NO TIME TO ARGUE

If Latvia's new government does not come up with a plan to appease Russia, the oil pipes running across its territory might dry up for a long, long time. For a nation that earns a sizable chunk of its wealth on cargo transits and has seen revenues plummet significantly this year, the issue is urgent. Oil deliveries to Ventspils have sunk some 40 percent this year, and judging by statements from Russians in-the-know, they will continue falling.

It is important for Latvia's government, as well as Ventspils Mayor Aivars Lembergs, to understand, first and foremost, that the Russian oil industry has changed dramatically over the past seven years. In 1996 and 1997, the industry underwent mass privatization, and the new oil barons focused on consolidating their acquisitions and riding out the country's political turbulence. In 1998-99 the primary goal was to survive the financial crisis, aggravated political instability and record-low prices for crude on world markets. No time to fuss.

Beginning in 2000, however, the situation changed dramatically. Crude prices began to recover, and oil exporters could feel the full benefits of the devalued ruble. Better still, Russia got a young, popular president who had made it clear that as long as the oil companies paid their taxes the state would not meddle. Though there were instances of raids by the tax police into head offices around Moscow, oil companies began to focus on long-term development.

In short, they boosted production, and the results have been fantastic. Crude output has soared by over 20 percent in four years, and increased exports have brought a windfall. The industry finally has the cash and the momentum for strategic projects: exploration, refining and transportation.

The last one in particular concerns the Baltics. If five years ago oil exporters didn't think much about oil transit to the Baltic Sea, now, in times of intense development and expansion, they certainly do. Notorious in the industry as control-freaks, Russia's oil barons want a slice of the profits from transit and wet-cargo ports like Butinge and Ventspils.

From a market standpoint, they are in position to demand it. There are, after all, alternative routes for pipelines and ports, as the one-year-old terminal in Primorsk shows.

The initial reaction in Lithuania and Latvia to these new demands, much to their detriment, was negative. As a consequence, Russia stepped up the pressure and Williams International had to pull out of Mazeikiu Nafta, which will suffer huge losses this year. Now Yukos, Russia's second largest producer, has taken over, and exports at the Klaipeda terminal have soared 28 percent so far this year.

Latvia has proven even more intransigent. Granted, much of this is due to parliamentary elections and the postelection hassle of creating a new Cabinet, all of which had placed the issue on the back burner.

But looking ahead, there can be no more excuses. The Kremlin has been showing signs of goodwill – most notably the cancellation of bilateral financial restrictions – and now that the Baltics' national security is secure, there should be no more reasons to balk. It is time that Latvians think about financial security, and the best way to do that is to sell a Russian company a stake in Ventspils Nafta. That's what neighbors are for.