MAZEIKIU NAFTA MANAGER EXPRESSES CONCERNS OVER

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
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