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Trading Russian oil? Learn more about potash
September 17, 2013 / 3:52 PM / in 4 years

Trading Russian oil? Learn more about potash

* Traders watch Russia-Belarus potash spat for oil market clues

* Oil supply threats to Belarus slow to materialise

* Sechin leaves door open to potash giant nationalisation

By Dmitry Zhdannikov and Vladimir Soldatkin

MOSCOW, Sept 17 (Reuters) - Kremlinology, or understanding Moscow politics, has long been crucial for traders of Russia’s oil.

But rarely have the signals from the Russian capital been trickier to read than in the ongoing diplomatic spat with Belarus over another commodity, potash.

When Russia and its former Soviet neighbour first locked horns in August over the collapse of a joint Russian-Belarusian potash production cartel, the prognosis for Russian crude supplies looked straightforward.

Russia had been expected to retaliate by cutting oil supplies to Belarus, a traditional move in rows between Moscow and Minsk that would also hit refineries in Poland and Germany by emptying Belarusian transit pipelines.

Russia’s pipeline monopoly, run by Nikolai Tokarev, a close ally of President Vladimir Putin, did not surprise by ordering a swift curtailment in flows.

But then Putin’s top ally in the oil industry, state giant Rosneft’s head Igor Sechin, said he would oppose the cuts, effectively siding with Belarus and its long-time leader Alexander Lukashenko.

What started as a fairly predictable game is quickly becoming one of the more complex stories of feuding clans in Putin’s entourage.

“My head is spinning. This Belarusian story is one of the most important for Europe’s oil markets this winter. Everyone wants to know where this oil ends up and how much prices will drop,” said a big buyer of Russian oil with a Western major.

PUTIN SILENCE

Sechin, who has built Rosneft into the world’s largest publicly traded oil firm by output since Putin became Russian leader in 2000, says he opposes the cuts as Belarus is one of the most profitable destinations for Russian oil.

“Who will compensate us for the losses?” he said on a visit last week to Minsk, where he met Lukashenko, whose ties with the Kremlin, based on loyalty in exchange for economic and financial support, have often been difficult.

“We want to continue supplies ... We don’t have any problems,” said Sechin. Belarus has two major refineries, one of which is partially owned by Rosneft.

While most traders agree that duty-free oil exports to Belarus are indeed a significant money-spinner, they note that profitability was hardly ever a factor in previous spats between Russia and its much poorer neighbour.

Russia has cut energy supplies to transit countries Ukraine and Belarus several times over the past decade during various disputes, in what the European Union has repeatedly described as politically motivated moves that put EU energy security at risk.

Yet Putin has said surprisingly little since Minsk detained Vladimir Baumgertner, CEO of Russian potash producer Uralkali , in August. Belarus accuses the executive of causing damage by sparking a possible collapse in global potash prices as a result of quitting a partnership with a Belarusian firm.

“The most important thing is that Putin, who decides on everything, so far hasn’t lashed out with criticism of Belarus,” said Ildar Davletshin, an energy analyst at investment bank Renaissance Capital in Moscow.

Such a move by Minsk would have been impossible without the blessing of Lukashenko and would normally be expected to precipitate a tough response from the Kremlin.

The absence of such a reaction has triggered market speculation about Sechin’s intentions and whether he and Putin want the same thing.

NATIONALISATION

Key among the questions traders are asking is whether Uralkali’s billionaire owner Suleiman Kerimov has fallen out of favour with Putin as a result of quitting the potash cartel and infuriating close ally Belarus.

Kerimov has seen abundant support from officials in the government of Prime Minister Dmitry Medvedev.

On Tuesday, a preliminary export schedule by the Russian energy ministry showed oil supplies to Belarus would be cut by over 40 percent from October to December.

That in theory could lead to a massive drop in Russian oil prices in the Baltic region, as most volumes would be rerouted to that market. It might also trigger a supply crisis at Polish and German refineries as Belarus could cut transit supplies, as it has done in the past.

But given Sechin’s opposition to the cuts for Belarus and near-normal supplies in September, oil traders say they have yet to get a clear picture about the outlook for supplies from Russia in coming months.

“I‘m learning something new about potash every day,” a Russian trader with a major company joked.

Sechin seems to be learning about potash too.

On Monday, he said the owners of Uralkali had yet to make an offer to sell their shares to Rosneftegaz, a state holding company Sechin heads in addition to his job at Rosneft. That remark left the door open to a potential nationalisation - even if Sechin ruled out a purchase by Rosneft.

Such a scenario would reduce the likelihood of an energy spat with Belarus, said Sergei Zhavoronkov of the Gaidar Institute, a Moscow-based think tank.

“Longer-term, those conflicts will continue ... We are seeing those spats with Belarus almost every year,” he said.

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