Washington Monthly - From Russia, With Monopolies
Research associate Garphil Julien illustrates how Moscow’s control of supply chains—particularly the fertilizer industry—could stymie America’s efforts to punish Putin for his war on Ukraine.
This week, Russian forces, attempting to subdue Ukraine, launched missile strikes at its capital, Kyiv, beginning the largest military conflict in Europe since World War II. The U.S. and its allies have started sanctioning Russian financial institutions, oligarchs, and high-tech sectors, stopping Russia’s ability to raise debt in foreign markets. Allies also halted the approval of Nord Stream 2, a natural gas pipeline through Europe built by Moscow’s state-owned energy company Gazprom.
President Joe Biden has signaled more severe sanctions are coming. One of these could include cutting off Russia from SWIFT, the Society for Worldwide Interbank Financial Telecommunication, over which 200 countries conduct financial transactions. This would mean Russia would be unable to engage in international trade. But that action comes with an even greater risk for the world economy.
The problem with our sanctions regime is that Russia has crucial global monopolies, not only significant positions in energy, which are well known, but especially in the global fertilizer supply chain—which are considerably less well known. Any sanction has the potential to drastically influence the supply and price of fertilizer and, thus, food on the world market.
“This is why monopoly is a problem. They’re in the dominant bargaining position now,” says Peter Rutland, a professor of Government at Wesleyan University and Russia expert.
The global fertilizer industry includes three main categories: nitrogen, potash, and phosphorus fertilizers. Potash is a potassium-rich salt fertilizer that enhances plant quality and is responsible for 20 percent of global fertilizer demand.
With its most fervent ally in Europe, Belarus, Russia has a 40 percent market share in global production and export of potash fertilizer. The two autocracies form an informal cartel in the potash market, made up of Uralkali and Belaruskali, with the Belarusian Potash Company being the latter’s export arm. Late last year, the U.S. imposed sanctions on Belarus Potash Company (BPC), the main export arm of producer Belaruskali. It claimed Belarus intentionally created a migrant crisis at the Polish border. The sanctions applied only to U.S. enterprises doing business with the Belarusian company.
Earlier this year, Lithuanian Railways, encouraged by the U.S., halted shipments of Belarusian potash through its Klaipeda port which is Belarus’ main entryway for potash into Europe. Belarusian potash is now being reshipped through Russian railways, giving Russia greater control over a critical commodity; Russia may even buy the potash and resell it as it continues its exports.
Before sanctions were imposed, global potash prices were already at a 13-year high. Prices have soared over the past year, alarming farmers across the world. Potash prices saw a 71 percent increase in 2021 from $350 per ton to $600 per ton; the spot prices last week showed that number has reached $815 per ton. U.S. sanctions on Belarus are likely to exacerbate the issue, with Belaruskali announcing last week that it wouldn’t be able to meet its contracts. One of the world’s largest fertilizer companies, Yara International, headquartered in Norway, announced it would reduce its sourcing of Belarusian potash by April. Other corporations in the potash industry are not planning on increasing production and would face challenges in their attempts.
The ease with which Russia can impact the food market was demonstrated during the 2007-2008 global food price crisis. Russia and Belarus cut potash production to drastically raise prices and increase profits, with CFO Victor Belyakov stating at the time that “price was more important than volume.” Between January 2008 and October 2009, the price of potash increased by 400 percent while production dropped by 39 percent and shipments declined by 43 percent. Potash producer profits peaked at 480 percent in mid-2008.
Russia is also a dominant player in the world nitrogen fertilizer market. While it only has a 16.5 percent market share of global exports, Russia manufactures ammonium nitrate, the key ingredient needed for the fertilizer and has a close to 66 percent global market share in the production of the chemical.
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