Baltic lessons for EU in dealing with a resurgent Russia

Financial Times ^ | November 24 2006 | Jan Cienski

[lizol]

Baltic lessons for EU in dealing with a resurgent Russia

By Jan Cienski

November 24 2006 02:00

When European Union leaders sit down in Helsinki today with Russian President Vladimir Putin to discuss political and economic co-operation, they would do well to consider the example of Lithuania's Mazeikiu refinery.

Vilnius's attempts to privatise the plant, the largest enterprise in the Baltic states, highlight the difficulties of working with a resurgent Russia.

Mazeikiu is the subject of a bid from PKN Orlen, Poland's leading oil company, which wants to extend its network and keep out potential rivals. Orlen, 27.5 per cent state-controlled, expects to complete the deal on December 15 after agreeing in May to pay $2.3bn (£1.2bn) to buy 53.7 per cent of Mazeikiu Nafta from Yukos, the bankrupt Russian oil group, and 30.7 per cent from the Lithuanian government.

But Mazeikiu's tortuous history suggests nothing should be taken for granted. Russian companies have long wanted the plant, which was built to run on Russian crude oil. However, when Vilnius first privatised Maziekiu in 1999 it sought a non-Russian buyer to reduce Moscow's influence in Lithuania and sold a strategic stake to Williams, a medium-sized US group.

After Williams ran into financial trouble, it sold control to Yukos but Lithuania drew comfort from the fact that Yukos, then headed by Mikhail Khodorkovsky, was free of state control. In 2003, however, Mazeikiu's future was again thrown into doubt when the Russian authorities arrested Mr Khodorkovsky, sued Yukos and seized assets in lieu of tax.

Fighting bankruptcy, Yukos prepared to sell its remaining assets, including Mazeikiu. Vilnius feared Rosneft, the state-controlled Russian oil group, might take advantage of the turmoil to win Maziekiu, and seized the chance to sell to Orlen. However, after the deal was announced, an accident on Russia's Druzhba pipeline cut Mazeikiu's supply line, forcing it to import oil at higher cost by train and sea, at least until Druzhba re-opens next year. That setback was followed by a fire last month that halved Mazeikiu's capacity and slashed profits.

This all coincides with some serious political rows between Russia and both Lithuania and Poland. Moscow was furious at a Polish-Lithuanian conference in Vilnius in May at which US Vice-President Dick Cheney warned Russia against using energy for "intimidation and blackmail". Lithuania is demanding the extradition from Russia of an ex-minister who is wanted for illegal political financing.

Warsaw wants more robust EU energy policies. In a recent FT interview, President Lech Kaczynski fretted about Russian energy dominance. "I do not want to create the impression that Poland or Europe is under [military] threat, it is not. But it is certain that there are different forms of expansion. And one of them is energy," he said. "Although we are partners with Russia when it comes to imports and we will continue to be on a great scale in oil and gas, we want to preserve our own energy system in our own hands."

Russian companies argue they act out of commercial motives. But, in energy, politics is never far away. Vladimir Milov, president of the independent Moscow-based Institute of Energy Policy, says: "In Russia the energy empire is largely viewed as geopolitical revenge." In a recent presentation he showed a 13-year-old girl's picture of Russian energy flowing around the globe captioned: "Together we shall conquer the world."

Until the early 2000s, Russia relied on the Baltic states for most of its oil exports. But officials decided to cut dependence on foreign outlets and developed a $2bn port at Primorsk, north of St Petersburg, which opened in 2002 and has become the region's largest exporter, shipping 57m tonnes of crude last year.

The Balts felt the competition immediately. In late 2002, Transneft, Russia's pipeline monopoly, stopped piping crude to what was then the biggest export terminal, Latvia's Ventspils. Ventspils refocused on oil products but it now exports only 8m tonnes of oil and oil products yearly, down from a peak of 25m. Estonia's Tallinn and Butinge in Lithuania have also diversified away from exporting crude. But all recognise Primorsk is now investing in oil products as well as crude

Aigars Stokenbergs, Latvia's regional affairs minister, says Russian companies act on good commercial reasons. "Oil producers are interested in integration. This is normal," he says.

But Atis Lejins, director of the Latvian Institute of International Affairs, warns Russia's "imperial impulse" runs strong. He urges EU members to stick together and present a common front, but he fears they will not. "With the EU in disarray, Russia will get bolder."

[lizol]

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[Lukasz]

EU needs some other lessons first, cause they are illiterates.

[quesney]

"EU needs some other lessons first, cause they are illiterates."

Not only that. They need several lessons and finally a direct lesson that effects each country personally, because Old Europe is also cowardly, selfish and short-sighted.