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