AMBASSADOR PROMOTES U.S.-LITHUANIA RELATIONS,

C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 000101

SIPDIS

STATE FOR EUR/NB, EUR/ERA, EB/ENG

E.O. 12958: DECL: 01/27/2015
TAGS: ECON ENRG OVIP ELAB PGOV LH
SUBJECT: AMBASSADOR PROMOTES U.S.-LITHUANIA RELATIONS,
DISCUSSES OIL REFINERY IN MAZEIKIAI

REF: A. 2004 VILNIUS 1522


B. 2004 VILNIUS 1521

Classified By: Pol/Econ Officer Christian Yarnell
for Reasons 1.4 (b) and (d)


1. (C) SUMMARY: Ambassador Mull traveled to the provincial
city of Mazeikiai, home to the Mazeikiu Nafta oil refinery,
January 19-20 to convey a message of close U.S.-Lithuanian
ties. He also focused on efforts to combat corruption,
intolerance, HIV/AIDS, and trafficking-in-persons. Mazeikiu
Nafta officials briefed on the refinery's recent operating
successes and discussed some serious challenges for the
future. The dismantling of Russian oil giant Yukos will
especially threaten Mazeikiu Nafta operations and, therefore,
the economy of Mazeikiai. END SUMMARY.

--------------
Background
--------------


2. (U) A January 19-20 visit to Mazeikiai was the most recent
stop in our ongoing Ambassadorial travel program to
Lithuanian regional towns. Mazeikiai is a medium-sized
(population 46,000),industrial town located in northwest
Lithuania near the border with Latvia. It is best known for
the Mazeikiu Nafta (MN) (translation: "Mazeikiai's oil") oil
refinery, by far the town's largest employer and one of
Lithuania's largest companies. Although MN has performed
extremely well since Russian oil giant Yukos took over
control of the refinery in 2002, the unemployment rate in
Mazeikiai remains one of the highest in the country at 14.4%.
European Union membership has led to increased emigration
(ref A) and has energized some local businessmen, however,
leading to a gradual decrease in unemployment.

--------------
The Ambassador's Message
--------------


3. (U) Ambassador Mull stressed the following themes with
local government, NGO, business, and media leaders:

-- CLOSE BILATERAL TIES: Ambassador Mull throughout his trip
emphasized the close relationship between the United States
and Lithuania. (Note: Some local citizens continue to harbor
ill feelings regarding the operation of the Mazeikiu Nafta
refinery under American firm Williams Intl).

-- FIGHT AGAINST CORRUPTION: The Ambassador stressed the
importance of transparency and ethics for Lithuania's
democracy, noting that anti-corruption activities would be a
priority for the Embassy during the year.

-- TOLERANCE AND MINORITY RIGHTS: The Ambassador praised
those who stand up against ethnic hatred and intolerance, and
encouraged greater legal protections for vulnerable groups
such as the physically impaired.

-- HEALTH CONCERNS AND COMBATING TIP: Ambassador Mull
encouraged greater dialogue of health concerns, such as
HIV/AIDS, and stressed the importance of combating
trafficking-in-persons.

--------------
It's All About Oil
--------------

Securing Profitability
--------------


4. (SBU) Mazeikiai Mayor Vilhelmas Dziugelis described how
the lifeblood of his town remains dependent on the
performance of the MN oil refinery, whose future the Yukos
affair now clouds. MN General Director Nelson English, whom
the Ambassador has met previously (ref B),introduced the
company's management team and gave a detailed run-down of its
operations. He noted that 2004 was an unparalleled year for
the refinery, with profits over $200 million, up three-fold
from the previous year. He credited the refinery's dramatic
turnaround to the modernization program that previous
managers Williams Intl began. English and his team also
attributed MN's success to Yukos's western management
practices and access to Russian oil supplies. The continued
profitability of the refinery, he said, depended on similar
access and business management acumen of whomever controls
the plant in the future.


5. (C) Topping the list of potential threats to MN's
profitability, English noted, are securing oil supplies, the
cost of doing business under EU rules, and corruption.
Regarding supplies, English said that the refinery could deal
with any short-term supply problems by importing crude oil
through the Butinge sea terminal, albeit at much lower profit
margins. Long-term supply could be a more critical issue,
with Russia apparently intent on pumping more crude to its
own refinery in Primorsk. The company leadership complained
that stringent EU environmental regulations, combined with
over zealousness on the part of Lithuanian authorities to
enforce even optional EU guidelines, will cost the company
millions in the coming years and hurt profits.

Combatting Corruption
--------------

6. (U) English emphasized his personal commitment to fighting
corruption in Lithuania. He said that corruption and theft
caused the company significant losses and described his
company's "zero tolerance" for such behavior by employees.
He praised Ambassador Mull's activity on the anti-corruption
front, and the Ambassador pledged to support English's
intention to host a conference on business ethics in the
coming months.

--------------
Societal Health
--------------


7. (U) Ambassador Mull met with representatives from the
Mazeikiai Health Coalition, an umbrella organization dealing
with a variety of local health concerns. The Coalition
described their efforts to foster a greater sense of
community health and activism on these issues. Youth and NGO
leaders noted a continued reluctance within Mazeikiai society
to discuss the problems of HIV/AIDS and
trafficking-in-persons. The Ambassador stressed the
importance of open dialogue in combating these threats.

--------------
Youth Flight
--------------


8. (U) The Mayor and some business leaders identified as an
area of concern the markedly increased emigration resulting
from Lithuania's 2004 accession to the EU. The head of the
Mazeikiai Entrepreneurs Association noted that young people,
forced to leave the city for higher education, do not find
economic motivations to return. The head of the local
unemployment office described a lack of qualified labor as
the biggest threat to Mazeikiai's economy, noting especially
the need to develop more small and medium-sized enterprises.
Youth leaders described a growing "age gap" in Mazeikiai, as
most residents are now either middle-aged or adolescent, with
few in between.

--------------
Media Coverage
--------------


9. (U) There was extensive media coverage throughout the
visit, including an exclusive interview to the region's
largest daily newspaper. Media reaction to the visit was
overwhelming positive, with only a few negative comments
surrounding past American involvement at Mazeikiu Nafta.

--------------
Comment: The Lifeblood of Mazeikiai
--------------


10. (C) While Ambassador Mull was able to address a variety
of issues of importance to our Mission, conversation in
Mazeikiai often seemed to turn to the city's prize
possession, Mazeikiu Nafta. Although the company is coming
off a banner year, the future for the oil refinery and
therefore this town is more uncertain. Yukos, the magical
combination of a Russian company with western management
practices, was indeed a perfect match for Mazeikiu Nafta.
The Kremlin's war on Yukos will likely have negative
consequences for operations at Lithuania's oil refinery. And
as goes Mazeikiu Nafta, so goes the town of Mazeikiai.
MULL