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By John Helmer in Moscow

Market speculation in Moscow turned sharply negative for Uralkali, Russia’s dominant potash producer, on Wednesday this week, as the share price was slashed 8% to $1.67 on the Russian Trading System (RTS). This followed a modest drift upward in international trading of the shares, while the RTS was closed for the long Russian New Year holiday.

The pressure on Uralkali stems from the failure of high Russian government officials to release the results of a commission of inquiry into fault, penalties, and costs of the two-year old collapse of Uralkali’s Mine-1 at Berezniki, in Perm region. The commission, which was initiated on October 29, has already missed several announced release deadlines during December.

Initial government investigations of the Mine-1 subsidence in October 2006 ruled that the loss of the mine and its potash reserves was force majeure.

The Ministry of Natural Resources said Thursday the current commission “is still working”, and it declined to say when it would finish. Yevgeny Anoshin, spokesman for the investigating organ, the Federal Environmental, Engineering, and Nuclear Inspection Service (Rostekhnadzor), told FW: “the commission is still processing data. The decision will not be made before the end of January.” He did not explain the reason for the delay of another month. This is significant because industry sources in Moscow do not believe the commission has uncovered fresh technical data that were unavailable to the first commission of inquiry, or to the December 26 session of the commission, when officials last met to review the decision materials.

The issue for the commission, according to these sources, is what are the full costs of the Mine-1 loss, and who should be liable to pay them.

At the December 26 meeting, it has been reported that Rostekhnadzor issued preliminary conclusions into the reasons behind the mine subsidence and flooding, and the potential fault or liability of the mine owner and operator, Uralkali. No word of these conclusions has so far leaked. However, industry analysts judged that the signals from the meeting indicated relatively manageable additional costs for the rail-users in the vicinity of the subsidence, and a financial burden that Uralkali could cover relatively easily. In sporadic trading after December 26, Uralkali’s share price moved modestly upward.

Russian industry reports also indicate that Uralkali had agreed at the meeting that it is ready to cover Rb3 billion ($103 million) of state budget expenses associated with the flooding of Mine-1. Both Uralkali and Silvinit had announced earlier that they are each ready to contribute Rb1billion ($34 million) to the cost of construction by Russian Railways (RZD) of the 53-km rail line that must be constructed to skirt the area of subsidence and ground risk.

But the technicalities of such budget costs are not believed to be the stumbling block for agreement and release of the Rostekhnadzor report. Instead, the disclosure to FW today of another two to three weeks of decision-making confirms the market suspicion that intense bargaining is going on behind closed doors that will affect the future of the Russian potash business in a big way.

The government remains silent on whether the commission decision is a preliminary to a state reorganization of the fertilizer sector, and the consolidation of Uralkali and Silvinit, the two potash producers, with PhosAgro’s Apatit, a phosphate producer in which the government took over a 20% stake by a court ruling in early December. According to the federal government’s position in the courts, Apatit was illegally privatized in the mid-1990s by Mikhail Khodorkovsky, who was convicted and sent to prison in 2004, principally for offences relating to the oil company Yukos.

The takeover scheme, forcing Uralkali into a merger with Silvinit and Apatit, was aired by a domestic news agency last month, based on remarks attributed to an anonymous government official. Uralkali itself has not commented on the takeover speculation, nor have the other companies.

The speculation in Moscow is that the godfather of the scheme, if there is one, is the deputy prime minister in charge of the resource sector, Igor Sechin. He convened the October 29 meeting at which the second commission was initiated. Sechin is the most powerful figure in the Russian government after Prime Minister Vladimir Putin.In 2003 he had led the government’s attack on Khodorkovsky. He now chairs the board of the Rosneft oil company, the state controlled concern which took over Yukos’s oilfields after it had been broken up, following Khodorkovsky’s conviction and government tax claims.

Sechin’s interest in restructuring the Russian potashsector had been limited until the October 29 meeting. Before that, Sechinhad an interest in the court and shareholder conflicts over Apatit. He was also reported to be involved in claims against the leading ammonia producer and exporter, Togliatti Azot (ToAZ), controlled by Vladimir Makhlai. Makhlai had earlier fought off a challenge from the Renova group of Victor Vekselberg. More recently, he won an appeal against lower court rulings to annul the privatization of a 6% stake in ToAZ dating from 1996. However, Makhlai is now reported to be in London, where, according to London sources, he is fearful of prosecution in Russia, and has sought political asylum. Makhlai reportedly blames Sechin for his problems.

In a report by Troika Dialog analyst Mikhail Stiskin, it was noted that the idea of forming a state-owned company in the fertilizer industry has been discussed in the government many times over several recent years, “but it has never led to anything, as its realization was fairly complex and mechanics unclear.” The relative smallness of the sector, and the recent high market capitalization of the listed companies, have also deterred state action. According to Stiskin, this “has markedly changed recently, warranting increased interest from the state. A merger between Uralkali and Silvinit would make perfect economic sense, as both entities mine the same ore body and used to be a single company in Soviet times. A merger with Apatit is a less straightforward idea, though one that is also reasonable, as it would enable the creation of a diversified fertilizer holding with exposure to potash and phosphates, an essential emulation of the strategy implemented by Canada’s PotashCorp and Mosaic.”

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