A source close to the talks between Sibur and Phosagro said: "Sibur and Phosagro already have an understanding on the sale of assets. If the deal comes together, it would be part share sale, part merger."
Phosagro, chaired by St Petersburg Mining Institute Rector Vladimir Litvinenko, a longtime ally of Prime Minister Vladimir Putin, considered a bid for a stake in Potash Corp to counter moves by BHP Billiton in potash, a major market for Russia.
Phosagro appeared to lose interest in the Canadian company once Canada rejected BHP Billiton's bid for Potash Corp and the threat of greater competition to Russia in the lucrative potash market receded.
Russia's fertilizer industry is already undergoing its own consolidation as the country's two top potash miners, Uralkali and Silvinit, merge to form the world's second largest producer.
Russia's government does not classify fertiliser production as a strategic industry like oil and gas and metals but still keeps a close eye on ownership and pricing.
The price of fertilisers is a particularly sensitive issue after a drought that slashed the 2010 grain crop by over a third from 2009 and forced the world's third largest wheat exporter to turn to imports.
Producers of complex fertilisers, including Phosagro, are already subject to domestic price formulas linked to minimum export prices, and are sensitive to input prices for potash.
On Wednesday, the head of Russia's anti-monopoly watchdog Igor Artemyev said the merger of Uralkali and Silvinit could go ahead.
He said the merger would pass muster if domestic prices did not rise with export prices. The firms are largely export businesses whose top clients are India and China.
"We think the consolidation of Russian producers of nitrogen fertilisers makes sense and are looking at various options. However we have no decisions or agreements," Sibur spokesman Rashid Nureyev said.
Banking sources said Phosagro was looking to borrow $500 million. The debt finance is being organised by UniCredit, they said. UniCredit declined to comment.
Phosagro chief executive Maxim Volkov declined to comment on the potential acquisition of the Sibur division, Sibur-Mineral Fertilizers, but confirmed the company was looking to borrow.
"In January we sent around an RFP (request for proposals) to several banks. We need money for acquisitions," he told Reuters.
Ownership changes are already underway it Sibur. The petrochemicals firm is now majority owned by Leonid Mikhelson, the chief executive of Russia's top independent gas producer, Novatek. He bought a 50 percent stake last month from Gazprombank.
Mikhelson has an option to buy the rest of the company, Gazprombank has said. (Reporting by Olga Sychkar, Oksana Kobzeva, Natalya Shurmina Vladimir Soldatkin and Olesya Astakhova; writing by Melissa Akin; editing by Antonina Vorobyova, Louise Heavens and Jane Merriman)