MOSCOW/LONDON China acquired a 12.5 percent stake in Russian potash producer Uralkali (URKA.MM) in a deal that could help Beijing secure stable supplies of the soil nutrient, put new pressure on prices and reduce the chances of a Russia-Belarus cartel being revived.
The investment by China's $575 billion sovereign wealth fund China Investment Corp (CIC) CIC.UL is the latest twist in a saga that began when the world's leading potash producer quit the lucrative sales partnership with Belarus in July and led to the company's chief executive being jailed.
Under the deal, Uralkali said on Tuesday that CIC had received the stake in a bond exchange deal with Wadge Holdings Ltd, which belongs to three shareholders including oligarch Suleiman Kerimov.
The deal is a rare example of China, the world's largest consumer of potash, acquiring direct ownership of Russian natural resource assets, although it is only the latest in a series of commodity-related investments by CIC.
It also coincides with speculation that Kerimov might sell his 21.75 percent holding over a dispute that has soured Russia-Belarus relations.
Uralkali sent the $20 billion global potash market into turmoil when it quit the marketing alliance with state-owned Belaruskali. Belarus hit back by arresting CEO Vladislav Baumgertner after talks with the country's prime minister.
Some investors believe the Kremlin wants to repair the alliance to avert a possible collapse in the price of potash, which accounts for 12 percent of Belarus's state revenue.
"I can see little chance that the government would allow the Chinese fund to acquire a much larger stake," said Boris Krasnojenov, an analyst at Renaissance Capital in Moscow.
"There is no similar precedent in Russia, and the eventual buyer would probably be a Russian player."
There are no negotiations to sell Kerimov's personal stake to CIC, a source close to the businessman told Reuters.
CIC declined to comment.
While China is unlikely to support steps that would push up global potash prices, and has little chance of being allowed to increase its holding significantly, the minority stake should facilitate smoother potash trading between the two countries.
"China wants to secure stable supplies of potash from the Russians," one industry official said. "Having a big buyer as a shareholder in a producer company would definitely have an impact on the market."
A source familiar with the bond exchange said it was triggered when Uralkali's market value fell below $20 billion, while no cash changed hands in the deal. Chengdong Investment Corp, a subsidiary of CIC, bought the exchangeable bonds from Wadge last November.
Urakali's biggest rival, Canada's Potash Corp of Saskatchewan (POT.TO), said it sees the Chinese stake as a "non event" without direct implications for potash sales.
"I can't imagine there would be any associated transactions with this thing that would impair the valuation of the remaining (shares of Uralkali)," Potash Chief Financial Officer Wayne Brownlee said at the Scotiabank Agriculture and Fertilizers conference in Toronto. "It just doesn't make sense to me from a business basis, and so I think this is purely a passive investment at this stage."
One banker familiar with the deal said it is a logical completion of November's bond purchases.
"CIC has an interest in taking a 10-year view and sitting there as financial investors, not as interferers," he said, adding that CIC might, however, act as a facilitator for Chinese buyers of Russian potash.
Uralkali's equity market value is now $16.4 billion, valuing the 12.5 percent stake at around $2 billion.
The transaction could seek to set a benchmark for a broader change of ownership in a Kremlin-blessed deal that would bring in one or more strategic buyers.
"It is a company that could be bought by a huge number of Russian and foreign investors," First Deputy Prime Minister Igor Shuvalov told Reuters on Monday.
Shuvalov sought to quash speculation that a Russian state business might buy into Uralkali: "There is no sense for the Russian government to take on the risks (of ownership) itself," he said at the Reuters Russia Investment Summit.
While Kerimov's foundation owns 21.75 percent of Uralkali, his partners, Filaret Galtchev and Anatoly Skurov, own 7 percent and 4.8 percent, respectively.
Kerimov is not under Kremlin pressure to sell down his stake but might be willing to step back to resolve tensions between Moscow and Minsk, the banker said.
China has in recent years increased efforts to secure its needs for natural resources, in one case lending $25 billion to Russia's state oil major Rosneft (ROSN.MM) and pipeline monopoly Transneft (TRNF_p.MM) secured against long-term oil supplies.
The deal with Uralkali could strengthen China's position in negotiations with other producers. China imports around 6 million tonnes of potash a year, more than 10 percent of global demand, and the Chinese potash price is considered the global benchmark.
Potash prices nosedived after the split between Uralkali and Belaruskali in July, though many buyers continue to wait on the sidelines as they expect further price decreases.
The joint venture - Belarusian Potash Co (BPC) - controlled some 70 percent of the market together with Canpotex, a rival North American alliance.
The deal could give Uralkali an upper hand in selling potash in the Chinese market ahead of Canpotex, said an official at Rashtriya Chemicals and Fertilizers Ltd <RSTC.NS>, a leading state-run Indian fertiliser company.
The deal is unlikely to affect Indian supplies, said the official, who declined to be identified. India is the world's second-largest potash consumer.
Uralkali shares closed down 1.7 percent in Moscow. Potash Corp stock was down 0.6 percent in New York in mid-day trading.
(Additional reporting by Victoria Andreeva, Douglas Busvine and Steve Gutterman in Moscow, Rod Nickel in Winnipeg, Manitoba, Rajendra Jadhav in Mumbai and Koh Gui Qing in Beijing; Editing by Louise Heavens, Timothy Heritage, Dale Hudson and Lesie Gevirtz)