MOSCOW TARGETING YUKOS IN LITHUANIA

As anticipated (see EDM, July 1), Russia has delivered to Lithuania an official request to prohibit transactions involving assets of the Yukos company on Lithuania’s territory (ELTA, July 22). Those assets consist of the 53.7% stake in the Mazeikiai oil-refining and -transport complex, the largest business entity in Lithuania. The government owns 40.6%, and Lithuanian minority shareholders the rest. There is a wide political consensus in Lithuania that replacement of the U.S.-friendly Yukos by a Kremlin-friendly company would pose serious national security problems.

The freeze request from Russia’s Justice Ministry and Bailiff Service seems designed to prepare sequestration and a takeover by the Russian government, under the guise of debt-collection from Yukos. Alternatively, it might reflect a tactic by the Russian government to drive down the Mazeikiai share price under political pressure and then authorize a favored Russian company to acquire the Yukos stake on the cheap. Lukoil and Gazprom have already announced their interest in taking over the Yukos stake in Mazeikiai.

In either case, Moscow’s freeze request almost certainly seeks to stop possible offers by international oil companies to acquire Yukos or Lithuanian shares in Mazeikiai. The American companies ConocoPhillips and ExxonMobil, Kazakhstan’s KazMunayGaz, the Russian-British joint venture TNK-BP, and the Swiss-registered oil trader Vitol have all looked into that possibility with varying levels of interest. Under almost any scenario, a non-Russian company would partner with a Russian oil supplier. However, uncertainty and concern about Moscow’s intentions tend to discourage the involvement of non-Russian companies.

The Social-Democrat Prime Minister, Algirdas Brazauskas, is said to control personally the confidential negotiations with Russian companies. For its part, the opposition Conservative Party calls for greater transparency and proposes a set of national-interest-based criteria for assessing potential buyers of Yukos or Lithuanian shares in Mazeikiai. In several recent statements, most recently a July 22 news conference, the Conservative Party’s chairman and vice-chairwoman, Andrius Kubilius and Rasa Jukneviciene, have demonstrated that national security is a more important consideration than the price offered for the shares by the purchaser. While an ability to guarantee crude oil supplies is a self-evident requirement, Conservatives suggest the following additional criteria to be met by any possible purchaser of Mazeikiai stock:

-independence from the Russian authorities’ influence;

-a commitment to refrain from interfering with Lithuania’s political processes;

-adherence to Western standards of corporate governance and management;

-public accountability and full transparency of business practices; and

-any Russian purchaser should have a real, not fictitious Western partner, with the power to block politically motivated decisions detrimental to Lithuania.

By the same token, Lithuania almost certainly need not hasten to comply with Moscow’s request to prohibit transactions with Yukos shares on Lithuania’s territory. That politically motivated request can probably be shown to conflict with Lithuanian, EU, and international law regarding the immunity and protection of private property (ELTA, July 25).

On July 25, the former U.S. ambassador to Lithuania, Keith Smith, told an international energy seminar in Vilnius that Russia’s attempt to take over the Yukos assets in Lithuania reflects the dangerous, twofold trend ongoing in Russia itself: first, imposition of central political power over the energy sector (along with destruction of the independent, modern company Yukos); and second, the upsurge of state-sponsored nationalism, financed in part by energy companies. With those energy companies increasingly used as foreign policy tools of the Russian government, Lithuania along with its Baltic and Central European neighbors face a “dangerous cocktail” in that Russia is their sole external supplier of both oil and gas (BNS, ELTA, July 25).

Acquiring stock in Mazeikiai remains a highly attractive business proposition. Yukos completed a major upgrade of the equipment last year, raising product quality to European Union standards and enabling the refinery to post record profit margins in 2004. The refinery processed 4.4 million tons of oil in the first six months of 2005, up by 13% from the first half of 2004. However, crude oil shipments out of the same company’s Butinge maritime terminal declined by 43% to only 2.6 million in January-June 2005.

The Russian government is cutting oil deliveries to Butinge, as it has done at Latvia’s Ventspils maritime terminal, citing the rapid expansion of Russia’s own Primorsk terminal for oil tanker shipments. However, Primorsk’s capacity is insufficient for fully handling Russia’s oil volumes available for export. Moscow’s decision to underutilize Butinge and Ventspils is mainly politically motivated with regard to these Baltic states, and is also unhelpful to the international economy.

(BNS, ELTA, July 19-25; see EDM, January 20, February 3, April 1, July 1