was assured that the decree was only for public consumption. “We won’t break the quota,” a person in the room recalls Mr Lukashenko saying.

Despite Mr Lukashenko’s assurances, Belaruskali entered into private sales talks with customers such as India and Brazil, and from May to June sold an estimated 85,000 tonnes outside the cartel, according to Uralkali. While the amount was not considered large, for the Russians it was enough. “It was a signal that if we waited they would just cheat us,” says one senior Uralkali executive.

On Friday July 26, Uralkali’s board decided to pull the plug on the cartel, informing the market of their decision the following Tuesday. The news sent Uralkali’s stock tumbling 17 per cent. Yet it dealt a bigger blow to Minsk, which is struggling to pay back a $3.5bn loan to the International Monetary Fund and which relied on Belaruskali for 20 per cent of its annual budget. Mr Lukashenko was furious.

Two weeks after the decision,  Mr Kerimov received an invitation from Russia’s deputy prime minister informing him the Belarus prime minister had personally invited him and Uralkali’s top management to Minsk.

Mr Kerimov offered to attend the meeting, a person close to the oligarch says, but Mr Baumgertner refused, insisting that he travel to Minsk on his own. It was a decision that would prove fortunate for Mr Kerimov and disastrous for the chief executive. Mr Baumgertner was charged with abuse of office – a crime carrying a prison sentence of up to 10 years. A week later Belarus issued a warrant for Mr Kerimov’s arrest on the same charge. People close to Mr Kerimov say he cannot leave Russia for fear of an Interpol warrant, though Interpol said on Thursday the requisite notice had yet to be issued.

A person close to Mr Kerimov says the oligarch blames himself for a “miscalculation . . . for not understanding the political ramifications of the actions and pre-empting them”. Another senior Uralkali executive says they had not consulted with Russia’s presidential administration, where most business decisions are vetted, before leaving the consortium.

As Mr Baumgertner waits behind bars, the Kremlin has been strangely reluctant to get involved – a fact that some attribute to political infighting in Moscow. Mr Kerimov is said to have good relations with Dmitry Medvedev, the Russian prime minister, but not with his reputed competitors in the Kremlin.

While one Russian deputy prime minister who is close to Mr Medvedev has petitioned for Mr Baumgertner’s release, Vladimir Putin, Russia’s president, has only said he does not want to “kick up a fuss” with Belarus.

Despite an indirect threat on September 5 by Arkady Dvorkovich, deputy prime minister and a Medvedev ally, to cut oil supplies to Belarus in retaliation for the move, Igor Sechin, chairman of Rosneft, Russia’s state oil company, and a key Putin ally, travelled to Minsk to reassure Mr Lukashenko that Russia would continue to meet Belarus’s oil needs. Mr Baumgertner’s fate was not mentioned publicly. Mr Sechin denied press reports that he was interested in taking over Uralkali amid a number of press reports that the shares were up for sale.

A person familiar with Mr Kerimov’s thinking says Mr Putin is merely trying to give the Belarusian president a way out. “Putin is thinking, ‘let’s not put him in a corner’.”

Others say Mr Kerimov is being punished for failing to negotiate an Uralkali-Belaruskali tie-up and for losing control of the cartel. A senior Russian banker says: “Lukashenko is not a decision maker. He’s being influenced, controlled, managed. In Russia someone in the government wants Uralkali back.”

Minsk insists this is not a dispute between Russia and Belarus but between Belarus and a Russian company. “We are not fighting with the Russians at all,” says Andrei Savinykh, spokesman for the Belarusian foreign ministry. “This is not a political dispute, it is a commercial issue.”

The Kremlin’s inaction can also be explained another way. Russia is seeking to lure Ukraine into a customs union, while Kiev is debating closer ties to the EU. “You can’t be strangling Belarus with one hand and at the same time telling the Ukrainians, ‘it’s OK, you have nothing to worry about, we’ll make a good trading partner’,” says a former Kremlin official.

People close to Mr Kerimov say he is in talks to sell his stake in Uralkali to several potential buyers, including Vladimir Evtushenkov and Mikhail Gutseriev, the billionaires, and Vladimir Kogan, a former state official, to placate Mr Lukashenko, who wants the oligarch out.

“There is genuine concern for Vlad’s [Baumgertner] life and wellbeing. There are lives at stake and it’s only money,” says a person close to Mr Kerimov.

Others say that Mr Kerimov has no intention of selling, and contend that the Kremlin’s end game is to obtain a stake in Belaruskali.

Uralkali executives say that the prospects of an Uralkali-Belaruskali tie-up are slim. “Lukashenko would never sell. To him, Belaruskali is worth more than Gazprom is worth for Russia. It’s his favourite toy,” says a person close to Uralkali.

Yet in the next breath, this executive suggests perhaps the Russian state could buy a stake in Belaruskali directly, an agreement that would be more palatable to Uralkali’s nervous London shareholders.

Belarus has already sold its share of a natural gas pipeline to Gazprom for $2.5bn, helping rescue the country from an economic crisis in 2011. Although the Belarusian economy is again in trouble, Mr Lukashenko is keen to hang on to his strategic assets, including Belaruskali. If forced to sell Belaruskali, Mr Lukashenko wants a very high price, about $30bn, and would only sell a minority stake.

“I was not going to and I am not going to sell Belaruskali to anyone for peanuts,” Mr Lukashenko has said. “If someone wants to buy it, they have to pay the price we’ve set. Nobody is going to reduce the price.”

Even if Russia is not allowed to buy a stake in Belaruskali, it is hard to imagine Uralkali refusing to patch up ties with its Belarusian partners and resuming the profitable old country-club-style way of life.

“Exiting the cartel never made sense. It didn’t make sense then and it doesn’t make sense now,” says Joseph Dayan, head of Markets at BCS Financial Group. “It was such a perfect set-up for producers. People don’t tend to self-destruct intentionally.”

Sport: Oligarch’s football fantasy kicked into touch

As the conflict between Belarus and Russia escalated this summer, Uralkali’s main shareholder was distracted by another issue: football.

In 2011, Suleiman Kerimov ploughed $450m into Anzhi Makhachkala, a fledgling football club in restive Dagestan. He hired star players such as Samuel Eto’o and Roberto Carlos with fantasies of turning Anzhi into a top club. The dream failed.

In August, after a disappointing start to the season, Mr Kerimov’s holding company announced it was pulling most of Anzhi’s funding and slashing the club’s annual budget from $180m to less than $70m.

A person close to Mr Kerimov said the oligarch would now be willing to give the club back to the Republic of Dagestan, though the annual costs of running it are in excess of $60m. The person said the club’s poor standing had tortured the football-obsessed Mr Kerimov to the point where he “wasn’t even thinking about business any more”.

Mr Kerimov’s decision on Anzhi came as Uralkali’s troubles began to fuel speculation that the oligarch – known for borrowing aggressively with only his financial holdings as collateral – was in some sort of financial trouble.

Last week Kommersant, the Russian daily, reported that Mr Kerimov was looking to sell his 36 per cent in London-listed PIK Group, one of Russia’s biggest developers, as well as a 75-storey skyscraper he owns in Moscow’s financial district.

As well as his estimated 21 per cent stake in Uralkali, Mr Kerimov owns 40 per cent of London-listed Polyus Gold and holds small stakes in Sberbank and VTB, the Russian state lenders.

A representative of Mr Kerimov declined to comment on the sales reports or on his financial standing. While people close to Uralkali say that some of his 21 per cent shareholding in the company is collateral for credits, they deny that he is facing any margin calls. A banker from a state-owned lender echoed this. “Kerimov is not under pressure financially. We are 100 per cent behind him,” the banker said.

Some speculate that Mr Kerimov’s troubles at Uralkali and Anzhi may be the result of a loss of political standing with the Kremlin. But people close to him also denied this, saying Mr Kerimov appeared to be preparing a financial play.

“Kerimov is a financial investor, probably the smartest in Russia,” the banker said. “He has a record for getting things absolutely right.”