Lithuania to hedge its 'bets'

  • 2006-06-28
  • From wire reports
VILNIUS - The ministries of Finance and Economy are considering possible ways to hedge the government's sale of a stake in Mazeikiu Nafta to Poland's PKN Orlen against currency fluctuations that could damage the value of the state's proceeds. The Verslo Zinios daily reported that the Finance Ministry has already made preliminary estimates as to how to hedge the $851.8 million sale of a 30.66 percent stake in the oil refinery.

For example, hedging the currency risk with an options contract would cost the government around 50 million litas (14.5 million euros). On the other hand, it would have a chance to gain from currency fluctuations if the U.S. dollar moved in a favorable direction.
Another option would be to enter into a forward contract. For example, if Lithuania agreed to sell $851.8 million to a bank three months from now at the current dollar exchange rate, this way of hedging against currency fluctuations would cost it 14 million litas.

The government's final decision is complicated by the fact that it is not clear yet when the deal will be completed. European Commission officials confirmed on June 23 that PKN Orlen had not yet formally applied for regulatory approval of the acquisition. This makes it difficult to forecast how much time the evaluation of the deal will take.

PKN Orlen purchased both a majority stake (53.7 percent) from Yukos, a Russian oil company being dismantled by the Kremlin, and a 30 percent stake from the Lithuanian government, for a premium. The nearly $1 billion Lithuania will receive from the deal represents the single largest cash transaction in post-independence Baltic history, and naturally ministers want to protect the windfall from unexpected fluctuations.
PKN Orlen expects to finalize the transaction by the end of March 2007 at the latest.