Lithuania

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.