Transition   Privatization   

Privatization of Lithuania's Oil Industry 

by Raj Kothari

Lithuania has historically been a primarily agricultural economy. During the period of independence, from 1918-1940, Lithuania's economy was booming in the private farming sector. The annexation by the Soviet Union in 1941 deterred the economic growth and started a period of rapid, heavy industrialization, which Lithuania could not then support. The result of the Soviet exploitation was decreased agricultural output, widespread poverty and slow increase in productivity in the industrial sector. In 1991, Lithuania gained independence from the Soviet Union and began a transition from the command economy system to a free market system. The sale of the Lithuanian oil utility in 1999 serves as a good example of the difficult transition from a soviet type to free market economy. Today, 90% of housing is privately owned, 80% of small retail enterprises are privately owned and state-owned industrial enterprises are in the process of being sold to private investors.

The largest privatization deal ever done in Lithuania is the one between Mazeikiu Nafta, a Lithuanian state-owned oil refinery and the largest enterprise in the country, and Williams International, an American energy company. Nafta is the Lithuanian word for "oil". Both U.S. and Russian companies were competing over the deal, but in the end Williams was chosen. There was much disagreement in the Lithuanian cabinet over the deal and political and economic priorities clashed. The deal signifies a decision between Russian loyalty and integration with the West. By opting for an American partnership, Lithuania would pave the way for admittance into Western economic and political structures however, this would also mean sacrificing economic stability. Russia is an important trade partner and severed relations would undoubtedly hurt the economy. A large provider of Lithuania's oil is Russia, which was upset at the Williams deal being made. Alternatives to Russian oil would be considerably more costly. Also, Williams required that before the deal could be finalized the Lithuanian government would have to put $350 million into modernizing the refinery, further hurting the economy. 

Another problem was that an accurate price for a share of Mazeikiu Nafta was impossible to estimate. A large problem in the post-soviet world was evaluating the worth of an enterprise in the absence of any competition. The price Williams paid, $150 million for 33% of Mazeikiu Nafta was by several accounts, an almost arbitrary number. All these problems represent hardships in transition from one economic system to another. Lithuania is eager to join the West, but it can not afford to leave the security of existing Russian relations. Competition between U.S. and Russian companies is seen by many Lithuanians as Lithuania's attempts to integrate with the West and Russian attempts to hold them back. In this sense, the political ramifications of the Mazeikiu Nafta and Williams deal outweighed the economic benefits.

Another classic characteristic of the transition period is the lack of transparency in the government. The public is often not told or misinformed regarding government deals and in a free market economy (theoretically) this does not work with the system. On October 19, 1999, the Lithuanian cabinet of ministers voted in favor of the deal granting Williams a third of Mazeikiu Nafta. Many important officials, including the Prime Minister, at the time, voted against Williams and once the deal had been finalized the finance minister and economics minister turned in their resignations. In addition, this deal was clearly an example of non-transparent privatization. The Lithuanian government had decided in 1998 that Williams was to be the American company with which to carry out negotiations, as opposed to keeping options open with Shell, Texaco or any other such company.

 However, by the end of 1999 several officials were vehemently arguing against Williams being a good choice for a partner. Clearly, something changed during that time period, which was not revealed to the public. Non-transparency within the government may be representative of a command economy, but in order for a free market system to work such cannot be the case. Private investors demand a knowledge and to some degree control over their governing body. The Lithuanian ministers thought the deal would go through without any problems, but then political and economic demands from Williams and Russian companies complicated matters. Public protests in Lithuania and court hearings continue even today.

The transition from a command economy to a free market economy structure has been very difficult for Lithuania. These hardships are exemplified by the privatization of the oil industry and within that the Mazeikiu Nafta - Williams deal. As Rasa Razgaitis, the chief of staff of the chairman of parliament, said, "The privatization of the oil industry in Lithuania is basically a lesson in how things should not be done - lack of transparency, a sweetheart deal, subsequent hostile public sentiment."




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