LITHUANIAN MINISTER USPASKICH'S VISIT SCENESETTER

C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 000200

SIPDIS

STATE FOR ASSISTANT SECRETARY TONY WAYNE AND EUR/NB

E.O. 12958: DECL: 02/28/2014
TAGS: PREL PGOV ECON EFIN LH
SUBJECT: LITHUANIAN MINISTER USPASKICH'S VISIT SCENESETTER

REF: A. VILNIUS 1099


B. VILNIUS 1323

C. VILNIUS 1352

D. VILNIUS 1523

E. VILNIUS 1439

Classified By: ECONOMIC OFFICER MIGUEL KAMAT
FOR REASONS 1.4 (B) AND (D)

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SUMMARY
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1. (C) Your meeting with the Baltic Ministers of Economy will
provide an opportunity to underscore to Lithuania's Minister
Victor Uspaskich the need to do more to attract U.S. direct
investment. Uspaskich, who came to office in December 2004,
has publicly recognized that increasing foreign investment is
key to Lithuania's continued growth, but he yet to take
action to improve the country's investment climate. The
Minister's participation in the Baltic Ambassadors' Trade and
Investment Conference in Washington is a step in the right
direction. Uspaskich will meet you on his way back from
California where he will have had meeting with high-profile
IT companies, whom he hopes to draw to Lithuania.
Uspachkich, a Russia-born multi-millionaire who made his
fortune as a trader in ferrous metals, Gazprom broker, and
now pickle magnate, whom other politicians would portray as a
populist, presents himself as all business and is
spearheading GOL efforts to improve the business climate.
End Summary.

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BACKGROUND
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A Growing Economy
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2. (U) Lithuania's robust economic growth continues to grow,
though it has slowed from a nine percent GDP high jump of
2003 to a still enviable 2004 6.6 percent rise. Analysts
forecast annual average real GDP growth of 5.7 percent in
2005-06. Domestic demand will continue to drive economic
growth, as households benefit from wage increases, falling
unemployment, and low lending rates. Uncertainty about the
future of the oil supply and management of Lithuania's
Mazeikiu Nafta oil refinery, currently under management of
the major shareholder Yukos, could slow growth even more
through 2005. Disruptions in the flow of oil, or price hikes
would most acutely affect the manufacturing sector, which
constitutes some 20 percent of GDP. Annual average
inflation, which was 2.9 percent at the end of 2004, will
rise in concert with rising electricity and gas prices, and
wage costs, while the trade deficit will widen as a result of
the increasing trade imbalance with Russia and other trading
partners.

Fiscal Discipline
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3. (U) The GOL is trying to implement key reforms to sustain
growth and help ensure Lithuania's acceptance to the EU's
economic and monetary union in 2007. Its economic policy
goals include improving the business environment to boost
greenfield investment, expanding the revenues through
introduction of a real estate tax and improved VAT
collections, and improving the country's administrative
capacity to fully absorb EU funding. The government plans to
cut income tax from 33 percent to 24 percent over a period of
three years beginning in 2006. The GOL has set its fiscal
deficit target at 2.75 percent of GDP for 2005, within the
Maastricht limit of three percent, but a push by Uspachkich's
Labor Party to fulfill a campaign promise and increase social
spending, may increase the deficit and tensions within the
government.

Increasing U.S. Investment
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4. (C) Lithuania boasts one of the fastest growing economies
in Europe, but, with GDP per capita at about 40% of the
average EU-15, it has a long way to go, and there is plenty
of room for new investment. The United States is currently
the sixth largest source of foreign direct investment in
Lithuania with USD 479.3 million in total investments. In
the last month, U.S. companies have announced major new
investments or intentions to invest. Citigroup Venture
Capital International invested USD 53 million to acquire a
significant minority stake in Lithuania's second-largest food
retailer. The engineering firm Foster Wheeler won a USD 43
million contract for the construction and supply of a new
gasoline hydro treatment unit at the Mazeikiu Nafta refinery.
Norcon International announced plans to invest up to USD 100
million to build waste treatment and processing centers in
Lithuania's two largest cities.
Improving the Investment Climate
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5. (C) Lithuania offers investors a highly educated
workforce, low corporate profits tax, low cost of living,
relatively low cost labor (by European standards),and high
quality of life. Companies on the ground and business
analysts tell us that establishing a business in Lithuania is
overly complicated, however. It would be useful to encourage
the GOL to improve the transparency of, and accountability
within, the regulatory system. More than 50 agencies
regulate the business environment. Investors complain that
many laws and regulations are vague and often contradictory,
and that bureaucratic procedures to obtain clearances
burdensome. They also point to discouragingly high
labor-related taxes. With salaries and other business costs
expected to rise to EU standards over time, Lithuania will
need to do better, where it can. While taxes structures
obviously lie outside the purview of the Minister of Economy,
you could encourage Uspaskich to work within his Government
to improve this picture. Finally, the visit affords an
opportunity to enlist Uspaskich's support in promoting
greater government support for international education in
Lithuania is a key factor in attracting foreign investment
(not to mention recruiting Embassy Vilnius personnel!).


6. (C) The visit also provides an opportunity to comment on
the need for the GOL to continue tackling corruption.
Transparency International's recent Global Corruption Survey
noted that one in three Lithuanians admitted paying a bribe
within the last twelve months. You might also stress the
need for the GOL to diversify its energy options and maintain
its energy security. Virtually all of Lithuania's natural
gas and crude oil supplies come from Russia. The GOL is
considering additional options, such as the construction of
additional gas pipelines, importation of oil and/or gas from
Nordic countries, and the connection of the Lithuanian
electrical grid to its Polish counterpart (ref. E). Finally,
you might encourage the GOL to continue its privatization
program. Major assets still in government control include
the electric power company, the national airline and the
railways.

Bio Note
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7. (SBU) Uspaskich, 45, is one of Lithuania's richest men. A
major landowner, he has a declared net worth of Euros 46
million (USD 60.7 million),though his actual net worth may
be several times greater. Uspaskich was born and raised in
Russia's Arkhangelsk district. He studied in Moscow and
received a Master's degree in economics from Kaunas
Technological University. He moved to Lithuania in 1987, and
obtained Lithuanian citizenship around 1991. He started a
major food processing and retail trade firm, Vikonda, then
made a fortune serving as an intermediary for Gazprom's gas
sales in Lithuania. He maintains close ties with Russia,
helping to rebuild several churches there, and receiving the
Russian orders of St. Vladimir and St. Danil. Uspaskich has
not shied away from using his wealth to promote his causes
and political allies, particularly in founding the upstart,
and highly successful, Labor Party last year.


8. (C) Two of Uspashkich's four children study in American
universities. He speaks, Russian, Lithuanian, and
understands some English.


9. (U) Renata Dromantaite, who will accompany Uspaskich,
served as Economic Specialist to Embassy Vilnius until
January 2005, when she assumed her current position as the
Minister's Economic Advisor.

Comment
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10. (SBU) Uspaskich's visit will present an opportunity to
become acquainted with an influential Lithuanian leader who
not only controls the influential Economic Ministry, but also
someone who will significantly impact the face of Lithuania
for years to come. It is also a chance to advance the USG
interest in promoting a more investor-friendly environment in
Lithuania.
Mull