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At the beginning of September, the Belarusian news outlet Nasha Niva revealed that due to Western sanctions on Belarusbank, China had not paid another tranche of credit ($103 million) for the construction of the $2 billion Slavkaliy potash mining and processing plant in Lyuban, Belarus. The project has been stalled since June and subsequently, subcontractors have begun to leave the construction site. The investment is being carried out with China’s active financial support. In 2015, during Xi Jinping’s visit to Belarus, the Chinese Development Bank agreed to provide $1.4 billion credit, guaranteed by the Belarusian government. Importantly, the Slavkaliy project is owned by the Russian oligarch Mikhail Gutseriyev, who was also sanctioned due to his close business and political ties with Belarus’s President Alyaksandr Lukashenka; Gutseriyev provided $600 million for the project.

So far, neither China nor Belarus have commented on the Slavkaliy credit holdup. Despite the China-Belarus “strategic partnership,” China views the looming political crisis in Belarus with growing concern, especially given the latter’s escalation of tensions with European Union (EU) member states and the resulting disruptions in potash supply chains. The credit freeze indicates that China responds to Western sanctions, and that Beijing is increasingly concerned with Alyaksandr Lukashenka’s conflict with the West, and has given Minsk a signal of its reassessment of the “strategic partnership.”

Western Sanctions on Belarus: Implications for China’s Potash Industry 

The Belarusian potash mining and processing industry has faced serious problems due to international sanctions imposed on the regime following fraudulent presidential elections in summer 2020. The sanctions were further expanded in June due to human rights violations in Belarus and the forcing of a Ryanair plane to land in Minsk in order to arrest an opposition blogger, which was considered an act of air piracy in the West. The restrictions imposed by the EU, Great Britain, Canada and the US, affected two key sectors of the Belarusian economy: the petrochemical industry (which accounts for 8 percent of GDP), potash fertilizers (Belarus accounts for nearly 20 percent of global exports), and the financial sector.  Sanctions on the potash industry are potentially harmful to Belarus as the Belaruskaliy plant is the second-biggest producer of potash globally, and one of the main sources of foreign exchange for Alexander Lukashenka’’s regime.

In practical terms, EU sanctions on potash exports have large loopholes, and last year’s sanctions did not disrupt Belaruskaliy’s supplies to China. However, given the expected tightening of EU measures, the sanctions may pose a significant challenge to China’s agricultural industry. According to data from the PRC customs office, in 2020 Belarus sent 1.38 million tons of potassium chloride to China: 16 percent of total Chinese potassium chloride imports. Therefore, China’s credit freeze on Belarus appears only temporary. China’s domestic potassium resources are small, and production costs are uncompetitive. Furthermore, modernization of the domestic potash industry and foreign investment in this area is in line with the assumptions of the 14th Five-Year Plan, and is relevant to China’s food security. An important element of this policy is investment in Slavkaliy. The 2015 agreement provides that, once Slavkaliy starts operating, its entire production will be transferred to China over 25 years. Moreover, already in 2020, the Slavkaliy complex reported a successful extraction, and production was set to start in 2022.

Currently, China is struggling with a shortage of potash fertilizers, resulting from the limited capacity of its domestic industry, rising prices of raw materials on world markets, and pandemic-related supply chain disruptions. Although EU sanctions do not cover pre-signed contracts, shipment of supplies to China will pose an increasing challenge because most Belarusian potassium is exported through Klaipeda port in Lithuania. As a result, sanctions will likely bring about redirection of potash transport roots from Lithuania to Ukraine or Russia.

The Sino-Belarusian Potash Trade and the Limits of the Lithuanian Transit Corridor

Unsurprisingly, recent Western actions have provoked a nervous reaction in Belarus. Prime Minister Roman Golovochenko, who threatened to retaliate against Western companies operating in Belarus, announced that his government was also ready to push out Western technologies in favor of Chinese alternatives. Lukashenka sought to leverage Belarus’s strategic position along the EU-China land transportation routes, when he first warned in March and again in July that he would stop the transit of goods between Belarus and the EU. Over 90% of rail freight traffic between China and Europe goes through Belarus. Of course, blockade of transit is possible and detrimental for third countries, but Belarus would primarily harm itself with this action.

In securing China’s potash supply interests, an important aspect of the dispute is the fact that a huge part of Belaruskaliy’s exports are transported through Lithuania. Political relations between the PRC and Lithuania reached a nadir after the latter opted to leave the 17+1 (now 16+1) format, and agreed to the opening of Taiwanese representative office in Vilnius using the name “Taiwan” as opposed to “Taipei”. In response, China recalled its ambassador from Vilnius, and has signaled possible economic retaliation by suspending the EU-bound cargo trains transiting Lithuania. However, these threats have so far not materialized. On the contrary, the diplomatic rupture with Lithuania may additionally complicate China’s potash imports from Belarus.

Although in June, Lithuanian railways declared that Western sanctions will not affect the contracts signed already with Belaruskaliy until the end of 2023. Yet, in the light of the new U.S. sanctions imposed in August, the Lithuanian Minister of Transport stated the Belaruskaliy products will stop moving through Lithuania by December of this year. This was met with a blunt reaction from China’s Ministry of Trade spokesman, who urged Lithuania to “create favorable conditions for neutral economic and trade cooperation.”

The potential problems for China to secure imports of Belarusan potash through Lithuania will also seriously affect the Lithuanian transport and logistic sectors. The main beneficiary of Belarus’s exports in Lithuania is Klaipeda port, for which one-third of cargo serviced in 2020 came from Belaruskaliy.

The sanctions mean revenue losses for Lithuania’s transport services, but also constrict Belarus and China’s access to the Baltic region. The Russian route to Ust-Luga or Murmansk ports could function as an alternative. Still, both Russian railways and ports are not fully capable of the logistics and transport technology required to take over the shipment of a much larger volume of potash products. Unlike Belarusian oil and petroleum products, exports, which have already been redirected to Russian ports (at a cost for Lithuania) potash fertilizers would require an infrastructural upgrade. Moreover, the redirection of fertilizer exports would make Belarus completely dependent on transit through Russia and would significantly increase the final cost of sales.

What is Behind the Credit Freeze?

Although Mikhail Gutseriyev and the Belarusian government have tried to convince China to unfreeze credit, and sanctions imposed on Belarusbank as the credit operator are a key obstacle; the payment can be potentially bypassed and transferred through Eurasian Development Bank. The other reason for the credit freeze is most likely the political crisis in Belarus and the tense atmosphere around Gutseriyev. The Russian oligarch has tried to save the project at all costs: he handed control of Slavkaliy’s main shareholder, the British GCM Global Energy, over to his brother. Gutseriyev is also suspected of plotting with Lukashenka to take over the control of the Russian potash giant Uralkaliy. From China’s perspective, this would mean being drawn into the conflict between Belarus and Russia, a scenario which Beijing has tried to avoid at all costs when investing in Belarus.

China has a vested interest in the exploitation of a new, promising potash deposit and constructing its processing plant. Therefore, it is highly unlikely that China will drop the project, which is set to increase its supplies of fertilizers for a period of 25 years. From China’s perspective, an increased supply of raw materials on the market means a lower purchase price. The credit freeze could have been China attempting to exert additional leverage over Belarus in order to drive down costs.

What is Next for the Slavkaliy Project and Sino-Belarus relations?

The suspension of Slavkaliy’s financing should be seen through the prism of the changing political and economic situation underway in Belarus since at least mid-2020. The sanctions targeting Lukashenka’s regime are an important factor that impedes Beijing’s plans in terms of potash imports and economic activities in Belarus, and complicates its trade exchanges with the EU.

Although for the Chinese side, Belarus has traditionally been more important for its role in relations with Russia than with the EU, good relations between Belarus and the EU (particularly after the Russian annexation of Crimea in 2014 and the eruption of the Donbas conflict) are conducive to China’s activities and interests in Belarus. Currently, the tables seem to be turning: China sees the increasing isolation of Belarus as an ever-growing burden in its relations with the EU.

Some Chinese experts think that a political crisis in Belarus resulting in uncertainty and internal instability will have a long-lasting impact on relations and may negatively affect Chinese investments in Belarus and joint Belt and Road projects. Belarusian experts confirm that now Chinese partners look at Belarus even more cautiously, and that the role of the EU is definitely a growing driver of this concern. Thus, the suspension of China’s payment of another tranche of the credit for Slavkaliy set off alarm bell to Belarus against further escalation of relations with the EU.

China officially supports the hardline policies of Lukashenka, whom Xi Jinping – even before Vladimir Putin – personally congratulated for his victory in the fraudulent 2020 presidential election. However, the growing distance in bilateral relations is best reflected in the significant slowdown of China’s economic engagement in Belarus. Since last year, China has provided no new investments and credit lines to Belarus, and the implementation of already-started projects is progressing far below expectations. Between January and April 2021, Belarus managed to attract a mere $8.3 million loan from China’s Exim Bank, an economically insignificant amount of money, streamlined to save face and bolster the “strategic partnership.”

Road Ahead

Western sanctions jeopardize China’s future imports from Slavkaliy, where production is meant to begin in two to three years. Yet, the suspension of further lending to the Slavkalyi project seems to be only temporary. In the past, there were cases of unsuccessful China-funded projects in Belarus, e.g., Pulp and Board Mill in Svetlogorsk, which failed because of the technical flaws and underperformance of Chinese subcontractors. However, this is an unlikely scenario for the Slavkaliy project, which is strategically important for China’s agricultural production, has the “personal seal” of approval from the leaders of China and Belarus, and is being implemented with German technological expertise. Nevertheless, the resumption of further Chinese lending to the Slavkalyi project will require overcoming two major obstacles propelled by Western sanctions on Lukashenka’s regime and Gutseriyev.

China will need to use alternative transportation routes to import Belarus’s potash products. The main shipment channel through Klaipeda Port is currently not a viable prospect due to the Western sanctions and Lithuania’s consistent policy in terms of national security against both Belarus and China, respectively.

However, if China wants to keep the Slavkaliy project afloat, transportation channels are of secondary importance. The most challenging issue will be to bypass sanctions on Belarus financial institutions and to find other ways to streamline the credit without involving big state banks; it is highly unlikely that Beijing will put its banks at risk, even for the sake of this strategically important potash project. In this way, the controversies surrounding Slavkaliy are further proof that China adheres to sanctions on Belarus (which was also often the case in relations with Russia), and is increasingly cautious in its relations with Lukashenka’s regime, adopting a wait-and-see strategy when it comes to Western sanctions on Belarus.

This article was originally published by The Jamestown Foundation’s China Brief. It is republished here with permission.

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Written by

Bartosz Kowalski is an assistant professor at the Department of Asian Studies of the University of Łódź, Poland, and researcher of its Center for Asian Affairs. His research focuses on China’s foreign policy, including relations between China and Central-Eastern Europe.
Michał Słowikowski is an associate professor at the Department of Political Systems of the University of Łódź, Poland, and researcher of its International Center for East European Research. His research focuses on Russian politics and Russia’s relations with former Soviet Union republics.