Cablegate: Slovakia Appears to Change Course On Transpetrol.

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DE RUEHSL #0657/01 2201329
ZNY CCCCC ZZH
P 081329Z AUG 06
FM AMEMBASSY BRATISLAVA
TO RUEHC/SECSTATE WASHDC PRIORITY 0176
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHAK/AMEMBASSY ANKARA PRIORITY 0034
RUEHMO/AMEMBASSY MOSCOW PRIORITY 0592
RUEHVL/AMEMBASSY VILNIUS PRIORITY 0124
RUEHWR/AMEMBASSY WARSAW PRIORITY 3320
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 04 BRATISLAVA 000657

SIPDIS

SIPDIS

E.O. 12958: DECL: 08/07/2016
TAGS: ENRG ECON EPET PREL PGOV LO RS
SUBJECT: SLOVAKIA APPEARS TO CHANGE COURSE ON TRANSPETROL.

REF: A. A) BRATISLAVA 613
B. B) BRATISLAVA 618
C. C) VILNIUS 727

Classified By: Charge D'Affaires Lawrence R. Silverman for reasons 1.4(
b) and (d).

1. (C) Summary. On August 3-4, Special Advisor Steve Hellman
met with high-ranking GOS officials, including Prime Minister
Robert Fico and Minister of Economy Lubomir Jahnatek, to
discuss the benefits of buying back shares in Transpetrol
from Yukos Finance rather than approving a quick sale to
Gazprom Neft. Before Hellman's visit, all indications
suggested that the GOS would shortly approve a sale to
Gazprom Neft, because they felt browbeaten by the Russians
and had come to believe they had limited choice and leverage
in the matter. Through the series of meetings, GOS officials
started to seriously reconsider the buy-back option. To
address GOS concerns that Yukos Finance did not want to
negotiate with the GOS, Hellman offered to intercede with
company officials on behalf of the GOS -- if the GOS was
certain it wanted to pursue a buy-back option. On August 7,
Jahnatek announced that he will be meeting with Yukos Finance
in Bratislava on August 9. On August 8, Jahnatek expressed
to CDA that the GOS fully supports the buy-back option and
will pursue such a deal with Yukos. End Summary.

Pre-Visit State of Affairs
--------------------------

2. (C) Hellman's visit was precipitated in large part by a
July 27 meeting between Ambassador Vallee and Minister of
Economy Jahnatek, in which the Minister implied that sale of
Yukos stock to Gazprom Neft was imminent, and might take
place before Yukos International bankruptcy proceedings
started in early August (see reftel A). Subsequent contacts
with the GOS -- including Charge's August 2 meeting with
Minister of Economy State Secretary Peter Ziga -- tempered
our concerns about a quick GOS decision. It still seemed
apparent, however, that Gazprom Neft would gain the 49
percent share from Yukos sometime in the next month unless
strong action was taken. Prior to the visit, Ambassador
Vallee and Hellman decided to simplify USG strategy: rather
than discuss two options -- buying back the shares or selling
to a non-Russian competitor (such as the Polish firm PERN,
the American firm MEZI, etc.) -- we would focus specifically
on the buy-back option. This was decided on the basis that
selling Yukos shares to a non-Russian third party would not
be a politically viable option in the minds of GOS officials,
and mentioning it would dilute our central message.

Opening Meetings
----------------

3. (C) On August 3, Hellman and CDA met with Minister of
Foreign Affairs Jan Kubis to discuss the Transpetrol
situation. On July 24-25, Kubis travelled to Moscow with
Jahnatek and met with Gazprom representatives; upon his
return he had suggested to Ambassador Vallee that sale to
Gazprom might be acceptable as long as Slovakia regains
management control of Transpetrol (see reftel B). To counter
this line of reasoning, Hellman focused on our major reasons
for supporting a buy-back, including Slovakia's energy
security and the financial benefits of Transpetrol ownership.
Kubis responded by saying, "Your basic premise is we can buy
back the shares. But no one is selling." It became apparent
that Kubis and other high-ranking GOS officials had become
convinced that meaningful conversation with Yukos Finance had
been cut off, and that any arguments in favor of a buy-back
were purely theoretical under the circumstances. The major
challenge in upcoming meetings would be to convince the Prime
Minister and the Minister of Economy that Yukos Finance could
in fact be brought to the table.

4. (SBU) The following morning, Hellman and Emboff met with
the Marian Jusko, CEO of Slovnaft, and later with Stefan
Czucz, Chairman of the Board of Directors at Transpetrol.
Slovnaft, through its parent company MOL, had itself
expressed tentative interest in purchasing Transpetrol shares
from Yukos. Slovnaft said their basic relationship with
Yukos and Russian suppliers had been positive, and they
wanted to continue receiving oil from the Urals without
difficulty. They believed that re-equipping their refinery
to process Caspian crude would not be feasible, though
Hellman tried to disabuse them of that notion. In general,
Slovnaft executives left an impression that they would be
content with a Gazprom purchase as the path of least
resistance.

Prime Minister not-so-Sinister
------------------------------

5. (C) After the GOS finally concluded its extended opening
session of Parliament in the wee hours of the the morning on
August 4, Prime Minister Fico agreed to meet with Hellman and
CDA at the Parliament building. The Prime Minister was
alone, and held the meeting entirely in English without
translation. Fico appeared relaxed (albeit tired), and open
to further points of view on the Transpetrol issue. He
opened remarks by quickly running through the range of
possible options for the GOS, including re-purchase of Yukos
shares for $110 million (noting that this would create a hole
in the budget), and sale to a variety of business interests
from Russia, Poland, and the Czech Republic. He added that
his Cabinet planned to discuss Transpetrol in its first
meeting on August 9, but he could not say when a decision
would be reached.

6. (C) In response, Hellman made the key arguments favoring a
buy-back. He noted that Transpetrol has an annual net cash
flow of $30 to $40 million per year and has no debt, meaning
that the 49 percent stake would return $15 to $20 million
annually -- an amount that could easily facilitate financing
of a buy-back without having to use one korun of state funds.
Simply put, a buy-back makes economic sense. He then
started to discuss Yukos Finance's self interest, at which
point the Prime Minister interjected, "would Yukos be
interested in selling to us?" Hellman emphasized the
company's need to liquidate assets and its strong dislike of
businesses affiliated with the Russian government. Hellman
also suggested that he could talk with key people in Yukos as
needed, if the GOS were serious about a buy-back. He also
emphasized that after a buy-back the GOS would have the
option to announce re-privatization of Transpetrol in 2009,
which would give Slovakia leverage as it renegotiated its gas
and nuclear fuel contracts in 2007.

7. (C) The arguments we provided narrowed Fico's focus in a
helpful way. The Prime Minister concluded that, given his
country's needs, he has two "relevant options": 1) to buy
back the shares from Yukos, or 2) to approve a sale to
Gazprom or another Russian firm. Fico observed that selling
to a Polish firm would only infuriate the Russians without
benefit to Slovakia. Selling to a Czech firm would be less
problematic, he said, but would not be a strategic decision.
He thanked us for providing additional information,
particularly on the financial aspects of a Transpetrol
buy-back, and asked us to discuss the situation with the
Minister of Economy in greater detail.

Three Hours with the Minister
-----------------------------

8. (C) Which we did. In a meeting that lasted nearly three
hours, Hellman laid out the reasons for a buy-back with
Minister of Economy Jahnatek and Maros Kondrot, Chairman of
the Parliamentary Committee on the Economy. Janhatek was
still feeling the pressure from the Russians, as he had
emphasized in his first meeting with the Ambassador.
Kondrot's presence at the meeting was important since he has
been strongly in favor of a buy-back, and had expressed
concern to the Embassy that Jahnatek might be about to sign
off on a bad deal. (Note: Kondrot has been in regular
communication with the Embassy on Transpetrol over the past
two weeks, and we would not have secured the meeting with
Prime Minister Fico without Kondrot lobbying for it.)

9. (C) As Hellman made the arguments for pursing a buy-back
option, Jahnatek seemed visibly stressed and brow-beaten, as
if to say: "I know. I know. But how can I possibly do this?"
Jahnatek offered that his first idea was to buy back the
shares, but he lamented that Yukos never gave an official
response to his request last month for a meeting to discuss
re-purchasing Transpetrol shares. He feared Yukos' seeming
lack of interest was part of a strategy to freeze the
Minister of Economy out of the negotiating process until his
veto power over Transpetrol expires in April 2007. Jahnatek
said that, under the circumstances, he was forced to find the
best deal in which: 1) Slovakia could regain management
control of Transpetrol; 2) pipeline flow would be increased
from 10.4 to over 16 million tons per year, 3) the extensions
to Schwechat and Odessa-Brody would be completed and
operational.

10. (C) Hellman stripped down the Slovaks' perceived problems
and explained the real possibilities of a buy-back. He also
why Gazprom was not the best vehicle for reaching the goals
outlined, particularly goal #1. He also discussed the
threats that Russia had made toward Lithuania, and explained
how Slovakia actually had a much better hand of cards than
Lithuania in this situations (see reftel C). As Jahnatek
slowly became convinced that it would be able to co-exist
with Russia in the case of a buy-back, he asked if Hellman
could arrange a response from Yukos Finance to his meeting
requests. He said it had always been his personal preference
to buy back the shares, but he only had two weeks in which to
reach a decision. Hellman responded by telling Jahnatek that
he would do his best to help with Yukos if the GOS was sure
it would follow through on the buy-back option. Jahnatek
nodded and said, "for the first time I understood exactly
what you said (before the translation)." The Minister said
that he would speak further with the Prime Minister on the
subject later that day.

11. (C) After the meeting concluded, Hellman held a separate
short meeting with Kondrot to ensure he stays in close touch
with us on this matter. An hour later, Hellman met briefly
with Peter Kazimir, State Secretary at the Ministry of
Finance, to drive home the point that a buy-back of Yukos
shares could be financed without breaking into the state
budget. The message was well received. Also, before leaving
for Russia, Hellman met briefly with PERN board member Marcin
Jastrzebski to make sure they were clear about the direction
we were taking.

Jahnatek in Action
------------------

12. (C) On the afternoon of August 4, our meeting with
Jahnatek was announced in the local press. Interestingly,
the article said that Jahnatek delivered to us the message
that the GOS preferred to buy back its shares; the U.S.
position on the matter was not specifically mentioned.
(Note: Hellman requested to Jahnatek during the meeting that,
if asked by the press, he should say that we were there to
advance U.S. commercial interests.) The meeting between
Hellman and Prime Minister Fico did not make the local
papers. Also that afternoon, Jahnatek made a request to Bill
Shoff, Director of Finance at Yukos Finance in London, to
come to Bratislava next week for consultations. On the
afternoon of August 7, after meeting with President
Gasparovic earlier in the day, Jahnatek announced to local
journalists that he would be meeting with representatives of
Yukos in Bratislava on Wednesday, August 9. Jahnatek added
that buying back Transpetrol shares was the top priority for
Slovakia.

13. (C) On August 7, Ambassador Vallee heard from Steve
Theede, the recently departed CEO of Yukos International, who
is still involved in Yukos Finance's decision-making process.
Theede indicated to the Ambassador that selling Transpetrol
shares back to Slovakia would be the preferred option for
himself, and for other Yukos colleagues. On the morning of
August 8, CDA relayed this information in a telephone
conversation with Minister Jahnatek. Jahnatek was enthused
by the news. He added that he had just met with Prime
Minister Fico and President Gasparovic, and that they were
all in favor of pursuing the buy-back option. The Minister
said that he would like to reach a quick decision with Yukos
Finance -- possibly in the next two days -- in order to avoid
further complications. He also asked if Hellman could talk
to his contacts at Yukos to facilitate reaching such a deal.

14. (C) Comment: It is striking that Minister of Economy
Jahnatek has suddenly scheduled a meeting with Yukos Finance
for August 9, after taking the position for several weeks
that he couldn't strike a deal with Yukos because no one
would talk with him. The USG did not intercede with Yukos to
make the meeting happen, but the credible suggestion that
Hellman could do so seemed to spur Jahnatek into action. It
is still possible that this meeting with Yukos Finance is for
show, but mounting evidence suggests that the GOS has really
altered its course. There is still much that needs to happen
in order for the buy-back to become a reality, especially
considering that a few days ago the GOS had all but decided
to strike a deal with Gazprom. Janhatek's present concern
seems to be whether the GOS can come to a deal before the
Russians intervene somehow. In any case, we have gotten
across the idea that the GOS has more and better options on
Transpetrol. Given our general concern that PM Fico tends to
undervalue Slovakia's international role and potential
influence, the GOS response to our message sends positive
signals for the future. End Comment.
SILVERMAN

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