Oil Problems Threaten to Disrupt East Europe’s Nascent Democracies : Petroleum: Soviet Union cutbacks and hard-currency demands, coupled with Persian Gulf turmoil, put the squeeze on fragile economies.

The fragile democracies of Eastern Europe are being dealt twin blows by the petroleum crises in the Soviet Union and the Persian Gulf. The sudden reality is that these countries cannot afford to import vitally needed oil at today’s soaring prices.

Until last year, Eastern Europe--Poland, Czechoslovakia, Hungary, Romania, Bulgaria and East Germany--depended to an overwhelming degree on Soviet petroleum and natural-gas deliveries, financed by subsidies and barter through Comecon, the East-Bloc common market. Eastern Europe was thus sheltered from the great oil shocks of the ‘70s that hit Western economies so painfully .

When the fledgling democracies in Eastern Europe began preparing early this year for fundamental shifts from central planning to free-market economies--shifts calling for unprecedented austerity and social and personal sacrifices--they continued to enjoy cheap oil and easy eastward exports. They assumed that the transition from the old trade patterns with the Soviets to new ones would be long enough to cushion their economies. There seemed to be no reason for Moscow to upset existing practices.

The crucial assumption was that oil would remain available in needed volume and at an affordable rate. But the effects of vast economic changes in the Soviet Union under President Mikhail S. Gorbachev’s perestroika caught East Europeans unprepared.

Last spring the Soviets announced that starting Jan. 1, 1991, all exports to Eastern Europe, including oil, would have to be paid at world prices and in hard currency, such as U.S. dollars or German marks. While the Soviets promised to pay in hard currency for East Europe imports, their purchases dropped precipitously. Overnight, Polish potato farmers lost their Soviet markets, as did the Hungarian manufacturers of Ikarus buses.

The hard fact was that Moscow could no longer afford to subsidize the former satellites, desperately needing hard currency to finance its own vital imports from the West, such as grain and high technology.

Just as East Europe countries adjusted to the hard-currency realities of their new relations with the Soviet Union, things got worse. Domestic upheavals in the Soviet Union cut 1989-90 petroleum production, and Moscow decided last May to reduce its oil deliveries to Eastern Europe by about a third.

Even before the cut in shipments, the East Europeans were already calculating that their annual hard-currency expenditures would double this year to meet the Soviet fuel bill. Before the Persian Gulf conflict, these governments calculated that for 1990-91 they would need at least $6 billion in additional dollar earnings to pay for imported energy. East Germany, of course, will be removed from immediate peril by its absorption by West Germany, now set for Oct. 3. But elsewhere economic and social tensions have risen as retail gasoline prices shoot up; lengthy queues at stations brought back memories of the communist days.

There is concern that fuel shortages may diminish Western tourism, a basic source of hard-currency for Eastern Europe. Even at July oil prices, economists were projecting a surge in inflation and a reduction in industrial output.

In the aftermath of Iraq’s invasion of Kuwait, world oil prices jumped from $16 to more than $30 per barrel of benchmark crude oil, rendering it virtually impossible for East Europeans to buy the petroleum they need. Governments began to realize that even if prices did not keep climbing, they had to rethink all their fundamental economic planning. The only beneficiary of the new situation was the Soviet Union, whose hard-currency income from oil exports virtually doubled.

The worst hit were Bulgaria and Poland. Iraq was indebted to Bulgaria for $1 billion and to Poland for $500-million, in payment for large-scale engineering works and arms, in Poland’s case. Iraq was paying off the debt in crude oil; the U.N.-imposed embargo--fully supported by the two governments--has effectively shut off this source of fuel.

Under the circumstances, it should be a top priority for the United States and its Western partners to develop measures and policies to protect Eastern Europe from the new oil shocks. It would be morally and politically intolerable if the Eastern European nations, newly freed from nearly 50 years of communist dictatorship, were allowed to founder in economic chaos and social unrest as a result of oil shortages.

The Bush Administration, aware of Poland’s latest economic troubles and of the need to prevent social unrest certain to play in the hands of rightist political radicals, has taken preliminary measures to alleviate the oil problem. Among them, it has sought to establish a relationship between Warsaw and Saudi Arabia, in the hope that might help the Poles work out a favorable import arrangement.

The Administration has also looked into the possibility that oil belonging to Kuwait, now on ships at sea, might some way be diverted to Poland. But the government turned down Poland’s request to forgive part of its debt, fearing it would have set an unfavorable precedent for other debtor nations. Latin America, for example, has also been hit by rising oil prices, and carries enormous debts.

In a worst-case scenario, the emergence of right-wing, dictatorial regimes throughout Eastern Europe is possible if tension and frustration sweep the region. Profound splits within democratic forces are already occuring in several of these countries; economic catastrophes could push them over the edge.

A concerted plan by the United States, Western Europe and Japan is urgently needed to prop up the imperiled Eastern European democracies. Innovative policies must be launched, or else the West risks losing Eastern Europe for a second time in this century.