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Fri Oct 22 15:58:00 MDT 1999
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>China Looking Toward Mars
>Global Intelligence Update
>October 22, 1999
>Lithuania Faces Political Split Over Oil Deal
>Lithuania's government has fractured over a proposed business deal
>between the state-owned oil refinery and an American firm. The crux
>of the dispute is the degree to which Lithuania should sacrifice
>its economic stability and its relationship with Russia in the hope
>of gaining admittance into Western economic and defense structures.
>Disagreement over the planned privatization of Lithuania's state-
>owned refinery has split the country's Cabinet, with two key
>members submitting resignations. Political and economic priorities
>are clashing over the privatization, with U.S. and Russian
>companies competing for the refinery. While Lithuania has been
>eager for integration with the West, the privatization deal
>illustrates that there is a point at which the cost of
>integration is greater than the potential benefit.
>For months, the American company Williams International has been
>negotiating the privatization of the state-owned oil refinery
>Mazeikiu Nafta. On Oct. 19 the Lithuanian Cabinet of Ministers
>voted in favor of signing the agreement, which would give Williams
>a third of the company's shares and governing powers. Prime
>Minister Rolandas Paksas, Finance Minister Jonas Lionginas and
>Economics Minister Eugenijus Maldeikis, however, voted against the
>deal. When the final vote was announced, Lionginas and Maldeikis
>turned in their resignations.
>On the surface, the disagreement is simply about economics. The
>point of dispute lies in Lithuania's obligation to provide $350
>million for modernization of the factory. Lithuania originally
>hoped to pay this amount over several years or find another long-
>term solution. Williams, however, proved inflexible on the issue.
>The Cabinet will have to take the $350 million from the new issue
>of Eurobonds, depleting the federal reserves and pushing the
>country, according to Lionginas, to the brink of financial crisis.
>Thus, the skeptics argue, the Williams deal presents an incredible
>economic risk with little or no immediate benefit for Lithuania.
>Adding to the economic risk is the fact that Russia's LUKoil
>threatened to cut off the oil supply to Mazeikiu Nafta if it was
>not given the chance to bid against Williams. LUKoil's threat is
>quite credible, especially since it has made good on similar
>threats in the past. Alternatives to Russian oil would be more
>costly, adding to the economic impact of the Williams deal.
>In addition to the economic repercussions, there are political
>ramifications. In a televised speech the night before the vote,
>explaining why he would vote against the deal, Prime Minister
>Paksas insisted he did not view it as "a historical battle between
>the East and West, but as a business contract." He said that he was
>in favor of everything in the plan except the redirection of funds
>and made it clear that he did not intend to resign over this issue,
>even if the plan was approved.
>The Cabinet divided along lines of those who are willing to make
>any sacrifice necessary for integration with the West and those who
>argue the limits to Lithuania's capacity to absorb the political
>and economic costs of that effort. Competition between Russian and
>U.S. companies for control of the refinery is seen by many in
>Lithuania as an element of Lithuania's struggle to integrate with
>the West and Russia's attempt to hold it back. This, more than
>economics, is at the core of the political split.
>Judging from LUKoil's previous service in Lithuania and other
>former Soviet Republics as a foreign policy lever for the Russian
>government, there is no doubt that Russia views the refinery deal
>in political terms. On the other hand, it is not clear that the
>U.S. government sees the Williams deal as anything more than a
>business transaction. Lithuania's entrance into NATO is not likely
>contingent on the refinery deal. Nevertheless, many Lithuanian
>officials are eager to demonstrate their preference for the West
>and hope the Williams deal will accelerate their acceptance. In
>this case, three senior Lithuanian officials disagreed.
>That this crisis of confidence has erupted in a Baltic state, the
>most Western-oriented of the former Soviet Republics, is
>particularly disturbing. Whether or not the United States is
>cognizant of the fact, Lithuania finds itself in a difficult
>situation. By choosing a Western business partner in hopes of
>bettering relations with the West, it risks damaging its economic
>and political stability and losing Russia's favor.
>The West cannot take for granted the unmitigated devotion of its
>aspiring allies in Eastern Europe. Western political and military
>leaders have expressed their general affinity for the Baltic
>states, while offering no guarantees or timelines for integration.
>At the same time, the Baltics are expected to behave as though they
>were already allied with the West. And unlike Russia, the West is
>apparently not closely coordinating its economic and political
>agenda. That decision has now led to the fracture of the Lithuanian
>government. Only the three ministers who voted against the Williams
>deal seem to realize that Lithuania is headed for an arrangement
>where the costs are far weightier than the gains.
>(c) 1999, Stratfor, Inc.
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