How do you promote U.S. investment in another country when bribes are an ingrained way of life in its business culture and the U.S. Foreign Corrupt Practices Act prohibits American companies from slipping payments under the table? It is a dilemma faced around the world by Foreign Commercial Officers and others charged with promoting U.S. business abroad.
Such was the case when the Baltic state of Lithuania became independent of the Soviet Union. The Supreme Council of the Republic of Lithuania declared on March 11, 1990 that Lithuania was once again a sovereign nation. The United States recognized this independence in September of the following year and four days later the Soviet Union officially concurred. Lithuania’s economy struggled as it shifted from a statist model of communism to principles of free trade, and the early post-Soviet years in the Baltic States were filled with economic and political turbulence.
Within the first three years of Lithuania’s independence, six prime ministers led the country. This constant political turmoil, combined with the 1990 Soviet economic blockade, slowed economic reform. Although Lithuania was the first of the Baltic States to re-establish independence, it was the last to introduce a national currency (1993) and to open up its economy to external trade and foreign investors. Lithuania was also the last Baltic state to join the World Trade Organization (2001). The American Embassy’s attempts to mediate between local and foreign players in Lithuania’s economy forced them to confront bribery and other corrupt business practices left over from the Soviets.
Keith C. Smith, U.S. Ambassador to Lithuania from 1997-2000, related his experiences with the newly-independent nation in an interview by Charles Stuart Kennedy in February 2004.
“We came very close to convincing Intel to construct a microchip plant in Kaunas”
Keith C. Smith, Ambassador to Lithuania 1997 – 2000
The most frustrating issue for me was corruption, particularly by those trying to stop Williams Company [an American energy company] from investing in Lithuania. Williams eventually worked a deal with Yukos, a private Russian company, owned in large part by the young oligarch Mikhail Khodorkovsky. (Smith is seen at left.)
Unfortunately, after the U.S. business shakeout from the Enron collapse of 2001, any company that was doing energy training – and that included Williams – suffered financially. Williams was barely able to survive as a company.
To do so, they had to sell all of their assets overseas, including their assets in Lithuania. They sold out to Yukos, which by then had become the most transparent Russian energy company. By late 2004, however, the Putin Government took steps to take over the company and split its assets up among a new set of Kremlin-approved oligarchs.
Mikhail Khodorkovsky and several of his associates were thrown in prison and the company effectively destroyed. After I retired, I met Khodorkovsky on several occasions, both in Washington and in Moscow. He was quite an interesting and impressive young Russian.
As ambassador, I worked closely with several other American companies, and helped get an American mobile phone company reimbursed for $8 million that they had been defrauded out of by their Lithuanian partner. We came very close to convincing Intel to construct a microchip plant in Kaunas.
This would have been an enormous economic coup for Lithuania. With Lukoil paying money under the table to politicians and others to try to kill the Williams deal, nationalistic feeling against American firms scared off Intel. The company is very secretive and worried about being criticized in Congress for “sending American jobs abroad.”
Intel representatives came to Lithuania twice, and each time refused to meet with the prime minister or president. Instead, I met with them. As a sign of their serious interest in Lithuania, however, they brought in a site selection team from the Far East, and found a piece of property north of Kaunas that was suitable for a chip factory.
Unfortunately, the drumbeat of nationalistic opposition to Williams scared off Intel. It was real tragedy for Lithuania. Intel factories are sought after by almost every country in the world. Today, Lithuanians are reluctant to talk about their failure to reassure Intel or other foreign investors…
There were other companies that we successfully helped, such as the Mars confectionary company. I had to intervene on their behalf so that they could buy land to build a large pet food plant near Klaipeda (seen left.) Their first attempt to buy land for a factory site was blocked by local politicians who wanted to have the area privatized to them for a token amount. Mars supplied product to much of western Russia and to all the Baltic States. It was a lot of fun promoting American companies.
Before getting involved, however, I always made sure that they were legitimate firms. I often traveled around the country with the FSN commercial officer. He was a capable Lithuanian and good at promoting American investment. We would usually start off by me giving the local people a political message about the U.S. Then my Lithuanian FSN would inform local business leaders about how his office could help promote contacts with American companies. We were mildly successful.
The Williams investment, however, was the largest foreign investment in Lithuania, and Williams had been attracted to the country by a Canadian firm. Without Embassy support they would have never invested in the country…
“Under the proposed agreement, Duke would put $20 million into a bank account in the Turks and Caicos Islands”
The educated class recognized that they would not develop without large amounts of Western investment. As in every other country, there were local interests that did not want to share the country’s assets or to face Western competition. In a country like Lithuania, where a lot of the old nomenclature remained influential, some entrenched interests were able to stop some foreign investment from entering the country.
For instance, the privatization of the country’s main port at Klaipeda (seen right) was not conducted in a transparent manner and it was handed over to a powerful local “businessman” who had good Soviet-era contacts, rather than a U.S.-Dutch consortium. The winner was the country’s richest guy and a close personal friend of President [Algirdas] Brazauskas [the first President of post-Soviet Lithuania].
Many of us, including some Lithuanian economists, questioned the fairness of the tender. At the time, the winner was giving money to every one of the political groups in the country. The prime minister [Algirdas Brazauskas] was president when I presented my credentials. He had earlier arranged to have a four million dollar hotel privatized to his mistress for a fraction of its real value.
Another frustrating case involved the interest of Duke Energy from North Carolina (seen left) in making a substantial investment in Lithuania. Duke is a very good company and it was interested in setting up power lines to carry excess electricity from Lithuania to Poland. It would have been a big money earner for Lithuania and good for eastern Poland, where they lacked sufficient electricity.
However, when the Duke people were in a private meeting at the home of the wealthy owner of the Klaipeda port, there was an offer made by the Lithuanian to secure the power line contract in return for a bribe. Of course, the Lithuanian industrialist did not make the offer personally; he had his assistant do it while he was in the other room.
Under the proposed agreement, Duke would put $20 million into a bank account in the Turks and Caicos Islands. The Duke quickly rejected the offer and returned to Vilnius. They flew back to the U.S. the next day.
The Embassy was able to secure a copy of the draft contract. I had our embassy check out the account in the Turks and Caicos, and found that the account really belonged to Lukoil, the Russian oil company then in negotiations with Williams. So there again came a corruption tie with a Russian energy company.
Unfortunately, a lot of European companies will come in and pay the bribes, the French especially, but the Germans also. I saw evidence of this in Estonia and Lithuania. Although U.S. companies are not always the cleanest in the world, they are constrained by the U.S. Foreign Corrupt Practices Act. I was impressed that Williams distributed copies of the Act when they entered the bidding in Lithuania.
There are some who still charge that I, backed by the U.S. Government, coerced Lithuania into awarding the contract to Williams. It is sad to hear these old charges brought up by people who should know better. Even the American-trained President, Valdas Adamkus, eventually withdrew his support for the deal (after it was signed) and joined the chorus of those charging that the Williams agreement had been “forced” on Lithuania.
In fact, Williams only signed the deal because the president [Adamkus] personally asked them to. When he called them, they were preparing to leave the country without signing with the Lithuanian Government.
His cowardly reaction to nationalistic criticism was disheartening to me. I had worked damn hard, month after month to bring the deal between Williams and the Lithuanian Government together. The President could never tell me what alternative Lithuania had. No other Western company wanted to buy Lithuania’s facilities, since they would have to rely on crude oil from Russia.