LITHUANIA MAY NATIONALIZE MAZEIKIAI OIL COMPLEX

While Gazprom is rapidly making inroads into Europe’s gas infrastructure (see EDM, March 13, 21), Russian authorities are now targeting oil assets on EU territory in Lithuania for takeover by a Kremlin-approved company. The Mazeikiai oil refinery and associated enterprises in Lithuania are among the last remaining major assets of the Kremlin-destroyed Yukos company. Moscow seems to plan a seizure of Yukos’ majority stake in the Mazeikiai complex as part of settling the Yukos “tax arrears” to the Russian state. Lithuania can prevent such a move by nationalizing the Mazeikiai complex — the largest and most lucrative business enterprise in the country — on national security grounds.

On March 28-29, the Moscow Arbitration Court ruled in favor of the state-owned Rosneft company’s request concerning the “bankruptcy” of Yukos. The court appointed a temporary administrator of Yukos and forbade sale-and-purchase transactions in Yukos property and shares without that administrator’s prior approval. The ruling also targets Mazeikiai in that it extends to Yukos assets registered in third countries. Technically, Yukos owns the majority stake in the Mazeikiai complex through the Netherlands-registered Yukos International company.

Undoubtedly government-inspired, the ruling aims to block the negotiations between Yukos and the Lithuanian government and between Vilnius and international investors, even as both sets of negotiations had moved into the end-game phase. Yukos owns 53.7% and the Lithuanian government 40.66% of Mazeikiai’s shares. The government plans to purchase the Yukos stake and resell it to a strategic investor, along with at least half of the government’s stake, in a package totaling more than 75% of the Mazeikiai shares. The government must retain a stake of at least 10% and blocking rights under Lithuanian law.

Moscow seeks to thwart this entire process and to position a Russian company for taking over the Mazeikiai complex. Rosneft had expressed an interest earlier, but is not officially a candidate at the moment. Lukoil has just submitted a new bid for Mazeikiai, this time apparently in Lukoil’s own name, no longer in tandem with ConocoPhillips. Last year these two companies submitted a joint bid that Lithuania seriously considered as long as the American company was involved. Lithuania’s experience with Lukoil is highly discouraging: In 1999-2001, using its Kremlin-awarded power as “coordinator” of supplies to the Baltic states, Lukoil deprived Mazeikiai of crude oil supplies so as to destroy its market value and take it over on the cheap. Ultimately, the American-friendly Yukos rescued Mazeikiai and turned the refinery into a highly profitable enterprise, before the Russian government destroyed Yukos.

According to the leading Vilnius newspaper, Lietuvos Rytas (March 28), the Lithuanian government has offered $1.2 billion to Yukos, plus the company’s dividends for 2005, as the purchase price of the Yukos stake in Mazeikiai. Three candidates are now bidding to re-purchase the Yukos stake from Lithuania. Kazakhstan’s oil and gas state company KazMunayGaz offers $1.2 billion. Lukoil and TNK-BP have made offers “very similar to that of KazMunayGaz,” according to Prime Minister Algirdas Brazauskas. However, he cautions, “Lithuania’s political assessment of Lukoil must be factored into any decision.” The Polish firm PKN Orlen has dropped out of the bidding. It had offered $1.5 billion, but was unable to guarantee stable supplies of crude oil.

The Moscow court ruling threatens to derail this entire process. Addressing a parliamentary hearing on March 30, Brazauskas raised the possibility of nationalizing the Yukos stake on national security grounds, if this is the only way to ensure that Lithuania itself chooses the strategic investor. Labor Party leader Viktoras Uspaskikh supports this approach. The left-leaning Labor is the single largest parliamentary party, it is allied with Brauzauskas’ Social-Democrats in the government coalition. Lithuania’s constitution provides for nationalization of strategic assets in the national interest (a precaution against possible hostile takeovers by Russia). The fate of Mazeikiai is a paramount national security issue, and a decision to nationalize the majority stake in it would undoubtedly rest on a political consensus in the country.

(BNS, Interfax, March 28-30; see EDM, March 17)