Viewing cable 06VILNIUS711
Title: REFINERY'S PROBLEMS UNLIKELY TO CAUSE ECONOMIC

IdentifierCreatedReleasedClassificationOrigin
06VILNIUS7112006-08-01 14:39:00 2011-08-30 01:44:00 CONFIDENTIAL Embassy Vilnius
VZCZCXRO7227
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHVL #0711/01 2131439
ZNY CCCCC ZZH
P 011439Z AUG 06 ZDK
FM AMEMBASSY VILNIUS
TO RUEHC/SECSTATE WASHDC PRIORITY 0439
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHEHNSC/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 000711 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/NB, EUR/NCE, EB/ESC 
DOE FOR HARBERT 
DOC FOR 4231/IEP/EUR/BOHIGIAN 
NSC FOR GRAHAM, MCKIBBEN AND COEN 
TREASURY FOR LOWERY, LEE AND COX 
 
E.O. 12958: DECL: 07/31/2016 
TAGS: ENRG ECON PREL LH RU
SUBJECT: REFINERY'S PROBLEMS UNLIKELY TO CAUSE ECONOMIC 
CRISIS IN LITHUANIA 
 
REF: A. VILNIUS 645 AND PREVIOUS 
 
     ¶B. WARSAW 1336 
 
Classified By: Classified by Economic Officer Scott Woodard for reasons 
 1.4 b and d 
 
¶1. (C) SUMMARY:  The problems Lithuania's Mazeikiu Nafta oil 
refinery (MN) is facing in obtaining crude supplies are 
unlikely to cause a major economic crisis here, according to 
several public and private sector officials and analysts. 
Although the refinery is Lithuania's largest economic entity 
and accounts for more than a quarter of Lithuania's exports, 
these officials and analysts told us that the macroeconomic 
consequences of even a total supply cut off to MN would be 
ameliorated by Lithuania's low unemployment, taxes that the 
GOL would continue to collect on imported gasoline, and 
continued strong, consumption-driven GDP growth.  Our 
interlocutors emphasized that politicians and other 
non-economists tend to overemphasize MN's importance to 
Lithuania's economy.  Lithuania's political class, however, 
sees the country's dependence on Russian energy as a major 
vulnerability, and not just as an economic issue.  END 
SUMMARY. 
 
--------------------------------------------- ----- 
LOOKING AT A WORST-CASE SCENARIO: MAYBE NOT SO BAD 
--------------------------------------------- ----- 
 
¶2. (C) We recently spoke individually with several private 
and public officials to discuss the possible macroeconomic 
consequences of a total supply cutoff to MN (reftels).  These 
officials included the director of the central bank's 
Economics Department, the chairman of MN's Board of Directors 
and former vice-minister in the Ministry of Economy, an 
advisor to the prime minister on energy matters, and senior 
analysts/advisors at two of Lithuania's top banks.  All gave 
surprisingly congruous conclusions about the macroeconomic 
effects of a supply cutoff to MN:  this scenario would not 
cause a crisis for the Lithuanian economy. 
 
---------------------- 
HOW BIG IS MN, REALLY? 
---------------------- 
 
¶3. (C) Raimundas Kuodis, Director of the Economics Department 
in Lithuania's central bank, told us on July 28 that 
politicians and other non-economists tend to exaggerate MN's 
importance to Lithuania's economy because they rely on a 
production- or "turnover"-based calculation to estimate MN's 
contribution to GDP.  This kind of calculation, he said, 
concludes that MN is responsible for about five percent of 
Lithuania's GDP.  He told us that a value-added approach, on 
the other hand, leads to the conclusion that MN creates only 
about one or two percent of Lithuania's GDP.  The two bank 
analysts told us that they estimated that MN contributed 
three percentage points to Lithuania's GDP. 
 
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MN AS A TAX ISSUE 
----------------- 
 
¶4. (C) All of our interlocutors emphasized that the GOL would 
not suffer a major loss of tax revenue in the event that MN 
faced a supply cutoff.  They noted that Lithuania would still 
consume imported gasoline, which would continue to generate 
excise tax revenue for the GOL.  Kuodis noted that many 
Lithuanians believe MN pays far more taxes than it actually 
does, because they do not realize that Lithuania's tax laws 
require MN to collect excise taxes directly from the gas 
stations it supplies.  The end result is that while it 
appears that MN pays a large amount of taxes, in truth it 
merely collects revenues for and turns revenues over to the 
GOL.  If MN were unable to supply Lithuania's gas stations, 
he said, the GOL would simply collect the excise tax on 
gasoline at a different point in the supply/delivery chain. 
 
------------------ 
EMPLOYMENT EFFECTS 
------------------ 
 
¶5. (C) Mazeikiu Nafta directly employs more than 3200 people, 
making it the largest private employer in Lithuania.  A 
 
VILNIUS 00000711  002 OF 002 
 
 
supply cutoff could potentially throw many of these 
individuals out of work.  Again, however, our interlocutors 
were unconvinced that this would cause a major crisis for the 
Lithuanian economy.  They noted that Lithuania's low (and 
rapidly dropping) unemployment rate (6.4 percent in Q1, down 
3.8 percentage points from Q1 2005) has created a labor 
shortage and argued that MN's highly skilled labor force 
would have little problem finding new work (in Lithuania or 
elsewhere in the EU).  Any measurable impact would be 
temporary, and limited to the geographic area around Mazeikai. 
 
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INFLATION 
--------- 
 
¶6. (C) There was some difference of opinion about the impact 
this scenario would have on inflation in general and on 
gasoline prices in Lithuania, specifically.  Kuodis, noting 
that MN supplies gasoline to the Lithuanian market at import 
parity prices, said that he would not expect the price of 
gasoline to increase much if Lithuania's gas stations started 
relying on imported gasoline.  The market, he said, is very 
competitive.  One of the bank analysts, however, said that he 
would expect gasoline prices to rise as much as 20 percent if 
Lithuania needed to import all of its gasoline.  An increase 
of this magnitude would have multiplier effects throughout 
the economy, raising production costs and further 
complicating Lithuanian efforts to qualify for inclusion in 
the eurozone under the Maastricht criteria.  Our 
interlocutors all agreed, however, that upward pressure on 
prices is increasing across the whole of the economy for many 
reasons, and that an increase in gasoline prices would be 
only one factor among many contributing to increasing 
inflation. 
 
----------------------- 
EXTERNAL SECTOR EFFECTS 
----------------------- 
 
¶7. (C) The loss of output from Lithuania's largest exporter 
would negatively impact the trade balance and the balance of 
payments, but not by as much as one might think, according to 
Kuodis.  (Refined oil products have been Lithuania's top 
export product for several years.)  He said that most of the 
value in refined oil products like gasoline comes from the 
value of the crude itself, and that the refinery only has a 
value-added of about 10-15 percent on a product like 
gasoline.  The increase in gasoline imports, he said, would 
therefore be largely, albeit not completely, offset by the 
decrease in crude imports -- except for this 10-15 percent, 
an amount that he said would not constitute a major crisis 
for Lithuania's economy.  (A ten percent decrease in the 
value of Lithuania's exports of refined oil products would 
translate into a loss of about 2.7 percent of total exports, 
or about USD 331 million.) 
 
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COMMENT 
------- 
 
¶8. (C) There is no doubt that a cutoff of Russian crude to 
Lithuania would create problems -- both economic and 
political -- for the GOL.  An end of pipeline-supplied crude 
to MN could harm the country's largest private enterprise, 
slow growth, exacerbate inflationary pressures, and aggravate 
the trade deficit.  As long as MN retains the ability to 
supply its refinery via its Baltic Sea terminal at Butinge, 
however, a Russian supply cut-off would not bring the economy 
to its knees. 
 
¶9. (C) This dispassionate conclusion by some of Lithuania's 
leading economists, however, is not shared by Lithuania's 
political class, who views the country's dependence on 
Russian energy as a security, rather than an economic, issue. 
 For them, the current supply contretemps evince Lithuania's 
vulnerability to a powerful neighbor that unabashedly uses 
energy resources as a weapon to further hegemonic political 
objectives. 
KELLY