Williams deal: the economy's savior or ultimate destroyer?

  • 1999-10-28
  • By Paul Beckman
VILNIUS - Just as the U.S. energy company Williams International was on the brink of buying a 33 percent stake in Lithuania's Mazeikiu Nafta oil complex, Prime Minister Paksas suddenly balked, saying on Oct. 18 he would not sign the deal because it would throw a devastating 1.4 billion litas ($350 million) financial burden onto the country. With the Lithuanian economy in a rut and the financial situation looking almost desperate, the Williams deal is still very much on track for being signed on Oct. 29. But will it send Lithuania's financial problems spinning out of control?

The government and Williams have apparently been sparring over how much each side should contribute to pulling Mazeikiu Nafta out of a huge financial hole. According to Williams information, Mazeikiu Nafta has over 1.2 billion litas in state-funded or state-guaranteed debt. Of that, 257 million litas must be repaid by the end of this year while another 528 million is due the end of 2000.

In order to halt Mazeikiu Nafta's impending fall into bankruptcy, the Williams deal has been laid out in a way that Lithuania will need to extend existing Mazeikiu Nafta loans and provide 1 billion litas in new loans over a period of time in 1999 and 2000. Meanwhile Williams will throw a total of 600 million litas into the oil complex.

"These funds are needed to convince Western banks that both Lithuania and Williams are seriously committed to the modernization and success of Mazeikiu Nafta," Williams President John Bumgarner stated. "Western banks will not finance future investments if modernization is not commenced promptly."

But given Lithuania's current financial state, Paksas said such a deal would be too costly to Lithuania. When a majority of Paksas' government decided in favor of keeping Williams around despite the prime minister's misgivings, Paksas' allies Economics Minister Eugenijus Maldeikis and Finance Minister Jonas Lionginas quit. Paksas decided to stick around for the time being to try to get better terms with Williams.

The three nay-sayers are at least right about one thing - the state's financial situation certainly has plenty of room for improvement. The original 1999 state budget planned for 7.21 billion litas was apparently too lofty as revenues have continually fallen way short of intended targets. By Oct. 1, the state was faced with a budget shortfall of 874.7 million litas. Although Parliament passed a package of cuts worth 450 million litas in mid-October, even Lionginas said the cuts were not deep enough.

Eugenija Martinaityte, director of the Lithuanian Banking, Insurance and Finance Institute, summed up her assessment of Lithuania's current financial state clearly enough - there is no money.

"There is no money and no financial sources," said Martinaityte. "The state's ability to borrow from the international market is now more difficult. The Williams deal just brought these problems [into the spotlight]. It's a very dangerous situation which ministers Maldeikis and Lionginas tried to show."

Martinaityte said the Lithuanian economy has been weak for a while. She attributed the positive economic figures of 1996 and 1997 to "short-term businesses" and that true restructuring in many sectors of the economy is still needed.

"It's not all caused by the Russian crisis. But the Russian crisis did come while this economy was weak. The next half year will be difficult," Martinaityte predicted. "Now Lithuania is in something similar to the Russian crisis."

In an interview with Veidas magazine, Lionginas also predicted Lithuania would be on the road to a financial crisis should the deal with Williams be signed.

"We know the International Monetary Fund's position very well that Lithuania cannot accept such a financial commitment," said Lionginas. "This year the financial deficit will grow to 9.8 percent and next year to 12 [percent]-13 percent. I want to say openly that it is the first sign of a financial crisis."

The IMF's representative office in Vilnius was also extremely wary about the Williams deal. According to local press reports, Lithuania's intentions to increase loans to Mazeikiu Nafta can cause tougher conditions in a planned deal with the IMF, thus making the state's ability to snag reasonable loans from foreign sources more difficult.

But rather than being a problem, Bumgarner insists the Williams deal is "part of the solution" to Mazeikiu Nafta and Lithuania's financial woes.

Williams' president mentioned that government loans to Mazeikiu Nafta will be paid back with a 10 percent interest, which is more than the interest the government pays on its own borrowing. He also added that Williams' business plan calls on capital investments of approximately 2.8 billion litas over the next five years.

"New investments always create additional economic activity - the multiplier affect. The new Mazeikiu Nafta capital investment could stimulate the Lithuanian economy by 8.4 [billion] to 14 billion litas," stated Bumgarner.

Adding that to 400 million litas in profit taxes per year beginning in 2005, other taxes and job creation, Bumgarner maintains that the country's economy stands to benefit "dramatically."

"The true risk faced by Lithuania, on top of an estimated 9 percent of GDP fiscal deficit, is the pending bankruptcy of Mazeikiu Nafta, the default of government guaranteed loans, and the loss of 4,000 jobs. Lithuania's current fiscal difficulties should not be used as an excuse to stop the Williams investment at Mazeikiai. Shortsightedness should not stand in the way of long-term solutions to Lithuania's economic problems," stated Bumgarner.

Bumgarner said that the government can either "face hard choices now" or delay them for a few months to a year and get nothing in return.

But the question that remains is whether Lithuania can survive the "hard choices" Bumgarner referred to in order to latch onto the long term solution. Maldeikis and Lionginas answered in the negative by leaving their governmental posts. And chances are, more vacancies in the government building will occur before the answer is found.