RUSSIAN GOVERNMENT GOING AFTER YUKOS INTO LITHUANIA

Effective April 1, the Russian government has imposed a definitive halt on oil shipments by the Yukos company’s remaining units to the Mazeikiai refinery, Lithuania’s largest economic entity. Yukos is the majority owner and operator, and the Lithuanian government the minority stakeholder in Mazeikiai. The move shows that the Russian government is extending an anti-free-enterprise campaign beyond Russia’s border.

Acting undoubtedly on political instructions from on high, Russia’s state oil pipeline monopoly Transneft has not allocated to Yukos or its subsidiaries any export quotas to Mazeikiai in the year’s second quarter. Transneft has cut overall crude oil supplies to Mazeikiai to 1.8 million tons for the second quarter (compared to the 2.25 million ton forecast, which was almost identical with the quarterly average for 2004). And it has apportioned the reduced delivery volume to Mazeikiai among several Russian state-owned or state-friendly companies, including Lukoil and Rosneft.

The three-pronged move seems designed to force Yukos entirely out of business and out of Lithuania; to leave Mazeikiai at the discretion of the Russian government for oil supplies; and to set the stage for takeover by a state-connected Russian company.

Indeed, on March 29, Lukoil chief Vagit Alekperov announced that it has entered into negotiations with Yukos to buy the latter’s 53.7% controlling stake in Mazeikiai. Lukoil had already expressed such interest in February, shortly after the Lithuanian government had begun its own negotiations with Yukos. Apparently, Lukoil intends to elbow out the Lithuanian government from the negotiations.

The government seeks to increase its stake by 9.72%, so as to raise the total Lithuanian stake to 50.48% and obtain the operating rights, as a precaution against hostile takeover by a Russian company. Under the investment contract, Yukos has a preemptive right to acquire that additional stake for $75 million (currently 58 million euros), with the Lithuanian government next in line for acquiring that stake if Yukos forfeits the option. For its part, Lukoil seems interested in buying Yukos out of Mazeikiai while Yukos needs cash to meet extortionate tax payments in Russia.

The Lithuanian government accepts the fact that Yukos is no longer in a position to discharge its obligations as strategic investor in Mazeikiai. The government is looking for another strategic investor on conditions similar to some of those that had been met by Yukos, such as: guaranteed supplies of crude oil for five years ahead, liability for any supply disruptions, and continuing upgrades in product quality.

Lithuania is again bracing for attempts by Russian government-connected companies to take over Mazeikiai under the threat of halting oil supplies. Lukoil resorted to the strangulation tactic in 2000-2002 and came close to success. Using its government-awarded position as coordinator of Russian oil supplies to Lithuania, Lukoil reduced those supplies gradually to a trickle, pushed Mazeikiai toward bankruptcy, and forced the American strategic investor Williams International out of Mazeikiai and Lithuania. With the refinery dry and idle, Lukoil was poised to acquire the majority stake at a fraction of its value.

It was at that point in 2002 that Lithuania made the agreement with the privately owned, U.S.-friendly Yukos, which quickly turned Mazeikiai into a thriving enterprise. Yukos guaranteed stable supplies of crude oil and upgraded the refinery’s equipment and product, enabling it to meet European Union standards and compete in EU markets.

The refinery processed almost 9 million tons of crude oil in 2004, up 21% on 2003. Yukos delivered 4.8 million tons of that crude in 2004 and procured most of the balance. Mazeikiai earned record net profits of 209 million euros in 2004, more than triple the net profit for 2003, thanks in part to Yukos-introduced upgrades. However, faced with the destruction of Yukos in Russia, the Mazeikiai board has recommended to the upcoming meeting of shareholders that no dividends be paid this year.

The Mazeikiai company — which includes the Butinge maritime oil-loading terminal — is Lithuania’s most lucrative economic asset and top taxpayer, accounting for approximately 10% of the country’s annual GDP. Ownership of the company is a major national security issue for Lithuania. One solution under discussion would involve a Western strategic investor to join with the Lithuanian government and a Russian oil company, in an arrangement that could guarantee stable crude oil supplies, ensure product access to markets, and avoid any disproportionate Russian influence.

(BNS, ELTA, March 18, 24, 30, 31, April 1; also see EDM, January 20, February 2)