Fertilizer, Food Security, Financial Warfare, and Formula 1

Sullivan & Worcester

This Sunday on the Bahrain International Circuit, Formula 1 teams will line up for the first grand prix of the 2022 season. There will be a few new faces and different sponsors on the track this year that have sent fans abuzz, but for those of us who also work in the energy, environmental, and sanctions legal fields, the most interesting change of direction is the removal of the Haas F1 team title-sponsor Uralkali and the replacement of Haas’ driver Nikita Mazepin. The cutting of ties with Uralkali and the Mazepins is illustrative of much more than how a professional racing team responds to current events. It is also illustrative of how far-reaching and intertwined financial sanctions are with daily life and the impact and implications of real-world events on worldwide food supplies, the environment, climate-related issues, and of course the Formula 1 season.

Dmitry Mazepin is a Russian businessman and the former majority shareholder, Chief Executive Officer and Chairman of Uralchem Integrated Chemicals Company, who is reported by Reuters to have sold his controlling stake and resigned as of March 11, 2022. He also is the Deputy Chairman of the Board of Directors of Uralkali, PJSC. Uralchem is one of Russia’s largest fertilizer producers, and has an 81.47% stake in Uralkali, a Russian company and one of the world leaders in potash and fertilizer production and exporting.[1] Uralkali had been a title-sponsor of the then-named "Uralkali Haas F1" team since the beginning of the 2021 season, pursuant to which Nikita, Dmitry’s son, also became a driver for the team. Uralkali and Nikita were set to continue as title-sponsor and driver, respectively, for the 2022 season until the events of a few weeks ago.

On February 24, 2022, the same day that Vladimir Putin launched an illegal invasion into Ukraine, Dmitry Mazepin was one of 36 business representatives who met with Putin to discuss the economic impacts of sanctions on Russia.[2] On the heels of Mr. Mazepin’s meeting with Putin—and the Russian invasion of Ukraine—Haas announced on March 5, 2022 that it would be terminating its contracts with both Uralkali as title-sponsor and Nikita Mazepin as driver. UK sanctions against Dmitry Mazepin and Nikita Mazepin individually, banning travel and freezing assets, came on March 15, 2022.

The individual sanctions against the Mazepins are interesting albeit unsurprising given Dmitry’s close relationship with Putin. But delving deeper into Uralkali, Uralchem, potash, and fertilizer reveals a far more fascinating story about financial warfare. Uralchem, and Uralkali, are large and lucrative Russian businesses that provide a substantial source of revenue to the government—of course, sanctions on large revenue sources of the target country are strategy 101. Moreover, western allies have in the past targeted the potash sector in Belarus with economic sanctions, designating major Belarusian potash businesses in efforts to dry up sources of revenue to the Belarusian government.[3] Potash, a type of fertilizer, reportedly provides more than 7% of Belarus’ export income, and Belarus controls a large chunk of the global market.[4] By stemming the flow of income to Belarus, the hope is that the flow of Belarusian funds to Russia would similarly decrease.

How did the fertilizer industry become such a lucrative revenue source? Fertilizer is a key link in the world’s food supply chain; it increases global yields of food crops from 40-60%.[5] Fertilizer has become a necessary element to maintain the world’s food supply and chip away at global poverty and food insecurity. When prices of fertilizer rise, the impact is seen in the world’s food supply chain and oftentimes the brunt is borne by those already facing, or on the cusp of, total food insecurity. Even before the recent sanctions on the potash and fertilizer sector, the World Bank described the already-sharply rising cost of fertilizer and raised an alarm regarding the resulting increase of food prices and the further compounding of food insecurity, a situation that we caught glimpses of during the COVID pandemic.[6] With new and increased sanctions on fertilizer companies, those fertilizer suppliers will no longer be available options in the markets that serve many countries and farmers—resulting in a higher demand on other fertilizer sources and likely further price increases on fertilizer that still is available.

The impact of fertilizer sanctions on the world’s food supply chain could have even more repercussions when placed into context of the region’s overall role in food production. Food prices are expected to rise during the conflict due to Ukraine’s and Russia’s role in the supply chain, with a significant portion of the world’s wheat and maize supply originating in Ukraine and countries in the region providing a significant amount of food product exports to a large segment of the world’s population.[7] With production halted or, in the case of Russia, exports sanctioned, the number of people experiencing food insecurity is also expected to rise. This can have ripple effects across a number of socio-economic categories—from workforce availability to fulfilling sustainability goals. Given the region’s role in the global food supply chain, the compounding factors of fertilizer scarcity and sanctions are poised to strain food security across the world, coming on the heels of increasing food prices and limited food availability, especially in regions of the Middle East, South Asia, and North Africa.[8]

While fertilizer plays an important role in food security, it would be remiss not to point out that fertilizer is also one spoke on the wheel of climate change. As climate change continues to reduce the planet’s ability to support and sustain food production for a growing population, more fertilizer is required to ultimately harvest the large quantities of crops needed. As succinctly put by the World Bank in a report on Agricultural Pollution and Fertilizer, "[o]ver the past 50-60 years, unbridled growth in global fertilizer use to boost and maintain crop yields has polluted natural and agricultural systems, leading to a range of harmful outcomes. . . This, in turn, has adverse consequences for public health, the climate, wildlife and business . . . Although its use, in combination with other Green Revolution technologies, is credited for feeding the world and averting a more dramatic expansion of agriculture into natural landscapes, today’s fertilizer use is considered to be pushing the planet’s biogeochemical boundaries."[9]

There is no perfect strategy or perfect tool that can achieve geopolitical strategy goals without repercussions. Financial warfare, and the use of economic sanctions, certainly has numerous benefits when compared to traditional war that should not be overlooked. But, in an increasingly connected world, economic sanctions can have impacts far beyond the intended revenue sources. Those impacts are illustrated, here, as impacts on the world’s food supply chain and impacts on the ecological health of the planet. On Sunday, as the cars line up for the grand prix, there will be no Uralkali logo racing around the track, and Kevin Magnussen will have replaced Nikita Mazepin as the second driver for the Haas F1 team. Uralkali’s and the Mazepins’ absence portends a far bigger story than a reaction to current events at the highest levels of motorsport. But just like every Sunday during the racing season, the lights will go out, the checkered flag will wave, points will go to the quickest racers and championships will eventually go to the best driver and team—Lewis Hamilton and Mercedes, of course.

[1] https://www.uralchem.com/corporate_management/ 

[2] https://twitter.com/KremlinRussia_E/status/1496934999295070211?s=20&t=r6ZwFInUigjS4QIXZ-IO8w; https://apnews.com/article/russia-ukraine-putin-sports-business-europe-58fe43d1ec863fcea2bd1a60cd0582ca

[3] https://home.treasury.gov/news/press-releases/jy0512 

[4] https://www.bloomberg.com/news/articles/2022-01-20/u-s-potash-sanctions-may-push-belarus-deeper-into-putin-s-arms 

[5] https://thedocs.worldbank.org/en/doc/538281534213493532-0050022018/original/EBA17Fertilizer.pdf 

[6] https://blogs.worldbank.org/opendata/soaring-fertilizer-prices-add-inflationary-pressures-and-food-security-concerns 

[7] https://www.dw.com/en/russias-invasion-of-ukraine-drives-global-food-insecurity/a-61124764#:~:text=The%20International%20Monetary%20Fund%20(IMF,to%20plant%20crops%2C%20including%20wheat.; https://docs.wfp.org/api/documents/WFP-0000137463/download/?_ga=2.165948029.2127211503.1647536836-334719473.1647536836 ; https://www.globalcitizen.org/en/content/ukraine-russia-conflict-hunger-food-insecurity/

[8] https://www.vox.com/future-perfect/2022/2/27/22950805/russia-ukraine-food-prices-hunger-invasion-war 

[9] https://documents1.worldbank.org/curated/en/759191521207948130/pdf/124343-repl-WB-Knowledge-Fertilizer.pdf 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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