Viewing cable 05VILNIUS200

05VILNIUS2002005-03-01 13:52:00 2011-08-30 01:44:00 CONFIDENTIAL Embassy Vilnius
This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 000200 
E.O. 12958: DECL: 02/28/2014 
     ¶B. VILNIUS 1323 
     ¶C. VILNIUS 1352 
     ¶D. VILNIUS 1523 
     ¶E. VILNIUS 1439 
¶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. 
A Growing Economy 
¶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 
Fiscal Discipline 
¶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 
Increasing U.S. Investment 
¶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 
¶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 
Bio Note 
¶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. 
¶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