By Douglas Busvine and Andrei Makhovsky

MOSCOW/MINSK (Reuters) - Russia demanded on Tuesday the release of the head of Russian company Uralkali <URKA.MM>, whose arrest in Belarus threatens to turn a business dispute that shook the $20-billion global potash market into a major diplomatic row.

Vladislav Baumgertner, chief executive of the world's largest potash producer, was detained on Monday at the airport of the Belarusian capital Minsk after being invited to secret talks with Prime Minister Mikhail Myasnikovich.

Television footage released by the Belarusian Investigative Committee, the former Soviet republic's top crime-fighting agency, showed Baumgertner being searched, his legs spread and hands against a wall. He was later pictured handcuffed.

Belarusian President Alexander Lukashenko appears to have taken it as a personal affront when Uralkali quit a cartel last month with a Belarusian company producing potash, a key fertilizer ingredient.

The main owner of Uralkali, which controls 20 percent of the world market, is billionaire Suleiman Kerimov, who has close ties with President Vladimir Putin's Kremlin administration.

The Russian Foreign Ministry summoned the Belarusian ambassador to issue a rebuke, warning of unspecified consequences for bilateral ties. The two countries allow passport-free travel and are members of a free-trade zone.

"It is impermissible to detain a person on his way home after he came for talks at the invitation of the Belarusian government," Deputy Foreign Minister Grigory Karasin told Interfax news agency.

Lukashenko, an authoritarian leader in power since 1994, has a history of maneuvering between Russia and Europe to shore up his isolated leadership and Soviet-style economy.

"Lukashenko loves trading hostages; he trades political hostages with the West and economic hostages with Russia," said Dmitry Oreshkin, an independent Russian political analyst.

Baumgertner, who faces up to 10 years in jail on charges of abusing his powers, could in effect be ransomed by Belarus in return for economic concessions by Russia, analysts speculated.


The market for potash has long been dominated by a handful of players led by the Belarus Potash Co (BPC), a marketing venture between Uralkali and state-owned Belaruskali.

Together with Canpotex - which groups North American producers Potash Corp <POT.TO>, Agrium <AGU.TO> and Mosaic <MOS.N> - BPC controlled 70 percent of sales, keeping prices high for farmers.

Angered by a law passed in Belarus last year allowing Belaruskali to sell product outside the marketing venture, Uralkali pulled out of the cartel on July 30, saying it would seek to maximize its own volumes and warning prices could fall by as much as 25 percent this year.

The recriminations, and a threat by Belarus to hold Baumgertner for at least two months, suggest there is little hope of early reconciliation.

"I doubt that this is possible," said one Russian industry source familiar with the situation, adding the charges against the chief executive were "unjust - complete and utter rubbish".

The dispute could be good news for some, however.

"I don't think Uralkali and Belaruskali can come together again. It is sure that there would be cut-throat competition among suppliers, which is good for buyers," said a senior official at a leading Indian potash importer.

Uralkali's shares steadied after sharp falls on Monday that extended its losses since mid-July to more than a quarter, while those of its competitors rallied.

Germany's K&S <SDFGn.DE> extended Monday's rise on news of Baumgertner's arrest, when Potash Corp, Atrium and Mosaic also attracted buyers.


Although Russia's reprimand amounted to a standard demarche, indicating it may not want the dispute to escalate, relations in the post-Soviet area can quickly hit the buffers.

Russia fought a brief war against Georgia, another former Soviet republic, in 2008, and it has cut off gas supplies to Belarus and Ukraine - key pipeline routes to the Europe market - in arguments before.

Sources said Prime Minister Dmitry Medvedev, who made way for President Vladimir Putin's return to the Kremlin last year, was furious, having been in direct touch with his Belarusian counterpart over Baumgertner's trip.

Belarus had also invited Uralkali Chairman Alexander Voloshin, a former chief of staff to Putin, and Russian Deputy Prime Minister Arkady Dvorkovich to the talks. They were unable to attend due to scheduling conflicts.

Playing hardball with Kerimov, whose fortune is estimated by Forbes magazine at $7.1 billion, is a risky proposition, given his ability to mobilize political backing to achieve his business ends. It was Kerimov who in 2010 forced out former Uralkali owner Dmitry Rybolovlev, now the emigre owner of French soccer club Monaco, before completing a Kremlin-backed Russian potash merger deal.

Lukashenko's tactics amount to an attempt "to force Suleiman Kerimov into dialogue", said Yaroslav Ramanchuk, head of the Mizes think-tank in Minsk, warning that the definitive collapse of the cartel would cost Belarus $1.5 billion.

The state of 10 million people, sandwiched between Russia and Poland, can ill afford such a hit as widening external deficits threaten a repeat of a 2011 balance of payments crisis that forced a 65 percent currency devaluation.

"Belarus needs additional external financing, and the most likely source remains Russia," analysts at Morgan Stanley said in a note.

Under a $3-billion loan facility granted by a Moscow-led bailout fund, Belarus has to privatize $1.2 billion in assets to qualify for the disbursal of a $440 million tranche in November, Morgan Stanley said.

(Additional reporting by Polina Devitt, Alessandra Prentice, Natalya Shurmina, Alexei Anishchuk, Clara Ferreira-Marques, Ron Bousso and Rajenda Jadhav; Writing by Douglas Busvine; Editing by Timothy Heritage and Will Waterman)