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. Last Updated: 07/27/2016

Lithuanians Get Taste of the Oil Game

The Kremlin has never been straightforward about its plans to take control of the oil and gas business.

So, Lithuanians were suspicious when Russia said it shut its pipeline -- the only one supplying Russian crude oil -- in late July because of a leak.

In fact, it was not so much the pipeline the Russians were concerned about, Lithuanian officials, analysts and company executives said. It was what the pipeline was connected to: Lithuania's sole refinery.

And because Russia often gets what it wants, it may not matter that the Lithuanian government had signed an agreement in June to sell the refinery to a Polish company, PKN Orlen, for much more than Russia had offered.

"The goal was to force Lithuania to reconsider the sale," Tomas Janeliunas, who has followed the sale closely as the deputy director of the Center for Strategic Studies, said in an interview. "They wanted a Russian company to buy the refinery, but for cheaper than a market price."

Lithuania's brush with Kremlin oil politics, critics of Russian business practices say, is a case study of what U.S. Vice President Dick Cheney called Moscow's use of energy exports as "tools for intimidation and blackmail" in relations with its neighbors.

That characterization angered Russian officials, who say they are being discriminated against in the business world as many Russian companies expand their operations into Europe.

"What is all the hysteria about?" President Vladimir Putin asked at a meeting with German business executives earlier this month, Interfax reported. "We cannot understand why the media is nervous about Russia's possible investments in Germany."

Russian companies, their accounts padded by high commodity prices, are on a buying spree overseas. A steel mill in Michigan, a pipeline in Germany and a mine in Australia have recently been sold to Severstal, Gazprom and Russian Aluminum, respectively.

In Lithuania, the government and Yukos, very much out of favor with the Kremlin, were trying to sell the Mazeikiu Nafta refinery in a sale organized by Lehman Brothers of New York.

Four companies bid: two from Russia, one from Kazakhstan and one from Poland. The Russian companies, LUKoil and TNK-BP, lost after entering bids lower than the others. When asked to match the competing prices, the Russians declined, Nerijus Eidukevicius, chairman of the board of Mazeikiu refinery, said in an interview in Vilnius.

In June, Orlen won the refinery with a bid of $1.49 billion for Yukos' 53.7 percent stake and $850 million for the 30.6 percent owned by the Lithuanian government.

"They weren't showing interest," Eidukevicius said of the Russian companies. "It was strange."

In fact, analysts say, Moscow was pursuing strategies to win the refinery for a Russian company outside the sale process -- and at a knockdown price.

At the time of the sale, Yukos was heading into a politically tinged bankruptcy proceeding in Russia. State-owned Rosneft, whose chairman, Igor Sechin, is also Putin's deputy chief of staff, had already acquired most of Yukos in a forced auction in 2004, and had its sights on the rest.

To get to the front of the line for Yukos assets, Rosneft signed a confidential agreement with Western creditor banks in December 2005 to assume Yukos' debt if the banks forced that company into liquidation, which happened in March. This made Rosneft a creditor in the bankruptcy filing.

The bankruptcy receiver representing Rosneft's claim, Eduard Rebgun, then sued in federal bankruptcy courts in New York and the Netherlands to block the refinery sale, but lost both cases. That ended the legal attempts to win title to the refinery outside the sale run by Lehman Brothers.

In what Yukos executives say was a sign of the Kremlin's deep displeasure at these rulings, Russian prosecutors opened criminal fraud investigations against four Yukos executives. The announcement of these investigations came less than an hour after the decision in Amsterdam on Aug. 17.

Former Yukos CEO Steven Theede called the Russian criminal case against him a "vendetta" that reflected the depth of frustration of Russian authorities at the collapse of their six-month effort to buy the Lithuanian refinery and other smaller Yukos assets in Slovakia and Switzerland. "When anybody stops them from doing anything it makes them angry," Theede said.

Russia, meanwhile, suffered a setback of a different nature inside Lithuania, political analysts in that country say. In the midst of the sale process, a pro-Russian politician in the Lithuanian government whose ministry was responsible for overseeing the refinery sale was ousted in a campaign finance scandal. The minister, Viktor Uspaskich, fled to Moscow and is now wanted by Interpol.

His replacement, Kestutis Dauksys, said he was invited to a Kremlin meeting on May 23 with First Deputy Prime Minister Dmitry Medvedev. The message, Dauksys said, was that the Russians truly wanted the refinery.

"He said the Russian government was interested in who buys Mazeikiu Nafta," Dauksys said by telephone. "He said Russian companies are interested in buying it."

"They thought they could buy it at low cost, but that is not possible today," Dauksys said of the Russians. He returned to Vilnius.

Alexander Temerko, a former vice president of Yukos, said the company interpreted Dauksys' account of the meeting as a threat to Mazeikiu's Russian-controlled oil supply through the Druzhba pipeline.

The refinery immediately retooled for tanker oil, a decision that proved prescient; the first shipment arrived a week before the pipeline was shut.

The sales contract with Orlen had an escape clause if the market value of the refinery dropped significantly before the sale closed. Lithuanian analysts and politicians said forcing Orlen to exercise this escape clause, thus reopening the sale for Russian companies, was one motive for the pipeline shutdown.

Then, on Oct. 12, a fire at the Mazeikiu refinery caused about $75 million in damage and lost profit for 2006, according to the Lithuanian government and Fitch. The fire is expected to reduce output by 50 percent until early next year. Orlen, shortly after the fire, said it would discuss with its lenders whether the sale could go forward.

With his country's largest asset tied up in business negotiations, Lithuania's president has hinted at possible reciprocation in kind. President Valdas Adamkus suggested on Aug. 19 that the only Russian railway supplying the Kaliningrad region, which passes through Lithuania, could be shut for what the Lithuanian news media called "political repairs."

"We should guarantee the safety of trains and passengers," Adamkus said. "Should repairs be needed in order to increase the safety of railway services, I see no reason to heat up political tensions."