Russia is keen to create a national potash mining champion via the merger of its two biggest companies in the sector and may allow a small stake to be bought by an overseas player, analysts said on Friday.

Uralkali (URKA.MM) is expected to kick-start merger plans with unlisted Silvinit in coming days, creating the world's second biggest potash miner worth around $20 billion.

Billionaire Suleiman Kerimov took control of 53.2 percent of Uralkali alongside two businessmen in June, clearing the way for the merger with Silvinit, in which market sources say he might have already accumulated control.

In my view Russian authorities have informally already approved the deal ... the merger plans are now being realised by Mr Kerimov, said Georgy Ivanin, senior analyst at Alfa-Bank.

Indicating government support, state-controlled VTB bank (VTBR.MM) helped fund the purchase of the Uralkali stake by Kerimov -- seen by the Kremlin as one of its most loyal businessmen.

Russia is seeking to become a greater agricultural force as part of bold plans to diversify the economy away from oil and gas. Potash is a key component of fertiliser, an increasingly valuable commodity for farmers as the world's population grows.

In the short term, soaring wheat and grain prices part-driven by Russia's worst drought in a century has had a knock-on affect on fertiliser producers.

We believe that the best way to play the drought story is through fertilisers. With increasing crop prices, farmers throughout the world will be seeking to maximise future yields, VTB analysts said in a note.

GOVERNMENT APPROVAL

Reuters reported on Thursday that mining giants Rio Tinto (RIO.AX) and potash mining leader Potash Corp (POT.TO) were running the rule over Uralkali and analysts said Russia would never allow more than 10-15 percent of the firm to be controlled by an overseas player and only after the Uralkali-Silvinit merger.

Rio Chief Executive Tom Albanese said in February he is interested in potash, while Potash Corp owns minor stakes in several players from Israel to Chile.

While we have little doubt that foreign miners have always been interested in the CIS potash industry, we believe that from a political perspective it is very unlikely Uralkali will be sold in whole to an international company, said Troika Dialog analyst Mikhail Stiskin.

However he added that Dmitry Rybolovlev, who ceded control of the group to Kerimov but still owns a 10 percent stake in Uralkali, could be persuaded to sell up.

VTB analysts said in a note that Kerimov could try to reduce his holding after the merger is completed, estimating that 13 percent of the combined group could go to an overseas bidder based on the current free float.

The Russian government would never allow a foreign company to control the country's largest potash producer and any such deal would be subject to government approval, they said.

Uralkali remains a 'buy' recommendation across the Moscow financial community due to the interest from foreign groups.

The shares were up 0.5 percent in Moscow at 1348 GMT and 0.8 percent in London. (Editing by David Cowell)

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