US embassy cable - 04VILNIUS1521

C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 001521 
 
SIPDIS 
 
STATE FOR EUR/NB, EB/ENR 
 
E.O. 12958: DECL: 12/15/2014 
TAGS: PREL, ECON, ENRG, LH, RS, HT25 
SUBJECT: MAZEIKIU NAFTA MANAGER EXPRESSES CONCERNS OVER 
RUSSIAN DESIGNS ON REFINERY 
 
REF: VILNIUS 1160 
 
Classified By: ECONOMIC OFFICER MIGUEL KAMAT FOR 1.4(B) AND (D) 
 
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SUMMARY 
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1.  (C) Mazeikiu Nafta (MN) General Manager Nelson English 
told the Ambassador that the Russian-owned Lukoil company is 
waiting in the wings to acquire the MN oil refinery in the 
aftermath of Yukos's "impending and almost certain collapse." 
 According to Amcit English, Moscow is already trying to flex 
its muscle at MN through newly appointed Management Board 
member Michail Elfimov, and he shares popular concern that 
Lukoil will end up owning the refinery.  English doubts that 
the incoming Lithuanian government, with Russian-born Viktor 
Uspaskich as Minister of Economy, will resist Kremlin efforts 
to increase its control over MN decision-making, though 
Uspaskich separately on December 14 said he supports 
renationalization of the refinery to thwart Russian 
intentions.  We will continue to monitor any fall-out for MN 
resulting from the Yukos crisis, and will inquire about GOL 
plans for the refinery with Uspaskich.  End Summary. 
 
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YUKOS COLLAPSE "ALMOST CERTAIN" 
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2.  (C) The Ambassador met December 13 with Nelson English, a 
veteran oil hand who has served for two years as the General 
Manager of Lithuania's oil refinery Mazeikiu Nafta (MN). 
English opined that Yukos faced "impending and almost certain 
collapse." 
 
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GOR INFLUENCE IN LITHUANIAN ENERGY 
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3.  (C) English suggested that the Kremlin is trying to 
increase its control over MN through newly appointed 
Management Board member Michail Elfimov.  Elfimov, former 
head of Yukos's crude logistics group, has close ties to the 
Kremlin, according to English.  He stated that unlike Mikhail 
Brudno, the former MN president who was a refinery 
shareholder and enjoyed the GOL's trust, Elmifov is an 
old-school apparatchik who does not own any shares, and does 
not enjoy the confidence of the GOL.  According to English, 
Elfimov is attempting to steer MN in a direction that would 
serve the Kremlin's interests, but not those of the 
refinery's shareholders.  For instance, English stated that 
Elfimov wants English to agree to a proposal by Latvia-based 
Woodson Trading Company to invest some of the refinery's 
profits in a new terminal to increase throughput, although 
this would needlessly tie up a substantial portion of MN's 
working capital.   (Per English, two former KGB generals own 
and operate Woodson.)  English also contends that Elfimov is 
trying to reduce the GM's role, making it more difficult for 
English to vet Board decisions with the shareholders at 
large, as he did in the case of the Woodson proposal. 
 
4.  (C) MN is a valuable and strategic asset -- "one of the 
most liquid in Yukos' portfolio," according to English -- and 
he shares popular concern about it falling under Kremlin 
control via a Lukoil acquisition.  MN employs about 3,500 
workers in Lithuania, and revenues from the oil refinery 
account for about two percent of GDP.  In 2003, MN 
contributed roughly USD 660 million.  This year, with profits 
currently showing a five-fold increase year-on-year, MN's tax 
contribution for 2004 should be much greater.  Yukos 
currently controls not only the management of the refinery, 
but also the supply of crude.  While English would clearly 
prefer that MN end up in the hands of a western company with 
equity in Russian oil, that option is not currently on the 
table. 
 
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THE USPASKICH FACTOR 
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5.  (SBU) Commenting on Victor Uspaskich, who on December 14 
became Minister of Economy, English said that "what I hear 
bothers me."  But this week the new Economy Minister made an 
announcement that, on its face, would not seem to favor 
Russian interests.  During a meeting with parliamentarians 
from the opposition (and anti-Russian) Conservative Party, he 
described a plan for the government to reacquire controlling 
interest in MN.  (The government currently retains 40.6 
percent interest in the refinery to Yukos' 53.7 percent, with 
the remaining interest in the hands of small shareholders.) 
The media reports Uspaskich defending the apparent 
renationalization of the firm as a way "to reduce the 
influence of the Russian Government."  The Russian-born 
Minister has yet to divulge the details of the "very 
effective and painless" means by which he hopes to implement 
his scheme.  PM Brazauskas, who also attended the meeting, 
added that the "issue will be considered, but...no decision 
has been made." 
 
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PURSUING CORPORATE CORRUPTION 
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6.  (SBU) The Ambassador and English also discussed the need 
for the GOL to intensify its anti-corruption efforts. 
English remarked that of the 28 indictments for corruption at 
MN, including charges against six law enforcement officials 
who allegedly siphoned oil from main pipeline, none led to 
prosecution.  English said he had received threats of 
reprisals from a regional prosecutor after English demoted a 
senior MN manager whom he suspected of theft from the 
refinery and bribery of the corrupt prosecutor. 
 
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COMMENT 
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7.  (SBU) English is well-placed to comment authoritatively 
on the local energy scene, although his association with 
Yukos doubtlessly influences his analysis.  In any event, the 
fate of MN awaits the resolution of the Yukos crisis or a 
preemptive move on the part of the Lithuanian Government.  We 
will continue to monitor the situation, and explore with the 
new Minister of Economy the GOL's intentions. 
 
Mull