SLOVAKIA TO REPURCHASE TRANSPETROL SHARES FROM

S E C R E T SECTION 01 OF 03 BRATISLAVA 000673 SIPDIS SIPDIS E.O. 12958: DECL: 08/10/2016 TAGS: ENRG ECON EPET PREL PGOV LO RS SUBJECT: SLOVAKIA TO REPURCHASE TRANSPETROL SHARES FROM YUKOS REF: A. BRATISLAVA 657 ¶B. BRATISLAVA 618 ¶C. BRATISLAVA 613 ¶D. VILNIUS 727 Classified By: Charge D'Affairs Lawrence R. Silverman for reasons 1.4 b ) and d). ¶1. (S) Summary - On August 9, Minister of Economy Lubomir Jahnatek reached an agreement with Yukos Finance representatives Steve Theede and Bill Shoff on a deal that allows Slovakia to repurchase the Transpetrol shares from Yukos Finance and thereby obtain greater energy independence. A "share purchase agreement" for the sale was signed by both sides in Bratislava in the evening on August 9, though the final selling price and several other details still needed to be worked out. Discussions continued on August 10 with a specific focus on measures to ensure that the agreement will hold up in New York and Netherlands Bankruptcy courts, as well as withstand the pressure that is expected to come from Moscow. There is no guarantee that the deal can cross these hurdles, but the Slovak government appears determined to do so, a position it did not have only a week ago. Special Advisor Steve Hellman was present throughout the negotiations and provided critical technical and strategic information to the GOS negotiating team. End Summary. SLOVAKS AND YUKOS CAME PREPARED TO CUT A DEAL -------------- ¶2. (S) Both the Slovak delegation and the Yukos representatives arrived at the August 9 negotiation with the goal of coming away with a deal for the GOS to repurchase the 49 percent stake in Transpetrol from Yukos. Minister Jahnatek recognized that for Slovakia to meet its four strategic criteria, outlined in Reftel A, its only option was for the state to repurchase the stake. Jahnatek told us before the negotiations that Gazprom Neft had sent him a letter promising to meet all of the Slovaks conditions, but that he recognized that it was against the interests of the Russian oil and gas company to provide access to Caspian oil, and therefore he could not accept the sale to Gazprom Neft as a viable alternative. Jahnatek made it clear from the beginning of the talks with Yukos Finance that there were no other options and that Slovakia would use its veto authority to negate any other proposed deals. ¶3. (S) In separate conversations with Ambassador Vallee and Hellman prior to the negotiations, former Yukos CEO Steve Theede, who still represents Yukos Finance and Yukos International, noted that his preferred option was to sell the Transpetrol stake to Slovakia (Reftel A). This is a practical position for Yukos Finance as Slovakia holds two cards that are critical for any deal to sell the shares. First, Slovakia maintains veto authority of any deal until April 2007, except in cases of bankruptcy proceedings. This veto authority prevented Yukos Finance from finalizing a sale to Russneft in May 2006. ¶4. (S) Second, and more important for ensuring that the present deal goes through, the Ministry of Economy never gave its consent to transfer the ownership rights for the 49 percent Transpetrol stake from Yukos Finance to Yukos International in 2005. Yukos Finance, the Netherlands subsidiary of Yukos Oil, initiated the transfer of the shares to Yukos International to protect them from eventual bankruptcy proceedings in Russia. According to the 2002 purchase agreement, Yukos Finance needs the approval of the Slovak Government to legally transfer the shares to another entity. Yukos Finance sent three letters to the MOE in 2005 requesting such approval, but never received Slovakia's consent. According to Theede, until the GOS gives its written approval, Yukos Finance remains the "legal owner" of the Transpetrol shares, while Yukos International is only the "beneficial owner." (Note: Yukos Finance promised to provide the GOS with a more detailed explanation of the difference between legal and beneficial ownership.) Getting Minister Jahnatek to sign a letter approving this transfer of shares appeared to be Theede's primary motivation -- it was the first issue he raised during the negotiations -- and the reason making a deal with Slovakia became his preferred option. THE DEVIL IS IN THE DETAILS -------------- ¶5. (S) The discussion over the selling price, which was the easiest part of the whole negotiation, lasted less than five minutes. Theede had received a written offer of USD 110 million for the Transpetrol shares and needed to get a higher bid in order to convince any courts reviewing the case that he had gotten good value for the creditors. (Note: Hellman heard separately that Gazprom Neft was now offering USD 120 million for the Transpetrol shares, but Theede apparently did not have this offer in writing at the time of the negotiations.) Theede opened with a suggested selling price of USD 115 million. Jahnatek came back with an offer of USD 111 million, which Theede accepted with the understanding that he would have to get the approval of his board. Theede expected to have an answer by COB August 10. (Comment: Jahnatek was careful not to tell us how high he could go, but we learned from other sources in the Finance Ministry that Jahnatek had authority to spend up to USD 120 million on the shares. After spending more than an hour August 9 going over Transpetrol's financial statements with their Deputy CFO, Hellman determined that the company is in excellent financial health (with minimal debt and USD 73 million in cash) and that the 49 percent stake is a bargain at USD 120 million. End Comment.) Discussion of the language in the Share Purchase Agreement, which was modeled on the Russneft deal, was similarly straightforward and non-controversial. ¶6. (S) The real debate centered on how to structure the GOS' approval of the 2005 transfer of shares from Yukos Finance to Yukos International, and how to protect the deal against court orders in New York and bankruptcy proceedings in Holland. After much discussion over two days, Minister Jahnatek signed a letter in the presence of Yukos's local representative, Jan Kridla, that provides the Slovak government's consent for the 2005 transfer of shares. Jahnatek did not give a copy of the letter to Yukos at this time, and based upon the verbal agreement made with Theede on August 9, will not do so until the deal is finalized and the GOS has taken possession of the shares. Jahnatek is concerned that with this letter in hand Yukos International could turn around and begin negotiations with a third party. ¶7. (S) Once an agreement is reached on the wording, Minister Jahnatek will sign a second letter later in the day on August ¶10. This letter states that the Slovak MOE will "not consent to the transfer of said shares to any party other than the Slovak Republic (represented by the Ministry of Economy) due to the clear decision of the Slovak Government to regard Transpetrol, a.s. as a strategic asset of the Slovak People." The letter is designed to clearly acknowledge that Yukos Finance and Yukos International did not have any other viable options other than selling the shares to the Slovak Government. ¶8. (S) Transpetrol must also get the approval of its General Assembly before the deal can be finalized. The MOE stated its intention to put out a notice of the next meeting of the General Assembly on August 10. According to the rules, the meeting cannot take place until 30 days after it is called. The GOS had been planning to call a general assembly so that the new government could appoint new board members. LEGAL AND OTHER EXTERNALITIES A THREAT TO THE DEAL -------------- -------------- ¶9. (S) Minister Jahnatek is very aware that the deal to buy-back the shares will be challenged from several fronts. He told us August 10 that shortly after signing the deal the previous day "representatives of Russian interests" came to the MOE for discussions. From his earlier trip to Moscow (Reftel B),Jahnatek realized that the Russians will pull out all of the stops to make sure that the Transpetrol stake returns to Russian control. In response to our question as to how he would handle the pressure, Jahnatek noted that he had a "sweetener" that could be used with the Russians. He did not provide any additional information on what this might involve. ¶10. (S) The most immediate threat to finalizing the sale is the beginning of bankruptcy proceedings in the Netherlands on August 11. (Note: this is the main reason MOE is working to sign all agreements and accompanying letters by COB August 10.) Yukos Receiver, Russian Eduard Rebgun, is attempting to gain control of Yukos Finance through these proceedings. If Rebgun is successful Yukos would be able to replace the board members of Yukos Finance as well as the Yukos' representatives on the Transpetrol Board, if Transpetrol is still legally owned by Yukos Finance. (Note: The assets of Yukos International are protected even if Rebgun is successful.) Jahnatek is certainly concerned about the possibility, but noted that according to the 2002 purchase agreement Slovakia would resume management control of Transpetrol in the event that ownership control of Yukos Finance is transferred in Bankruptcy proceedings. ¶11. (S) The agreement between the GOS and Yukos must also be reviewed by U.S. bankruptcy judge Robert Drain in New York. As was the case for the sale of the Lithuania refinery Mazeikiu Nafta, the judge will review the deal to ensure it provides sufficient protection for the creditors. Both MOE and Yukos Finance representatives expect Rebgun to argue against the transaction using letters of interest from other investors, of which there are many, to argue that Yukos Finance could have gotten a better deal. COMMENT -------------- ¶12. (S) Minister Jahnatek approached the negotiations with much more confidence and authority than he had shown in previous meetings. He clearly has the support of both Prime Minister Fico and President Gasparovic, and after much back and forth on which path to pursue, took a very firm line with the Yukos Finance representatives that there were no other options outside of selling the shares to the Slovak Government. This is a significant turnaround from the end of last week when Jahnatek and other senior GOS officials were resigned to Gazprom Neft's purchase of the shares and felt their was little they could do to influence the situation. ¶13. (S) Jahnatek is aware of the threats to completing the transaction and is actively developing strategies with his staff to head them off. Jahnatek is clearly appreciative of the input provided by Hellman, and will continue to look to him and the U.S. Embassy for information as he faces the challenges to the deal in the coming weeks. (Note: We have made it clear to all parties that we do not want to publicize our role as technical advisors, and to date none of the media accounts have mentioned our involvement.) End Comment. Note: Special Advisor Steve Hellman did not have the opportunity to clear this cable. SILVERMAN