The EU might ban (or limit) imports of Belarusian potash and other fertilisers as a part of its economic sanctions following the Ryanair forced landing and arrest of Roman Protasevich, said EU foreign ministers gathering in Lisbon on May 23, as it ratchets up its sanctions regime on Belarus' President Alexander Lukashenko’ regime.

Russia remains by far Belarus’ biggest trade and investment partner, accounting for 42% of exports in 2019 and just under half of all the foreign investment. Ukraine is the next most important trade partner with 13% in the same year, whereas the EU collectively accounts for some 20% of trade.

EU trade sanctions on Belarus would be very painful but they would not be debilitating, as Russia would take up some of the slack, and although Ukraine will follow the EU’s lead, it simply cannot afford to cut itself off from supplies of power and fuel that it current receives from Belarus. For example, Ukraine has just announced it will halt Belarusian power imports until October, but it imports little in the summer, and in the first two months of this year, during an unseasonal cold snap, imported more power than it imported in all of 2020.

Nevertheless, the proposed EU sanctions are more aggressive and economically damaging than any sanctions that have been suggested to date.

Aviation bans

The EU immediately retaliated against what many have dubbed a “hijacking” of the Ryanair plane, which was forced to land by a MiG fighter on May 23, with retaliatory aviation bans.

The EU moved to limit flights through Belarusian airspace on a voluntary basis, a recommendation that most European carriers have been following.

Some EU countries, and also the UK, have gone further and banned the state-owned national carrier Belavia from landing at their airports. On May 24 a Belavia plane bound for Barcelona, where there is still no ban on landing, was held at the Belarusian border while seeking permission to fly over France. France has not only banned Belavia from landing, but clarified that it was also withdrawing permission to fly through French airspace, forcing the plane to turn back and return to Minsk.

The EU has already sanctioned seven Belarusian entities and 88 individuals, including Lukashenko, and was already working on adding more people to that list over their support for the regime and the repressions of protests. Following the Ryanair incident EU leaders agreed on May 24 to extend the list to include people involved in the Ryanair incident, which will be approved by the bloc’s foreign ministers on June 21.

Potash

The aviation bans, while very inconvenient, are not particularly damaging. Belarus earns approximately $50mn from overflight fees a year and the losses to Belavia will increase the total losses to approximately $100mn, according to expert estimates. All in all, aviation is worth 2-3% of GDP.

Following the initial actions European Commission President Ursula von den Leyen warned that more sanctions were on the way and the talk has turned to sanctioning Belarus’ potash exports. But it is not a done deal: Brussels said on May 26 it needs more “time to make the final decision.”

Foreign ministers gathering in the Portuguese capital on Thursday said they were looking at targeting sectors that play a central role in the Belarus economy, to inflict real punishment on President Alexander Lukashenko.

Luxembourg Foreign Minister Jean Asselborn said as cited by Reuters: "The keyword, I think, is potash. We know that Belarus produces very much potash, it is one of the biggest suppliers globally, and I think it would hurt Lukashenko very much if we managed something in this area."

The small republic is home to Belaruskali, the largest potash producer in the world that accounts for 15% of global supply. Its production is equivalent to that of Russia and Morocco’s output combined.

Potash is the second most important export product (8.7% in 2019 of the total) after refined petroleum products (16.5%) and makes up 61% of the chemical and fertiliser exports by value.

The EU statistics agency said the bloc imported €1.2bn worth of chemicals, including potash, from Belarus last year, as well as more than €1bn worth of crude oil and related products such as fuel and lubricants.

 

Belaruskali exports all over the world, and accounts for 18.2% of global potash production, the third-biggest producer. The EU takes up 20% of its total production. Moreover, potash exports account for 20% of Belarus’ budget revenues, with oil exports accounting for another 30%. The Belarusian budget already went into deficit last year due ot the economic dislocation of country-wide protests and the deficit grew to a record 30% of GDP in the first quarter of this year, Tadeusz Giczan, the editor of Nexta, told bne IntelliNews this week. Cutting off exports of potash to the EU could be extremely painful for the already cash-strapped government.

If sanctions are imposed on Belarusian exports, VTB Capital (VTBC) said in a note that prices for the fertiliser would surge but the upswing would only be temporary.

Russia’s main potash producer Uralkali would happily step into the breach and supply EU farmers in its place. The two companies used to work together in a mini-cartel to boost prices, but the joint venture broke up in August 2013 after eight years.

Typically Lukashenko invited Uralkali CEO Vladislav Baumgertner to Minsk for talks with the Prime Minister on the deal the same month… and arrested him as he was on the way to the airport to leave. Another major scandal emerged. As bne IntelliNews reported at the time, it took until February the next year to get Baumgertner out of jail and the charges dropped.

China is one of the world's biggest consumers of potash and there is a possibility of a grand deal between China, Russia and Belarus where the exports of potash are rejigged so all the players maintain their current supplies and revenues, but following the incident in 2013 there is no love lost between the Russian and Belarusian potash producers.

“We’ll substitute Europe, which is growing mercilessly old, for rapidly growing Asia,” Lukashenko said on May 27, as cited by Bloomberg.

Uralkali tried to restart the joint venture in June 2016, but was rebuffed by the Belarusian side. A potential deal fell apart after Lukashenko insisted on dictating the terms of the co-operation.

In the meantime Russia’s major potash producers have been consolidating. In December last year Russia’s two largest players, Uralkali and Uralchem, merged in order to increase their clout specifically against Belaruskali on the international market.

Oil up next?

After potash the next obvious target is to sanction is Belarus’s oil and gas exports, which comprise 30% of the government’s budget revenues.

The Soviet Union completed two modern oil refineries that were situated in Belarus shortly before the union broke apart, and these have been major foreign exchange revenue earners for Belarus as they process Russian crude and export it, mainly to the West. For example, Ukraine sources much of its diesel fuel from Belarus.

In addition, while Ukraine handles most of Russia’s oil and gas piped exports, there is also a significant network of pipes that run across Belarus to Russia’s Western European customers that earn Minsk transport fees and a margin on the refined products.

Lithuanian Foreign Minister Gabrielius Landsbergis said on May 27 that the EU should consider hitting the oil sector, while Germany's Heiko Maas spoke of measures to target financial transactions, which diplomats said would probably involve preventing the EU from lending to Belarusian banks, which would also hit energy exports, as these need trade financing from Western banks to operate smoothly.

The EU has sufficiently diversified its oil imports so that it could weather the pain it inflicted on itself from banning Belarusian oil and gas imports, although analysts say that Ukraine would probably exempt itself from these sanctions, as it has few alternative options.

Bonds

Another option would be to sanction Belarusian bond issues. Although Belarus does not rely heavily on the international capital markets for funding, it has issued several billion dollars of Eurobonds which need to be serviced.

“We are talking about using financing means … particularly the question to what extent Belarus should be allowed in future to issue bonds, by the state or the central bank, in Europe,” German Foreign Minister Heiko Maas told reporters in Lisbon.  

Belarus bonds slumped on the first day of trading after the Belarusian government forced the Ryanair flight to land in Minsk.

The yield on the country’s dollar-denominated sovereign Eurobonds maturing in 2031 rose 56bps to 7.81% and it was up 94bps to 6.52% for notes due in February 2023, Bloomberg reported.

Belarus has now become entirely dependent on the large Russian capital market for funding and has already cut itself off from the Western markets. In a sign of the new realities the Ministry of Finance announced in the middle of May that it was planning to issue RUB100bn ($1.36bn) worth of Eurobonds on the Russian market over the next two years to raise cash to meet its debt obligations and cover the record budget deficit.

Most of the money will go towards serving Belarus’ foreign debt. The external public debt of Belarus as of February 1 was $18.3bn, according to data of the Ministry of Finance of the republic. In January of this year the country attracted external government loans amounting to the equivalent to $35.7mn, including $25.5mn from the Russian government and $10.2mn from the International Bank for Reconstruction and Development (IBRD).

In July 2019, the Belarusian Ministry of Finance, after a nine-year break, placed government bonds for RUB10bn on the Moscow Exchange with a maturity of three years. Demand amounted to RUB45bn.