POLICY IMPLICATIONS OF AN OIL SUPPLY AGREEMENT.

The Russian government and a small but seemingly influential pressure group in Lithuania are moving in tandem to thwart a crucial oil supply agreement that has the support of President Valdas Adamkus and of Western-oriented political forces. The documents were signed in mid-June by the American-operated Mazeikiai concern and Russia’s privately owned Yukos company. The supply agreement can rescue Lithuania’s oil-processing sector from the dilemma forced on it by the Russian government and its tool in this case, Lukoil. The state-controlled Lukoil is withholding oil supplies as a way to force Lithuania’s huge Mazeikiai refinery and associated enterprises either into bankruptcy or into accepting a hostile takeover by Lukoil itself. Mazeikiai is Lithuania’s largest enterprise, number one tax payer, and the largest Western investment project, operated and one-third owned by the American company Williams International.

Last month Mazeikiai’s American management succeeded in signing the long-term supply agreement with Yukos, a Lukoil competitor. Yukos chose to enter a lucrative bussiness deal without political strings attached. It reckons, moreover, that this agreement can facilitate U.S. approval for Yukos shares to be listed on the New York Stock Exchange–a privilege that the state-controlled Lukoil has sought in vain.

Last week the Russian government publicly signaled its disapproval of Yukos’ action. A lengthy article in the governmental Rossiiskaya Gazeta instructed that private company’s management–that is, its president Mikhail Khodorkovsky–that the agreement with the Williams-run Mazeikiai was bad business, “obviously disadvantageous to Yukos.” It chastised Yukos for not demanding–as Lukoil does–operational control of Mazeikiai. It described the agreement as detrimental to the Russian state because oil deliveries to Lithuania would diminish the amounts sent through Russia’s own Baltic Pipeline System–a phony argument because that system is under construction and far from complete. And it attacked Yukos for allegedly seeking close relations with “U.S. capital and U.S. politicians [and] preparing to enter the New York Stock Exchange.”

What is more, the article directly linked the issue of the oil supply contract with that of Lithuania’s foreign policy, quest for NATO membership and relations with the United States. It attacked “Americans who urge Lithuania’s admission to NATO” and chastised “Lithuanian politicians ever ready for transactions detrimental to the state, only to prove their loyalty to Washington.” And it lectured Yukos that that “the country’s geopolitical interests and the business interests of its companies are much more tightly woven together than one can possibly imagine.”

It is now up to the Lithuanian government to approve, and to parliament to legislate, the terms of the supply agreement with Yukos. The country’s reputation as a reliable partner to Western investors now largely hinges on its treatment of Williams–a treatment that has been far from impeccable at the hands of the outgoing Prime Minister Rolandas Paksas. The incoming, left-of-center government and the parliamentary majority on which it rests face a dual test. First, they have an opportunity to remove the uncertainties that some in their own ranks have created with regard to privatization in the energy and other sectors. Second, this controversy is testing prime minister-designate Algirdas Brazauskas’ and his Social-Democrat Party’s statesmanship. Specifically, it tests their ability and will to overrule the business interests and “third-road” political groups that question Lithuania’s fully Western orientation and free market economics.

Some of those interests and groups have grown symbiotic with the Social-Democrat Party or even joined it. The party’s parliamentary floor leader Vytenis Andriukaitis has vowed to “fight to the end” against the Mazeikiai-Yukos agreement. He and other left-wing Social-Democrats are ideological critics of privatization in general and of Williams in particular. As it happens, Andriukaitis’ group was the main recipient of electoral campaign funds last year from Lukoil Baltija’s managers, their family and firms owned by them, according to data filed by the candidates themselves under mandatory disclosure rules.

The right-of-center Liberal Union (LU), which still runs the acting cabinet of ministers, is divided on the isssue. The Paksas faction has all along opposed the Williams privatization contract. Acting Prime Minister Eugenijus Gentvilas’ wing of that party supports the Mazeikiai-Yukos agreement, and has ensured its approval by the acting government. That approval, however, does not bind the government which is about to take office under Brazauskas, much less the parliament with its newly formed left-of-center majority.

That majority’s junior partner, the New Union/Social Liberals (NU/SL), recently abandoned the governing coalition with the Liberal Union. Within the acting government, NU/SL sided with Gentvilas in approving the Mazeikiai-Yukos agreement. Now, however, NU/SL is trying to harmonize its position with that of its new ally, the Social-Democrats. On July 10, these two parties defeated a parliamentary effort by right-of-center parties to ratify the supply agreement immediately. Instead, the issue has been deferred to a parliamentary session planned for August. Procrastination can be one way of killing the argreement, short of assuming direct political responsibility for such action.

Brazauskas himself endorsed the agreement initially, but turned against it shortly afterward. It is generally assumed in Vilnius that the change may be due to the influence of Brazauskas’ business allies with connections in Moscow. The Social-Democrat leader has long been known as figure of integrity, and he has built a credible record for statesmanship in past years. His recent political comeback, however, has brought him close to some obscure business interest groups. It is up to Brazauskas to uphold his past reputation for defending national interests, rather than those of individual business groups. Brazauskas’ personal decision will undoubtedly sway the Social-Democrat Party and decide the issue one way or the other.

In recent days, U.S. President George W. Bush, Secretary of State Colin Powell, and U.S. Congressmen sympathetic to the Baltic cause have written letters to encourage ratification of the Mazeikiai-Yukos supply agreement. As reported by Lithuanian media, the letters from Washington are pointing not only to the economic but also to the political and strategic implications of this issue. Many in Vilnius have understood the overall message to be that Lithuania could risk its full latitude of policy choice if it ends up handing to Moscow–through Lukoil–a potential lever of economic and political pressure (BNS, LNK Television, July 1-11; Rossiiskaya Gazeta, July 3; see the Monitor, January 25, May 11, June 21, July 2).

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