Publication: Monitor Volume: 5 Issue: 195

Supported by Russia’s government, the Lukoil company is driving Lithuania’s Mazeikiai oil refinery and Butinge maritime terminal into bankruptcy, as a means of thwarting their takeover by the American company Williams International and forcing Lithuania into a partnership. The blackmail has also brought Lithuania close to a government crisis.

Russia is virtually the sole source of crude oil for Lithuania. Lukoil itself had been supplying approximately a quarter of Lithuania’s needs, and is empowered by the Russian government to coordinate all Russian crude oil deliveries to Lithuania. It has reduced those deliveries to a bare trickle, bringing Mazeikiai–the largest Baltic refinery by far–to the brink of closure. Due to the supply stoppage, Mazeikiai is currently incurring losses of some US$250,000 daily, on top of nearly US$50 million worth of losses already inflicted on it–and on Lithuania’s budget–this year by Lukoil’s punitive stoppages.

Lukoil’s actions–which have resulted in Mazeikiai’s debts and caused its operating capital deficit to balloon–jeopardize the Williams’ takeover which Moscow would like to block. Three weeks ago, the Lithuanian parliament approved legislation awarding Williams the right to acquire more than 50 percent of the shares in Mazeikiai and associated oil installations, reserving additional stock packages for other Western investors, and leaving only a small portion of the stock open to possible acquisition by Russian oil companies (see the Monitor, October 6). Lukoil retaliated by announcing that it would withdraw from Lithuania altogether and in essence close the supply valves.

As preconditions to resuming the deliveries, Lukoil demands a preemptive right to at least 33 percent of the shares in Lithuania’s entire oil sector (limiting Williams to 33 percent) and joint operation of the sector. But those conditions merely disguise Lukoil’s real goal of a full takeover. The Russian company knows that Williams has all along avoided a parity deal with Lukoil in Lithuania and has also insisted on sole operational control, as would most Western investors in these circumstances. Lukoil hopes that the Lithuanian government, faced with the prospect of bankruptcy (see below), will accept Lukoil’s conditions and thereby lose Williams as a partner, clearing the way for Lukoil or a Lukoil-led Russian consortium to acquire the absolute majority of the shares and sole operational control of Lithuania’s oil sector. Such a takeover had indeed been Lukoil’s original goal in the earlier negotiations.

The Lithuanian government has in recent days agonized over Williams’ proposed way to deal with this situation. Before consummating the takeover, Williams wants the Lithuanian government to inject US$350 million into Mazeikiai as a way to offset current losses and the deficit of operating capital–in effect, to pay for damages inflicted by Lukoil. According to Lithuanian government ministers, the American company wants those funds disbursed within one Lithuanian budget year and in cash, not over a several-year period and not in the form of loan guarantees.

Addressing the country on television on October 18, Prime Minister Rolandas Paksas came out against that proposal and announced that he could never sign or approve such a deal. Citing the loan guarantees already approved by the Lithuanian parliament to the tune of US$600 million, Paksas argued that adding the US$350 million in cash would in effect bankrupt the state budget, raising its deficit to 9.8 percent of the gross domestic product–compared with the International Monetary Fund’s 3 percent benchmark–and would also saddle Lithuania with a heavy current-account deficit. Paksas’ address appeared designed to set the tone of the October 19 government meeting. President Valdas Adamkus promptly countered through his chief spokesman, who questioned Paksas’ stand and appealed to the main governing party–Fatherland Union/Lithuanian Conservatives–to support the Williams proposal. Parliament Chairman and FU/LC leader Vytautas Landsbergis, breaking off an official visit abroad, urgently returned to Vilnius to rescue the deal with Williams.

In yesterday’s meeting, Paksas, Economics Minister Eugenijus Maldeikis and Finance Minister Jonas Lionginas voted against the Williams proposal. Almost all the other ministers voted in favor of finalizing an agreement based on it, but a few expressed misgivings about the documents they had not had a chance to study in advance or fully comprehend. Maldeikis and Lionginas–who are nonparty experts and have been in charge of the negotiations with Williams–resigned their posts. Paksas is, at least for the time being, staying on in order to avoid a government crisis: The prime minister’s resignation automatically triggers that of the entire government under the Constitution.

The country’s leadership and parliamentary majority seek to avoid Russia’s embrace at all cost and regard the deal with the American company as an essential component of Lithuania’s Western orientation. The question is whether Lithuania can, without urgent Western support, afford that deal while the liabilities inflicted on its oil sector by Lukoil keep mounting (BNS, LETA, October 12-15, 18-19; see also the Monitor, April 14, May 21, July 27).

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