SLOVAKIA HAS ITS OWN MOTIVES FOR REPURCHASING

C O N F I D E N T I A L SECTION 01 OF 03 BRATISLAVA 000529

SIPDIS

SIPDIS

E.O. 12958: DECL: 06/21/2016
TAGS: ENRG ECON EPET PREL PGOV LO RS
SUBJECT: SLOVAKIA HAS ITS OWN MOTIVES FOR REPURCHASING
TRANSPETROL

REF: A. BRATISLAVA 501


B. WARSAW 1314

C. BRATISLAVA 527

Classified By: Ambassador Rodolphe M. Vallee for Reasons 1.4 (B) and (D
)


1. (C) Summary: The Slovak government's primary aim in
repurchasing the Transpetrol shares from Yukos Finance is to
maintain state control in the Slovak oil pipeline.
Meciar-era businessmen from eastern Slovakia have claims on
34 percent of Transpetrol shares (two thirds of the
government's 51 percent stake) that are currently the subject
of several cases before the Slovak supreme court. Economy
Minister Jirko Malcharek believes an adverse court decision
is possible, and he is therefore using his remaining days in
office to establish the framework for a deal with Yukos
Finance that would allow the GOS to buy back the shares.
Since the current government is not interested giving
approval to third-party investors from Russia, Poland or the
U.S., efforts will now focus on Robert Fico's Smer-led
coalition that is expected to take over the reigns of
government on July 4. End Summary.

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UNDOING PAST MISDEEDS?
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2. (C) Minister Malcharek told us last Friday that his top
priority in his remaining days in office is to set up the
circumstances that would enable the Slovak Government to
repurchase the 49 percent stake in the Transpetrol pipeline
that is currently owned by Yukos Finance. (Note: Given the
recent political developments (Reftel C),it appears that the
new government will be formed by July 4.) Malcharek outlined
two primary reasons for quick action by the GOS: the upcoming
Yukos bankruptcy trial in Russia and the need to maintain
state control by getting all of the Transpetrol shares back
in state hands in order to undue the misdeeds of past
governments. Although we have heard different assessments
from independent analysts, Malcharek was certain that as a
100 percent subsidiary of Yukos, Netherlands-based Yukos
Finance would be affected by a forced disposition into
unfriendly hands during Russian bankruptcy proceedings that
are expected to begin sometime after the G-8 Summit in July.
Malcharek maintained that failure to secure the sale of the
Transpetrol stake prior to the start of these proceedings
would minimize the GOS' ability to have a say in who
purchases the stake.


3. (C) Malcharek told us that previous ministers of economy
and finance facilitated "a fraudulent deal" that jeopardizes
the future of Slovakia's majority stake in the pipeline. A
group of individuals with Meciar-era ties have claims on 34
percent of the Transpetrol shares (two-thirds of the total
GOS shares) that are currently the subject of multiple cases
before the Slovak supreme court. The claims date back to a
1995 real estate dispute by an eastern Slovak company,
CSI-CD, which is represented by Ignac Ilcisin. CSI-CD
received SKK 40 million (approx. USD 1.35 million) as
property damage from the government, which was awarded to the
company by a court executor in 1998 as a 34 percent stake in
Transpetrol (valued in the range of USD 50 million at the
time and approximately USD 70 million today.) At the time,
top officials in the Meciar government did not appeal this
decision, which provided the verdict a degree of validity.
There have been several court decisions both for and against
the GOS over the years, and there are currently several
pending cases with the Slovak supreme court.


4. (C) Malcharek was concerned that the GOS could eventually
lose the case due to "corrupting" influences in the courts.
According to Transpetrol's agreement with Yukos, this would
have further negative effects on the GOS. In losing their
majority status, Transpetrol would be required under the
shareholder's agreement to transfer two percent of their
shares to Yukos, giving the Russian oil company majority
control of Transpetrol. In addition, Malcharek noted that
Transpetrol could face a penalty of USD 25 million if its
shares dropped below 18 percent (Note: he did not provide
details on the mechanism by which this would happen.)


5. (C) The uncertainty surrounding a final supreme court
decision on the outstanding claims for the 34 percent stake,
which Malchareck maintains to have only learned about in
January despite taking over the economic portfolio last
October, led to the government's recent decision to not
approve the sale of Yukos to Russneft. During our meeting
Malcharek said that he had met with Yukos Chief Stephen
Theede two times in the previous two weeks to discuss a
possible repurchase of the 49 percent stake by the Slovak
government. He also showed us a letter he was sending to
Theede outlining the current GOS position:

-- The transfer of the shares to a third party of a
"strategic nature" is not viable
-- The GOS would like to buy back the shares
-- The GOS would be willing to reprivatize part of
Transpetrol, but only after securing state ownership of the
shares
-- Malcharek would like to coordinate actions with Yukos
Finance to avoid a forced transfer of the shares in during
bankruptcy proceedings
-- He proposes transferring shares to a reputable
international bank and giving the GOS a call option to
repurchase the shares within the next year.


6. (C) According to Malcharek and other GOS officials, the
government has the necessary resources to buy back the 49
percent stake, but is seeking the call option to avoid the
perception of making a questionable deal during the final
days of its mandate. The Director General for the State
Budget at the Ministry of Finance confirmed that the
government has the flexibility to repurchase the Transpetrol
shares, which Russneft reportedly was planning to buy for USD
103 million. Although there has not been any coordination
between Malcharek and opposition parties, Smer officials have
told us privately that they would also be interested in the
GOS repurchasing the Transpetrol stake from Yukos.

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OUTSIDE PARTIES REMAIN INTERESTED
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7 (C) As outlined in Reftel B, the Polish government has
requested our assistance in passing a message to the GOS that
the U.S. would support the sale to Polish pipeline operator
PERN. Peter Bachraty, a local Bratislava-based consultant
representing the Polish interests in purchasing the Yukos'
stake, approached us earlier in the week with such a request,
though at the time he lacked the details about the channel
through which the official request was being made. (Note:
Bachraty is not aware that a group of U.S. investors is also
interested in the Transpetrol stake - See reftel and para 9
below.) Bachraty met on Monday (6/26) with the Prime
Minister's Foreign Policy Advisor, who told him that it was
unlikely that the current government would move forward on
any private deal. We separately received a similar message
from Dzurinda's economic advisor yesterday (6/28). Bachraty
acknowledged that the Polish companies had "misplayed their
hand" by not more aggressively pursuing a deal prior to the
election and instead waiting until the interim period between
elections and the formation of a new government to act.
(Comment: Given Malcharek's position, which is not public and
may not be known to Bachraty, it is doubtful that earlier
intervention would have helped. End Comment.)


8. (C) Bachraty told us his company had thoroughly analyzed
the legal situation surrounding Yukos (they promised to
provide us with their analysis next week) and was not
concerned about impact of the upcoming bankruptcy case in
Moscow on the sale of the Transpetrol shares. He views an
eventual tilt in the Yukos board towards pro-Kremlin
supporters as a greater problem that could affect Yukos
Finance's disposition of the Transpetrol shares, especially
if this decision is delayed for some months. (Comment: After
April 2007 the GOS no longer has veto authority over the
deal.) Bachraty also recognized that Slovnaft and its
Hungarian parent MOL would likely oppose any deal with PERN
since the Poles would be viewed as competitors, but feels
that such opposition could be overcome. Given the connection
between PKN Orlen and PERN through common ownership (the
Polish government share) it is unlikely that MOL would view
one more favorably than the other. (Comment: The fact that
the Hungarian Party, SMK, is not a part of the proposed
coalition probably helps PERN's case. End Comment.)


9. (C) Bachraty recognizes that the final GOS decision on
what to do with Transpetrol will be taken by the new
government, and noted that he was already making plans for
his lobbying effort. In addition to meeting with key
officials in the new government, once they are announced,
Bachraty plans to work with journalists on stories stressing
the importance of diversifying energy sources. He requested
our assistance in building upon this message.


10. (C) GlobalNet Financial Solutions also remains
interested in purchasing the pipeline stake from Yukos.
Geoff Berlin, GlobalNet's Managing Director in Ukraine, told
Ambassador that the financing for the deal would come
primarily from Morris E. Zuckerman and Co., a New York based
investment firm. We advised Berlin on the current political
situation and, based on our conversation with Malcharek,
suggested that he may want to hold off making any specific
proposals until after the new government is formed. As is the
case for PERN, Berlin believes that GOS support for
Globalnet's purchase of the shares would give them an
advantage in negotiations with Yukos Finance.

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COMMENT
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10. (C) Based on our conversations with Malcharek and top
officials in the PM Dzurinda's office, we doubt that the
current government will have a change of heart and make a
last minute decision to support any potential investor.
Efforts to woo the current government could also backfire.
One of Smer's top campaign promises was to review the
privatizations and business deals enacted in the last few
years, and Fico is unlikely to take a kind view of decisions
made on significant investments by the outgoing Dzurinda
government. Unless Malcharek is able to get a deal for a GOS
buyback of shares in the next couple of days, it is unlikely
that the new government would be in a position to take action
until the fall at the earliest. End Comment
VALLEE