Russian-European Fertility Rites

Why Russian fertilizers are blocked in European ports, even though they are not sanctioned.

Nothing illustrates better the “Devil’s Dance” of Western sanctions against Russia than the on-again-off-again hesitation waltz of sanctions on Russian fertilizers, their producers, and associated banks. For those who worry about the unintended side-effects of sanctions on third countries, and the threats to Western unity, especially within the European Union, the fertilizer case is a prime example.

              To you and me, “fertilizers” may suggest “manure.” But plants know better. They need three essential elements: nitrogen, phosphorus, and potassium, contained in urea, phosphates, and potash respectively. Together these three make up a global market of nearly $200 billion a year. The world’s population could not feed itself without them.

              Russia is one of the world’s largest producers of all three fertilizers, with about 20% of the global market. The closest market is Europe, but Europe has a large fertilizer industry of its own, so most of Russia’s fertilizer exports go to Africa and Latin America, where several countries depend on Russia for 30% or more of their fertilizer supply. For them, anything that disrupts Russian fertilizer exports threatens them with food shortages. Such as a war.

              Hence our puzzle. How did it happen that hundreds of thousands of tons of Russian fertilizer have ended up stranded in European ports since the Russian invasion of Ukraine—even though Russian fertilizers are not subject to Western sanctions? Read on.

              BACKGROUND THE COLLAPSE AND REBIRTH OF THE RUSSIAN FERTILIZER SECTOR

              The tale actually begins in the early 1990s, with the collapse of the Soviet Union. Soviet agriculture promptly cratered, as the Soviet system of collectivized agriculture broke up. Crashing down with it came the fertilizer industry, as the entire supply chain connecting the fertilizer industry to the fields disintegrated. For the next ten years the production and application of fertilizers in Russia virtually ceased.

But then the sector was reborn, through a combination of consolidation, investment, modernization, and above all, a boom in demand from Russian farms, reflecting the renaissance of Russian agriculture as a whole. (https://www.routledge.com/Russias-Food-Revolution-The-Transformation-of-the-Food-System/Wegren/p/book/9780367547752) As it revived, the Russian fertilizer industry began exporting fertilizers on a large scale. This was new; it had never exported much in Soviet times. But by the 2020s exports accounted for nearly two-thirds of Russian production. Their growing export volume was supported by a network of export terminals, located mainly in the Baltic Republics, and several specialized banks.

In contrast to other sectors such as oil or automobiles, foreign investment played only a minor role in the revival of the sector. Fertilizer production was not particularly high-tech; the raw materials were plentiful, and the domestic market was close by. The sector was quickly profitable, and it paid its own way without state subsidies. Exports grew strongly, most of them passing through Baltic ports, especially Estonia. In short, on the eve of the Russian invasion, the Russian fertilizer sector was booming. Then came the sanctions.

THE SANCTIONED UNSANCTIONED FERTILIZER EXPORTS

              The official policy of the Western nations from the beginning was to keep Russian food and agricultural exports unsanctioned, but the reality has been quite different. On March 2, one week after the start of the Russian invasion of Ukraine, EU excluded 7 Russian banks, which handled the bulk of Russia’s agricultural and fertilizer export transactions, from access to the SWIFT international clearance system. Then, one week later, the EU sanctioned several dozen Russian personalities; among them the five leading owners of Russian fertilizer and agro-industrial companies.

The five designated “agro-oligarchs” were an odd choice: None of them met the classic description of Russian oligarchs as key associates of the Putin regime. None of them came from Saint Petersburg. None came from security backgrounds such as the FSB. Compared to the general run of Russian oligarchs, the five had reasonably clean reputations. In contrast to other sectors such as oil or aluminum, in which bloody wars were fought for control, the consolidation of the fertilizer sector had been relatively peaceful, and indeed largely invisible. The fertilizer sector in the 1990s consisted of mainly of decrepit legacy factories which earned little export revenue; consequently, it was of only minor interest to either the Putin circle or the big-time oligarchs who did battle for the big money-earners.

The five men who had ended up on top of the fertilizer heap were all classic entrepreneurs who had started in other fields. Vadim Moshkovich, the founder of the giant Rusagro agro-holding, was a radio engineer who had begun importing sugar in the mid-1990s. Andrey Melnichenko, while still a student, had founded MDM Bank, and had earned plaudits in the late 1990s for his cautious and skilled handling of Russia’s 1998 default, which MDM survived unscathed. He had expanded into fertilizers from there. Andrey Guryev, the head of Phosagro, was an early associate of Mikhail Khodorkovsky’s Menatep Bank, and built the company’s fertilizer business. The only one of the five who came close to answering the description of someone close to Putin was Dmitri Mazepin, the CEO of Uralkhim, who represented the fertilizer sector in the Russian industrial lobby group RSPP and who met regularly with Putin. All five promptly resigned from their companies; although they remain sanctioned, their companies are not.

              From the beginning, these decisions caused some unease among Western policy-makers. On March 11, the G7 agricultural ministers declared that “food and other agricultural products” should not be banned. Nevertheless, on April 8, in its 5^th package, the EU escalated further, announcing broad sanctions against Russian fertilizers, and barring Russian vessels from European ports as well as freight by road. In addition, it imposed a full transaction ban on four key Russian banks representing 23% of market share in the Russian banking sector. In June, in its 6^th package, the EU barred three more Russian banks from SWIFT, including the Russian Agricultural Bank, which played a key role in fertilizer transactions.

Yet it was soon apparent that Europe was divided between two opposite motives. On the one hand, there was the desire to punish Russia; hence the ban on the oligarchs and the banks. This motive was particularly strong among the eastern member-states, especially Poland and the Baltic Republics. But the Commission, and most of the western member-states, were of a different mind--they were more worried about the impact on global food supply, and danger of seeming to be “against food for the poor.” Even as it tightened its sanctions against the Russian agro-oligarchs and Russian shipping and trucking and banks, the EU’s governing body insisted that food and fertilizers were not sanctioned. At its meeting of 23-24 June, the European Council stated, “Anyone can operate, buy, transport, ensure food and fertilizers coming out of Russia.” Washington too was worried about the unfavorable impression on the rest of the world. In early July, the U.S. Treasury Department issued a “clarification” stating that Russian fertilizer and grain were not subject to U.S. sanctions.

What happened next verged on farce. Western shippers and insurers, presented with conflicting signals, refused to accept Russian fertilizers, arguing that since the (now ex-) owners of the five main Russian companies and the relevant banks were sanctioned, they could not let the Russian fertilizers through. Two of the biggest foreign operators of container vessels, Maersk and MSC, left the Russian market altogether. Russia fertilizers began piling up in European ports, especially in the Baltic republics, despite repeated “non-papers and guidance” from Brussels to port operators and customs officials, reminding them to allow export and transit of Russian fertilizers. In the United States, confusion was so widespread that the State Department created a “Food Security Help Desk, for those countries that are encountering difficulties, or have questions about our sanctions, when buying Russian grain or fertilizer.”

Russian officials complained bitterly, but to little avail. By mid-summer, as much as 260,000 tons of Russian fertilizer was blocked, mostly in Estonia, which was taking an especially stiff line.

              At that point, sensing an opportunity, Putin intervened personally. “What about the developing, the poorest countries of the world?” he exclaimed. Pointing out that the EU’s partial relaxation only applied to the EU-member-nations, he ordered that the fertilizer blocked in European ports be delivered free of charge to developing countries, chiefly in Africa. Armed with this offer, the UN’s Food Program was able to unblock some of the Russian fertilizers stuck in Rotterdam, Antwerp, and Estonia. In late November the first shipment, 20,000 tons of fertilizer bound for Mozambique and Malawi, was cleared from Rotterdam. The UN duly thanked Russia for its “humanitarian gesture”—leaving the EU with egg on its face.

              But the partial unblocking of the fertilizers did not remove the problem. There remained the sanctioned oligarchs and the banks, and the flow of fertilizers to and through Europe continued to be blocked. Finally in December, the issue came to a head as the EU ambassadors debated over a ninth package of sanctions. A majority of the member states, including Germany, France, and the Netherlands, called for amendments to the EU sanctions, to allow exports “to third countries.” The Commission proposed that sanctions on the five designated agro-oligarchs be relaxed. But the Poles and the Lithuanians were fiercely opposed, and the fertilizer issue tied up the negotiations over the ninth package. Finally at the 11^th hour a vague “derogation” was approved, which allowed the exhausted delegates to go home to bed. It didn’t mention the oligarchs by name, and any exemptions would have to be approved on a case-by-case basis for each transaction. As the EU Observer commented on what it called the “carve-outs,” “Under the deal, individual member-nations will be free to unfreeze their money if it’s ‘strictly necessary’ to expedite shipments of food and fertilizer, especially to Africa. But the EU capitals will need to ‘consult’ the EU Commission each time before they can go ahead.”

              Yet even this awkward compromise has not cleared up the problem. In February 2023, Andrey Melnichenko, the founder of the EuroChem Group, claimed that the European Union’s sanctions regime had caused a curtailment of 13 million tons of Russian fertilizer exports since the start of the Russian invasion, and meanwhile the blockage was continuing. Mazepin complained that even the first small free shipment had been tied up in transit for weeks. “We can’t even pay for transportation when the cargo is humanitarian and is being presented free of charge to Africa. The banks do not accept our payment.” His company, Uralkhim, held a handover ceremony with Malawi’s government, attended by the Russian ambassador. The Kremlin thus scored another public-relations victory, posing as the humanitarian defender of the poor against the EU machinery.

              In parallel, another conflict involving Russian fertilizers had resulted in the interruption of an ammonia pipeline from Tol’iatti to Odesa, a major export route dating back to Soviet times. There too the UN intervened, securing an agreement in principle to resume shipments. But that is a separate story, which is tied to ongoing conflicts over grain shipments through the Black Sea, and we will leave that one for another time.

HOW TO LOSE THE PR WAR

The imbroglio over Russian fertilizers illustrates the fundamental problem with the massive system of sanctions that has been imposed on Russia since the invasion, an assemblage of over 13,000 documents imposed by over 40 countries, and applied to hundreds of Russian personalities and companies across dozens of fields. Nothing on this scale has ever been attempted before. It affects many of the world’s most vital trade flows, including—as the fertilizer case demonstrates—highly sensitive ones such as food security in the developing world. Managing this system has required practically daily adjustments, compromises, derogations, exceptions, and clarifications—resulting in a fabric that is so thin and full of holes that, by the time it arrives in Moscow, the Kremlin can move right through it, scoring public-relations victories. So long as Russian fertilizers are blocked in European ports, and the Europeans remain divided, it is hard to see how it could be otherwise.

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Thane Gustafson is the author and co-author of eight books on Russian affairs, including most recently Wheel of Fortune: The Battle for Oil and Power in Russia (2012), The Bridge: Natural Gas in a Redivided Europe (2020), and Klimat: Russia in the Age of Climate Change (2021), all with Harvard University Press. As always, I am grateful to Simon Blakey for his kind and helpful comments on earlier drafts.