In 1979, a New York liquor importer decided to risk $83,000 on market research to see if Americans would drink vodka that came from Sweden. What Carillon Importers found was disappointing. Some had never heard of Sweden; some thought it a lovely place; others confused it with Finland. But no one thought of Swedes as vodka makers. “It was all negative,” recalls Michel Roux, who then made up Carillon’s entire sales force. Disappointed but determined to recoup the outlay for research, the company’s president told Roux, “Well, let’s go sell $83,000 worth of vodka.”

The rest is highly profitable history, but the story of Absolut is about to take a surprising twist.

In the late 1970s, the best thing vodka had going for it was James Bond, who famously ordered his vodka martini “shaken, not stirred.” Mostly, vodka was a tasteless, astringent liquid you mixed with something else. It was poured into orange juice for a screwdriver, swirled with Rose’s lime juice for a gimlet, or splashed into Kahlúa and milk for a White Russian. If you yearned for imagined authenticity, vodka for vodka’s sake, vodka to ease Cold War blues, then you drank Smirnoff, which today remains America’s top seller. Back then, vodka was relatively inexpensive; Smirnoff might have set you back a couple of bucks. More than any other spirit, vodka was a commodity, like copper or celery.

Absolut’s pristine glass bottle has become a looking glass into two worlds—Sweden in economic transition and the extension, worldwide, of the American super-premium vodka boom.

Carillon quickly jettisoned its research and got down to selling the stuff, and vodka underwent a revolution. Readers opened consumer magazines in 1980 to find a lovely picture of a transparent bottle, remotely medicinal in shape, backlit to show off a message in a handsome script, a halo glowing above the bottle cap. The ad copy read, “Absolut Perfection.” Carillon Importers made back its $83,000 and then some. After a few years, Seagram’s took over distribution, and the advertising campaign by the New York–based agency TBWA (now a unit within the Omnicom Group) used the theme for more than 1,000 variations. The notion that the vodka was distilled from the pure physicality of Sweden itself helped as well: vistas of winter wheat and the cleanest water in the world, drawn from wells in the tiny Baltic Sea town of Åhus. The Absolut brand became a cultural icon, and U.S. sales jumped from 20,000 cases in 1981 to nearly 5 million cases last year.

Absolut Vodka is manufactured by the V&S Group. The company, you might assume, is the one that got away from the industry giants, an ornery and obscure private firm that distills grain into money. Behemoths of the spirits industry stamp across newspaper front pages every couple of years. Diageo or Pernod Ricard or Bacardi pick off valuable competitors as easily as you might coax an olive off a tiny plastic saber with your front teeth. V&S, you figure, is the one they just missed.

Except that the V&S Group is a public company in the fullest sense of the word, a wholly owned subsidiary of King Carl XVI Gustav and the people of the constitutional monarchy of Sweden. Now, however, the new leaders of Sweden’s government are eager to get out of the spirits business—and other businesses as well. V&S has been valued at $5.7 billion by research analysts, and while no one knows the accuracy of that particular figure, a sale would be highly enriching to the Swedes. It would amount to fully 2 percent of their annual gross domestic product, or more than $600 per person. (Imagine a government-owned U.S. company worth $180 billion.)

In March, the center-right coalition led by Fredrik Reinfeldt asked Parliament for permission to sell holdings in half a dozen industries, signaling a change in Swedish economic policy and the start of a race for the Absolut jewel in the king’s crown. Details have not been revealed yet. The ideological push to get out of key industries (the state owns 55 groups employing 190,000 people, or about 4 percent of the workforce) has, for months, triumphed over the mechanics for how to do so. In coming weeks, Parliament is expected to vote on the privatization request, and a sale is not expected before autumn at the earliest.

At first glance, the term 'Swedish deregulation' today is as much an oxymoron as 'premium vodka' was in 1980.

In the meantime, Absolut’s pristine glass bottle has suddenly become a looking glass into two worlds, connected by one spirit—Sweden in economic transition and the extension, worldwide, of the American super-premium vodka boom.

From the outside, the V&S Group looks like a public company, the sort you might find listed on a prominent national exchange. V&S’s 2006 annual report comes with brightening photos of distillers at work. The report ticks off the fundamentals of a healthy business: operating profits grew 10 percent to 2.3 billion Swedish krona, or about $335 million; vodka makes up 58 percent of V&S’s sales across its three operating units; and the Group last year bought the third of Cruzan Rum that it didn’t already own. For the first time, non-U.S. sales of Absolut edged out U.S. sales, driven by double-digit growth in Canada, Germany, the U.K., and Mexico. And that’s before Absolut’s initial push into China has had a chance to kick in. V&S has opened a joint venture with a Chinese distiller of baijiu, a grain-based “white liquor.”

The profits paid out as dividends every year go directly into the Swedish Treasury, which currently, unlike those of the United States, Japan, and most of Europe, runs a budget surplus. The question for legislators is, on the one hand, why sell off a steady source of income—literally and figuratively a national treasure? On the other hand, what on earth is the government doing in the vodka business?

Absolut, as a manufactured commodity, is an aberration among Swedish exports. Engineering accounts for half of the country’s output, and Stockholm, a close cousin to Silicon Valley, quietly churns out talent and ideas at a world-class rate. Liberal trade laws and an educated workforce produce a steady stream of innovation. In January, Sweden became the first nation to open an embassy in cyberspace—inside the virtual-reality community, 6 million strong, at SecondLife.com. And Swedes speak English better than we do.

The Swedes have scored some notable private sector successes. Investor AB, the vehicle for the Wallenberg fortune, owns significant stakes in commercial Sweden’s greatest hits: the pharmaceutical giant AstraZeneca; appliance maker Electrolux; the Ericsson Group; Husqvarna, the chainsaw manufacturer; and many others. Three of Investor AB’s 15 largest shareholders are American: JPMorgan Chase, the New Jersey State Pension Fund, and Northern Trust. Similarly, about 25 percent of Svenska Handelsbanken, the much-admired 135-year-old banking juggernaut, is partially owned by foreign investors, many of them American. And then there is the Ikea Group, the global furniture chain owned by Europe’s richest person, Ingvar Kamprad.

But these bright spots are overshadowed by a lackluster economic record, especially in creating and sustaining jobs. Recent official figures show 5.6 percent unemployment (compared with 4.5 percent in the United States in May), but the Swedish figure is a soft one, and, taking into account jobs programs, early retirees, and disabled workers, one would find it reaching into double digits. The World Factbook, published by the Central Intelligence Agency, states, “Presumably because of generous sick-leave benefits, Swedish workers report in sick more often than other Europeans.”

On the one hand, why sell off a steady source of income--literally and figuratively a national treasure? On the other hand, what on earth is the Swedish government doing in the vodka business?

A report last year by McKinsey & Company found that from 1992 to 2003, the number of working-age Swedes who had jobs fell by 0.4 percent every year on average. In the U.K., France, and Norway, the figure rose by 0.5 percent.

Still, some sectors, notably automotive, have become more productive, and competitive forces at home and abroad drove GDP growth last year to a level as high as the 1970s—4.4 percent. Still, Sweden’s GDP per capita, calculated using the purchasing power of its currency, is about 30 percent lower than that of the United States. With nearly a third of its economy run by the government, Sweden, the McKinsey & Company report argued, must bring private sector efficiency to the state apparatus.

A recession tipped skeptical Swedes into the European Union in 1995, but they have rejected the euro as national currency so far. Swedes do nothing rashly. The euro’s time may yet come. It may not. Either way, this is a nation that knows how to have a national conversation, and isn’t in any rush to finish it.

Pressure for reforms has been building for years. Last September, Sweden elected a coalition of center-right legislators, ousting the Social Democrats, who had held power most of the time since before World War II. The new government took over with a flourish and with grand—but not overly grand—plans to rejuvenate the economy while maintaining the famous “Swedish model” of heavy public sector participation and lavish social welfare benefits.

The new coalition, called the Alliance for Sweden, is led by the Moderate Party, which tempered its economic ideals after a humbling 2002 election. Last year, Moderate candidates ran toward the center, promising to address the issues discussed in the McKinsey report (and later emphasized in an OECD study in March): jobs, jobs, and jobs. But the coalition will not be able to liberalize labor markets by toning down strict hiring-and-firing regulations. Those rules encouraged Ikea to launch a business model predicated on hiring as few people as possible: You make it! In the meantime, the Alliance for Sweden will try to push down payroll and income taxes. It’s a start, free-market economists say.

Selling off state-owned enterprises is an ideological end in itself for the Alliance leadership, but one that has an extremely sober, practical justification. “The main arguments have been those of economics—that private owners are simply better managers,” says Johnny Munkhammar, a commentator on economic policy who holds affiliations with two think tanks—Timbro in Stockholm and the Cato Institute in Washington, D.C.“

In 1994, Yngve Berqvist hit upon a clever way to attract an investment and marketing partner. He and his colleagues at the Ice Hotel built a bar exclusively out of ice and covered nearly every flat surface with bottles of Absolut.

Swedish deregulation,” which at first glance is as much an oxymoron as “premium vodka” was in 1980, has been occurring slowly for some time. With Volvo and Saab automakers already sold to Detroit, the Alliance had to find a handful of poster children to denationalize. The government has set in motion a process that is expected to put V&S up for sale with either parts or all of five other state-owned enterprises: the bank Nordea, regional communications giant TeliaSonera, mortgage-lender SBAB, real estate firmVasakronan, and OMX, owner of stock exchanges in Scandinavian and Baltic capitals.

Along with his colleagues, Reinfeldt, who at 41 years of age became one of the youngest-ever Swedish prime ministers when elected last fall, believes that the government should not own companies that can support themselves. “We don’t think that the state should run businesses on a competitive market,” Mats Odell, minister of financial markets, said in March. “The state shouldn’t make, sell, or distribute vodka.”

The government’s push to shed its business interests is so strong that V&S chief executive Bengt Baron—a 1980 Olympic gold-medal backstroker and a former McKinsey executive himself—earlier this year admonished elected leaders not to rush the auction. By speeding a sale on principle, Baron argued, Sweden would earn less than top market value for the brand. Since Baron’s admonition, the Alliance government has acknowledged, retaining a strict poker face, buying interest from virtually every major spirits company in the world.

The recipe for vodka—a word derived from the Russian word for water, voda (vah-DAH)—was standardized by that country’s greatest chemist, Dmitri Mendeleev, who invented the Periodic Table of Elements and was oil tsar to a real tsar, Alexander II. Many spirits play on the notion of water or “water of life.” Aquavit, vodka’s Scandinavian cousin, is short for the Latin aqua vitae. Whiskey descends from the same phrase in Scottish Gaelic, uisge beatha. The French call their distilled-fruit brandy eau de vie.

To find out what vodka means in the United States, turn to the Code of Federal Regulations, Title 27, Chapter 1, Subpart C, Section 5.22, Subsection (1): “‘Vodka’ is neutral spirits so distilled, or so treated after distillation with charcoal or other materials, as to be without distinctive character, aroma, taste, or color.”

On the question of distinction, some would differ. In the past five years alone, more than 100 new vodkas have entered the U.S. spirits market. Some use anise seed to take the bite out. Others vary sugar content to smooth the texture. The geology of grain and water matters. Old Russia hands argue that vodka should burn, but the super-smooth, super-premium vodkas—pricier than premium Absolut—that are bottled under names like Belvedere, Chopin, and Level (the last is V&S’s super-premium brand) certainly do not. Has vodka, the water of liveliness, grown too close to water itself?

Take special note of Ciroc. A premium vodka introduced by Diageo in 2003, Ciroc is distilled from grapes. Grapes! Making vodka from grapes is like making a cast-iron skillet from gold. The whole point of vodka is that it doesn’t matter what you make it from, so you can use whatever you have handy—potato, corn, rye. Distillation strips the ingredients of any recognizable traits.

Most of the world still treats vodka as a commodity—though not for long. In 2005, Absolut took a great leap forward into China, introducing a marketing campaign complete with a bottle bearing a Chinese ideogram designed by a noted calligrapher. China downs about a quarter of the world’s spirits, but premium vodka distillers, such as V&S, are still trying to establish a beachhead in the market.

For the first time, non-U.S. sales of Absolut edged out U.S. sales, driven by double-digit growth in Canada, Germany, the U.K., and Mexico. And that's before Absolut's initial push into China has had a chance to kick in.

Since vodka is close to pure alcohol, marketing it is a difficult task: customers have to be convinced that your brand is somehow different from others even though tastes are awfully close.

In this endeavor, the Swedes were, for a long time, far ahead of the pack. Labels, packaging, and advertising count. Now, the field is more crowded than ever, with attention focused on taller, frosted bottles, such as Grey Goose—the Absolut of the aughts. Grey Goose, introduced in 1997 by the same entrepreneur who somehow made Jägermeister a household name, was sold to Bacardi in 2004 for $2 billion.

Diageo, based in London, is the 800-pound gorilla of the spirits industry. Created in the 1997 merger of Guinness and GrandMet, the company owns Johnny Walker, Smirnoff, Tanqueray, and more whiskies than we have time to sip. Nipping at Diageo’s heels is Pernod Ricard, a Paris-based company whose brands include The Glenlivet, Wild Turkey, Chivas Regal, Kahlúa, and Stolichnaya. What happened to the big North American companies? The last was Seagram’s, most of which was swallowed by Pernod Ricard.

The industry reconfigured itself in the Diageo era, and the V&S Group nimbly embraced new strategies. In 2001, V&S moved to shore up its distribution by entering into agreements with Fortune Brands, owner of Jim Beam, Maker’s Mark, and lifestyle products including Titleist golf balls. In the U.S., Diageo controls nearly a quarter of the spirits market. Fortune Brands’ joint venture with V&S, called Future Brands, sold the United States 13.4 percent of its spirits in 2005, followed by Bacardi USA at 9.2 percent, Constellation Brands, Pernod Ricard USA, and Brown-Forman.

Nearly every player has already expressed interest in Absolut. For Pernod Ricard, Absolut would make a richer vodka brand than Stoli or its other premium vodka, Seagram’s Extra Smooth. Diageo is interested but could face regulatory hurdles in Europe because it already owns the leading vodka brand, Smirnoff. In addition to the two giants, Bacardi has expressed interest in V&S, three years after picking up Grey Goose. Fortune Brands is already the most entwined with Absolut and has signaled interest in the property. Private equity firms, perhaps in combination with a strategic partner in the spirits industry, could play a role in the reconfiguration of V&S.

Meanwhile, the Swedes just can’t help themselves. They were born to market vodka. Consider the Kiruna story.

The sale would amount to fully 2 percent of Sweden's annual gross domestic product, or more the $600 per person. (Imagine a government-owned U.S. company worth $180 billion.)

Kiruna is a city of 23,000 that’s 120 miles above the Arctic Circle. Earlier this year, Virgin Galactic signed an agreement that places Richard Branson’s newest spaceport on a site just north of the town, where the Swedish Space Corporation has made its home since 1972.

Kiruna sits on the largest single slab of iron in the world. The mine that exploits the unique mineral deposit, owned by the Swedish government through the company LKAB, is four kilometers long, two kilometers deep, and 80 meters (about the length of a football field) wide. Just 25 miles to the west is Sweden’s Ice Hotel—an 80-room establishment built every November entirely of ice and snow.

Dozens of artists from around the world descend on Jukkasjärvi, a village of 250 families, to design rooms using snow and one-by-one-by-two-meter blocks of transparent river ice. Tourists pour in from Japan, Europe, and the United States to wed, christen, or just chill out. The edifice melts every spring, and the pristine water of its floors, walls, and cathedral arches returns to the Tourne River, just yards away.

In 1994, Yngve Berqvist, the mastermind of the operation, hit upon a clever way to attract an investment and marketing partner. He and his colleagues at the Ice Hotel built a bar entirely out of ice and covered nearly every flat surface with bottles of Absolut. A photographer snapped a picture of actors in varied garb enjoying themselves. One press release later, the “ice bar” made its way into the American media. Absolut found out about the innovation and contacted Berqvist to inquire into working together. Today, Absolut Ice Bars serve shots in glasses cut from Tourne River ice in half a dozen cities around the world, and growing.

In Stockholm these days you hear lots of conversations about the fate of the nation’s vodka. A $5 billion windfall would be nice. It could lower the national debt or pay for tax cuts. But fuzzier, cultural questions arise from the potential foreign ownership of Absolut. Would English, French, American, or Indian ownership of Absolut make it less Swedish? Probably not. As long as Absolut is made with Swedish winter wheat and pristine Åhus aquifer water, it will still be Absolut. Most likely, only the Swedes themselves would feel the loss. 

Of course, the system that spawned Absolut might give rise to an equal or even better public spirit. Is another Absolut on the horizon? When people ask Michel Roux how he sold so much Swedish vodka in the United States, he always gives the same answer: “I don’t know. If I knew, I would do it again.”

Eric Roston, a former Time magazine journalist living in Washington, D.C., is currently writing a book about the science of carbon, to be published in 2008.