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Cablegate: Transpetrol: Slovakia Feels Pressure From Its

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PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHSL #0613/01 2090600
ZNY CCCCC ZZH
P 280600Z JUL 06
FM AMEMBASSY BRATISLAVA
TO RUEHC/SECSTATE WASHDC PRIORITY 0119
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHMO/AMEMBASSY MOSCOW PRIORITY 0588
RUEHWR/AMEMBASSY WARSAW PRIORITY 3316
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 BRATISLAVA 000613

SIPDIS

SIPDIS

E.O. 12958: DECL: 07/27/2016
TAGS: ENRG ECON EPET PREL PGOV LO RS
SUBJECT: TRANSPETROL: SLOVAKIA FEELS PRESSURE FROM ITS
RUSSIAN BROTHER


Classified By: Ambassador Rodolphe Vallee for reasons 1.4 (b) and (d)

1. (C) Summary. The new Slovak government feels under
increasing pressure to strike a deal with a Russian firm on
Transpetrol before Yukos International initiates bankruptcy
proceedings, now scheduled to begin on August 10. On July
25, the same day that Yukos creditors decided to commence
bankruptcy proceedings, the Slovak Ministers of Economy and
Foreign Affairs traveled to Russia to negotiate with Yukos,
Russneft and Gazprom. The Minister of Economy met with
Ambassador Vallee on July 27, and gave the impression that he
believed he held a weak hand, and would have to give up his
plans to buy back Yukos shares in order to achieve other
objectives. On further review, we believe that the Minister
is giving the Russian position too much credit, and may be on
the verge of making an unnecessary mistake. End Summary.

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The Yukos Bankruptcy: What Does It Mean?
----------------------------------------

2. (SBU) On July 25 in Moscow, Yukos International creditors
rejected the company's proposed recovery plan since it could
not repay its debts in the time alloted by law. In the
process, the Russian court valued the company's after-tax
assets at $15.4 billion, less than half of what Yukos' legal
team had claimed. Steve Theede, CEO of Yukos, resigned from
his post on July 20, saying that the process would be rigged
by those intent on carving up the pieces of Yukos. (Note:
Theede's resignation is not official until August 1 -- it is
unclear if he is still involved in company management during
his last few days on the job.) The decision clears the way
for the Russian government to commence liquidation of Yukos
assets, setting up the possibility of a firesale auction of
Yukos assets to well-connected Russian oil interests.
Liquidation proceedings, originally scheduled for August 1,
were postponed (on July 27) by Russian courts until August 10.

3. (SBU) It is doubtful, however, that any Russian court
decision concerning Yukos International is legally binding
for Amsterdam-based Yukos Finance, which actually holds the
49 percent share in Transpetrol. According to legal analysts
with close knowledge of the case, attached liens on
Transpetrol shares and any disposition of Yukos Finance and
its subsidiary Yukos International would need the approval
the Dutch court. Any decision taken by Russian courts on
August 10 would be subject to further review by Dutch courts
later this year. Experienced energy analysts suggest that
Russian firms are trying to pressure Slovakia to reach a deal
before August 10 because the Russians are worried about what
the Dutch court will decide, and want to play on the new
Slovak government's fears that bankruptcy proceedings could
leave them with nothing. (see paragraph 9)

Off to Moscow, Enter Gazprom
----------------------------

4. (C) Also on July 25, Minister of Economy Lubomir Jahnatek
and Minister of Foreign Affairs Jan Kubis traveled to Moscow
to meet with Yukos leadership and various Russian businessmen
and government officials. These included separate meetings
with Viktor Geraschenko, Yukos Chairman of the Board; Mikhail
Gutseriyev, President of Russneft; representatives from
Gazprom; and Sergei Narishkin, Minister of Economic
Development. Prior to these meetings, Jahnatek reportedly
sent letters to all stating that any prospective partner
needed to agree to the following four conditions and show the
financial and technical capacity to make them possible:

* Slovakia must re-acquire management rights to Transpetrol
(Slovakia does not currently own management rights even
though it holds a 51 percent share);
* The existing pipeline must be extended to Schwechat
refinery in Austria;
* The pipeline must be made available for
Odessa-Brody-Bratislava usage;
* Pipeline capacity must be increased from 10.7 to 16 million
tons per year.

Jahnatek left Moscow the following morning without striking
any deal.

5. (SBU) Meanwhile Yukos and Gazprom began serious
negotiations. On July 26, Yukos International
representatives in London announced that they had rejected an
offer from Gazprom to buy a significant percentage of the
company's holdings, most notably Yukos' shares in Gazprom
Neft and Arcticgas, but also Yukos' 49% stake in Transpetrol.
Wire reports on July 27 indicate, however, that the two
sides are close to reaching a deal, and some sources suggest
they may have already done so. According to one Russian
newspaper, Gazprom valued Transpetrol at $105 million;
another Russian newspaper said between $80 and $100 million.
By comparison, in February Russneft had agreed to purchase
Yukos' shares for $103 million before then-Minister of
Economy Jirko Malcharek nullified the transaction.

Perspectives from Slovak Government: Kondrot
--------------------------------------------

6. (C) For additional perspective, Emboff met with Maros
Kondrot, Chairman of Economic Committee in Parliament, on
July 26. Kondrot, like Jahnatek, is an ex-HZDS member who
recently switched to SMER; the two are tied to many of the
same financial backers and are quite close. Kondrot believes
that Slovakia must buy back its Transpetrol shares from
Yukos, and sees it as an ominous sign that Jahnatek had
traveled to Russia to meet not only with Yukos, but also with
Russneft and Gazprom. He said that Jahnatek was originally
willing to go forward with the buyback plan negotiated by
outgoing Minister Malcharek, but, after his personal lawyer
had reviewed the documents, decided against this option and
persuaded Fico to seek another solution. Kondrot had not
seen the exact details of the agreement but was told that the
financial terms of the buy-back negotiated through Credit
Suisse First Boston were unclear, suggesting that Slovakia
would have only gained a back a fraction of the 49 percent
share, with the rest going to private interests. Based on
Malcharek's close ties with Penta and Credit Suisse First
Boston's long history with the company, it appears that Penta
would have been the primary beneficiary. Kondrot is
presently in Ukraine, representing the Slovak government on
the Transpetrol issue, where he is meeting with EU
representatives.

Perspectives from Slovak Government: Jahnatek
---------------------------------------------

7. (C) On the afternoon of July 27, Ambassador Vallee met
with the new Minister of Economy, Mr. Jahnatek, for the first
time. Jahnatek opened by listing the four conditions listed
in paragraph 4. He seemed to be rather frazzled by the
pressure of the situation, and convinced he had only a
three-day timeframe to strike a deal before August 1 (now
extended to August 10) in order to attain some of the
conditions he listed. The Minister seemed to believe that we
were meeting with him primarily to make the case for the US
investor M.E. Zukerman Investments (MEZI), which had written
him on July 13 to express interest in purchasing the 49 share
in Transpetrol. Jahnatek told us that he had received
investment counseling from a London-based firm on the
capabilities of MEZI, and had decided that the company did
have not a financial position that made it viable to
undertake the pipeline investments that the GOS requires.

8. (C) At one point, after relaying USG goals of transparency
and open access, Ambassador Vallee asked him why Slovakia
couldn't just buy back the shares directly rather than work
out a complicated deal with Credit Suisse or Gazprom.
Jahnatek gave a resigned look and said, "It is a complicated
situation. Our Russian brother is sitting on the source."
He spoke of the veto power that the Ministry of Economy holds
on any Transpetrol deal, and lamented that this authority
runs out on April 1, 2007. He also spoke of Slovakia's
nuclear fuel and gas contracts with Gazprom that run out in
2008, and said that he didn't want to take any decisions that
"maybe in six months would seem stupid." In short, Jahnatek
seemed resigned to the fact that he had a bad hand and that
some sort of deal with Gazprom was inevitable and needed to
be reached before liquidation procedures begin.


Another View: Karol Hirman -- Why This Doesn't Make Sense
--------------------------------------------- ------------

9. (C) We subsequently contacted leading Slovak energy expert
Karol Hirman for perspective. He believed that a lot of
Jahnatek's reasoning was flimsy at best. Hirman noted that
Russian firms have no incentive to give management rights
back to Transpetrol, so the GOS is highly unlikely to receive
such a concession from Gazprom. Secondly, the Schwechat
pipeline connection erquires the consent of Schwechat, which
is not yet convinced of the economic wisdom of such a
project. Thirdly, unlike the situation in Ukraine, Slovakia
holds gas and nuclear fuel contracts at world market rates,
so Slovakia has little to gain by forfeiting Transpetrol
shares to Gazprom in order to get a future deal on gas
contracts. Also, Hirman agreed with our views on the strong
position of the Dutch courts, and added that, according to
the terms of the 2002 Transpetrol-Yukos transaction, if Yukos
shares are turned over to a third party in a bankruptcy
procedure without approval by the Slovak government, then
management control of Transpetrol must legally revert to
Slovakia. Hirman said that Jahnatek was panicking due to
inexperience, and believed that the Russians had done a
number on him with their pressure tactics.

Next Step
---------

10. (C) In a scheduled meeting tomorrow morning with Foreign
Minister Kubis, Emboff will press the point that Slovakia
should not rush into a hasty deal with Russian firms on
Transpetrol, and that a further review of options is needed.
VALLEE

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