GAZPROM, LUKOIL TESTING LITHUANIA’S NEW GOVERNMENT.

Publication: Monitor Volume: 7 Issue: 17

Russian energy giants are eyeing Lithuanian enterprises and apparently probing for vulnerable spots in that country’s new government. The government, based on the center-right Liberal Union and center-left New Union-Social Liberals, took over from the Conservatives last November.

Last week, while on an official trip to Moscow, Economics Minister Eugenijus Maldeikis held unofficial discussions with executives of Russia’s Gazprom in a meeting arranged by Lithuanian businessman Antanas Bosas. Bosas heads the Stella Vita company, which is both a major Lithuanian importer of Russian gas and partly owned by Gazprom. Stella Vita and Gazprom had recently declared their interest in the upcoming privatization of the state-owned Lithuania Gas [Lietuvos Dujos] utility company. Lithuania’s Economics Ministry has a major say with regard to the privatization.

Maldeikis, who belongs to Prime Minister Rolandas Paksas’ center-right Liberal Union, failed to inform the foreign affairs and other ministries in a full and timely fashion about his Moscow visit. While in Russia he bypassed the Latvian embassy and accepted instead Gazprom’s hospitality. Back in Vilnius, his tardy and vague explanations only made matters worse. President Valdas Adamkus issued a statement of “censure of the minister’s conduct” and declined to meet him after the ill-fated trip. The Public Service Ethics Commission is now looking into the case for possible violations. Paksas has announced that Maldeikis would resign if the commission finds him to have become involved in a conflict-of-interest situation.

As finance minister in the first Paksas government in 1999, Maldeikis opposed the terms of the privatization of Lithuania’s oil sector by the American company Williams International. He resigned in protest–as did Paksas–when the then-governing Conservatives signed and ratified the strategic partnership with Williams in the absence of realistic alternatives, and in order to avoid a takeover by Russia’s Lukoil. But only months after his gesture of protest, Maldeikis helped represent Lukoil in negotiations with its rival Williams which by then had acquired operating rights and a 33-percent ownership of Lithuania’s oil-processing and oil-transport enterprises (see below). In that situation, the Ethics Commission found Maldeikis in violation of the law on the basis of conflict of interest (BNS, ELTA, January 22-24).

Its outright takeover bid thwarted in 1999, Lukoil now wants to gain one-third ownership and operating rights–matching those of Williams–in Lithuania’s oil industry with its three centerpieces: the Mazeikiai refinery, the Butinge maritime terminal and the Naftotieks pipeline. With its annual processing capacity of 12 million tons, Mazeikiai is the sole large refinery in the three Baltic states and once had the largest business turnover of any Lithuanian enterprise. The government retains a 59-percent interest, most of which is up for privatization.

To muscle its way in, Lukoil has sharply reduced crude oil supplies and at times even halted them, forcing Mazeikiai and Butinge to operate well below capacity and incur financial losses. Worse, in the absence of long-term supply contracts for crude, the Williams-operated Mazeikiai is unable to obtain international financing of its US$400 million program of technical modernization. Lukoil has offered to sign long-term supply contracts if Williams and the Lithuanian government comply with Lukoil’s conditions on ownership and operating rights.

On January 12, Paksas suddenly criticized Williams publicly for “not doing everything it could” to obtain credits without resort to state guarantees. Four days later the prime minister again accused the American company of “not doing everything [in its power]” to obtain supply agreements and to ensure operations at full capacity. And he hoped aloud that “the strategic partner would not respond with actions detrimental to Lithuania’s economy.” Paksas, who had in October 1999 resigned his first prime ministership to protest against the partnership with Williams, now showed that he remained suspicious of the strategic partner’s intentions.

On January 17 and 18, Williams president John Bumgarner and Williams Lithuania general manager Randy Majors expressed “amazement” at such criticism and “concern that the government, by creating a dispute in the media, has undermined Mazeikiai’s chances to obtain international financing [for plant modernization] and Russian crude supply agreements.” On January 23 a letter from U.S. Deputy Secretary of the Treasury Stuart Eizenstat became public in Vilnius. Eizenstat expressed concern that the controversy may impair the company’s ability to obtain international financing for the planned upgrade. Meanwhile, the Lithuanian government withheld approval of the company’s operating plan. And the opposition leader, former President Algirdas Brazauskas, blamed the American partner’s “unrealistic proposals” for Lukoil’s refusal to sign a long-term supply agreement.

Such unprecedented political sniping emboldened Lukoil to turn up the pressure. The head of Lukoil Baltija in Vilnius, Ivan Paleichik, threatened during a meeting with parliamentary deputies that the Russian company would reduce crude oil supplies to even lower levels and would continue using its influence to block oil deliveries by other Russian companies to Lithuania, unless Lukoil were accepted as an “equal partner” in Lithuania’s oil sector. The Williams-run Mazeikiai company responded within hours that in the event of a further cut or a halt in supply, it would retaliate by stopping the sale of refined products to Lukoil’s affiliates in the Baltic states and would request the immediate repeal of those affiliates’ import licenses for refined products. Lukoil Baltija owns some 120 filling stations in the three Baltic states, including some seventy in Lithuania.

The stalemate seems set to continue, and Lithuanian politicians would only prolong it by blaming the American partner for Lukoil’s pressure tactics. (BNS, ELTA, January 12, 17-19, 23).

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