Viewing cable 05VILNIUS1007

05VILNIUS10072005-09-23 10:04:00 2011-08-30 01:44:00 SECRET Embassy Vilnius
This record is a partial extract of the original cable. The full text of the original cable is not available.
S E C R E T SECTION 01 OF 03 VILNIUS 001007 
E.O. 12958: DECL: 09/22/2015 
     ¶B. VILNIUS 380 
     ¶C. VILNIUS 326 
Classified By: Economic Officer Scott Woodard for reasons 1.4 (b) and ( 
¶1. (S) SUMMARY:  ConocoPhillips (CP) and Lukoil's plan to 
submit a joint bid to buy a controlling share of Mazeikiu 
Nafta (MN) has met with strong expressions of concern from 
some elements of the GOL, including President Adamkus. 
Representatives of the two firms visited Vilnius September 19 
to pitch their interest in MN, the only oil refinery in the 
Baltics and Lithuania's largest economic asset, which the 
Russian company Yukos currently owns.  If CP, in partnership 
with Lukoil, asks us to advocate on behalf of its bid, we 
will have a dilemma.  While the promise of Lukoil's ability 
to assure a supply of Russian crude oil is seductive to many 
here, others (including Adamkus) see Lukoil as beholden to 
the Kremlin and guilty of a long history of dirty tricks in 
Lithuanian domestic politics.  That belief, coupled with many 
Lithuanians' perception that the former (American) owner of 
the refinery underhandedly transferred ownership of MN to the 
Russians in 2002, makes this situation particularly sensitive 
for us.  In addition, a high-level MFA official told the 
Ambassador that Lukoil has established a USD 15 million slush 
fund to smear and/or blackmail President Adamkus, whom the 
company (correctly) believes is a strong opponent of MN's 
sale to Lukoil.  If we vigorously assist a CP-Lukoil 
consortium in purchasing MN, even many of our friends here 
will accuse us of naively serving Russian interests.  END 
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¶2. (U) Mazeikiu Nafta (MN) is the only oil refinery complex 
in the Baltics.  MN is Lithuania's biggest industrial 
facility and, according to some estimates, generates as much 
as 10 percent of the country's GDP.  It produced revenue in 
2004 of approximately LTL 7.7 billion (USD 2.7 billion), more 
than double the revenues of Lithuania's next largest company. 
 Its pre-tax profits last year were more than LTL 900 million 
(USD 310 million).  Yukos is the majority shareholder of MN, 
holding 53.7 percent of shares through a company registered 
in the Netherlands.  The GOL is the other major shareholder, 
with a 40.6 percent stake.  The remaining 5.7 percent of 
shares trade actively on the Vilnius bourse. 
¶3. (U) We reported earlier (refs A and B) that Yukos wants to 
sell its stake in MN.  According to the legal agreements 
governing MN, however, the GOL must approve the sale. 
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¶4. (C) High-level executives from several of the world's 
major oil companies, including TNK-BP, Gazprom, KazMunayGaz, 
PKN Orlen, Lukoil, and ConocoPhillips have visited Lithuania 
since April.  TNK-BP's Vice President for International 
Affairs Shawn McCormick told us in May that his company was 
interested in MN and that he was briefing both the British 
and U.S. Embassies on the progress of TNK-BP,s talks with 
the GOL.  (He cited BP,s presence in the United States to 
explain why he was keeping us in the loop.) 
¶5. (C) ConocoPhillips's President of International Downstream 
Operations, Mike Fretwell, and Lukoil's Director of Strategic 
Development, Andrei Gaidamaka, told us on September 19 that 
their companies were seriously considering a joint bid for 
MN.  They explained that their firms had not yet decided on 
the two firms' relative participation in the bid, but did not 
rule out the creation of a new company, held 50-50 between 
the two, that would serve as the bidding entity.  CP-Lukoil's 
representatives contacted us on September 14 asking us to 
help set up meetings with GOL officials for September 19.  We 
did so.  The company has not explicitly asked for any 
additional advocacy on its behalf.  However, in his meeting 
with the Ambassador September 19, Fretwell clearly hoped for 
further assistance from us in emphasizing the "American" 
provenance of the bid. 
¶6. (C) Fretwell and Gaidamaka told us at the end of their day 
in Vilnius that meetings with the Minister of Economy, an 
adviser to the Prime Minister, and three parliamentary 
leaders did little to clarify the situation regarding the 
sale of MN's shares.  Fretwell and Gaidamaka said that their 
GOL interlocutors explained that the GOL might be willing to 
sell some of its holdings in MN to complement the shares 
Yukos would sell.  However, Fretwell and Gaidamaka said that 
they were unable to pin down exactly how many of its shares 
the GOL might be willing to divest, when, or at what price. 
This, said the executives, made it difficult for their 
companies to figure out how to proceed. 
¶7. (C) Lukoil's ability to secure a steady supply of crude 
oil for MN is seductive to many here, especially the Social 
Democrats (successors to the Lithuanian Communist Party), who 
head the governing coalition.  Critics, especially members of 
the conservative opposition, allege that Social Democrat 
Prime Minister Algirdas Brazauskas has received kickbacks 
from this Russian company, which they see as a wholly owned 
subsidiary of the Kremlin. 
¶8. (C) Other critics of Lukoil include people close to 
President Adamkus.  We understand that Adamkus himself 
strongly shares this view.  In their view, Lukoil's ownership 
of MN, because of what they consider to be an inexorable tie 
to the Kremlin, could lead to a loss of sovereignty over 
critical decisions affecting one of Lithuania's most valuable 
assets and to increased vulnerability to Russia's use of oil 
as an instrument of influence over Lithuania.  Even more 
troubling to many is Lukoil's alleged history of manipulating 
internal Lithuanian politics to advance its commercial 
interests.  Foreign Minister Valionis told the Ambassador on 
September 22 that he has it on good authority that Lukoil was 
a major contributor to campaign funds for former President 
Rolandas Paksas, whom the Parliament impeached in April 2004 
for, among other things, having too close ties to Russian 
¶9. (S) The Director of the MFA's Americas Department, Jonas 
Paslauskas, told the Ambassador on September 21 that his 
ministry had information that Lukoil was not going to let MN 
"slip through its fingers again." (NOTE:  Lukoil has long had 
a strategic aim to acquire the refinery.  It lost out to 
Williams in the 90's and was a potential buyer again when 
Williams sold the refinery to Yukos in 2002.  END NOTE.)  He 
said that Lukoil considers President Adamkus to be its 
biggest obstacle to buying MN.  He indicated that the GOL has 
intelligence that the company has budgeted USD 15 million for 
a smear campaign designed to discredit Lithuania's president. 
 The campaign, he said, will allege that during a trip to the 
USSR that Adamkus took as a U.S. EPA official, Adamkus 
slipped away from his planned itinerary to meet a KGB 
handler.  Paslauskas said that intelligence sources indicate 
that Lukoil is already constructing an incriminating story 
about Adamkus by sending employees to the former Soviet 
cities Adamkus visited while working as an EPA official. 
(NOTE:  Adamkus, who was born in Lithuania but emigrated to 
the United States and then returned to Lithuania in the late 
1990s, began visiting Soviet Union in 1972 and made annual 
trips there, bringing emigre literature to and organizing 
study visits in the Lithuanian SSR.  He retired from the EPA 
in 1997, and became President of Lithuania in 1998.  END 
NOTE.)  Alternatively, Paslauskas said that Lukoil might 
simply use the allegations to blackmail Adamkus, seeking to 
force him to avoid opposing Lukoil's bid for MN. 
¶10. (C) Our insertion into this process on CP's -- and, by 
extension, Lukoil's -- behalf will expose the USG on an issue 
that is already uniquely neuralgic for us here because of the 
circumstances surrounding the sale of MN by the U.S. firm 
Williams to Yukos.  That story has only started to fade from 
the collective memory in the last year.  Rightly or wrongly, 
many Lithuanians blame us for delivering Lithuania's single 
largest economic asset to the Russians in the first place. 
If we advocate aggressively on CP-Lukoil's behalf, many of 
those same people (many of whom are our friends) would say 
that we are naively serving Russian interests here again, 
allowing them to use CP as a figleaf for their objectives 
¶11. (C) Given the risks, we believe that this is one of those 
rare cases in which the Embassy should not assume an advocacy 
role on an American firm's behalf.  We will be happy to meet 
with CP and its partner as the bid process proceeds. 
However, given our broader interests here, we would prefer to 
forego a direct role in the competition for MN, especially if 
CP-Lukoil remains the only "American" contestant.