SLOVAKIA REMAINS FOCUSED ON REGAINING TRANSPETROL

S E C R E T SECTION 01 OF 03 BRATISLAVA 000720

SIPDIS

SIPDIS

E.O. 12958: DECL: 08/25/2016
TAGS: ENGR ECON EPET PREL PGOV LO RS
SUBJECT: SLOVAKIA REMAINS FOCUSED ON REGAINING TRANSPETROL
STAKE

REF: A. BRATISLAVA 673

B. BRATISLAVA 657

C. BRATISLAVA 618

D. BRATISLAVA 529

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

This is an action request. Please see Para. 7.


1. (S) Summary - The Ministry of Economy continues to pursue
a deal to buy back the 49 percent stake in Transpetrol from
Netherlands-based Yukos Finance and/or its subsidiary Yukos
International. This task was complicated when a Dutch judge
appointed Yukos Oil Receiver and Russian Eduard Rebgun as the
receiver for Yukos Finance on August 11, effectively
splitting control over the two entities both laying claim to
the ownership of the Transpetrol shares. Yukos International
remains committed to completing the sale, and Economy
Minister Lubomir Jahnatek would support going this route if
he could get a solid legal opinion from the Netherlands that
Yukos International is able to complete the transaction
alone. Jahnatek has also contacted Rebgun and tentatively
agreed to meet with him and the new director of Yukos Finance
in the coming weeks. Recognizing that Rebgun may also be
considering other options, Jahnatek is pursuing other
strategies that would encourage Rebgun to strike a deal with
the GOS. These include gaining support in Brussels for a GOS
buyback, using Slovakia's rights as a shareholder to block
any non-GOS deal, and possibly threatening to nationalize the
pipeline. Despite the legal uncertainty and strategic
complications Minister Jahnatek remains fully committed to
his goal of gaining control of 100 percent of the Transpetrol
shares. End Summary.

CHANGE OF CONTROL AT YUKOS FINANCE COMPLICATES THE DEAL
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2. (S) On August 11, the day after the GOS reached a
preliminary deal with Yukos Finance (YF) and Yukos
International (YI) representatives Steve Theede and Bill
Schoff to repurchase the Transpetrol shares (Reftel A),a
Dutch judge gave control of YF to Yukos Oil Receiver Eduard
Rebgun. Rebgun immediately dismissed YF Directors David
Godfrey and Bruce Misamore. The split ownership of the two
Netherlands-based Yukos entities further complicated the sale
of the shares to the GOS. YF remains the legal owner of
Transpetrol shares pending the approval by the Slovak
government of the transfer to YI. (Note: As outlined in
Reftel A, Minister Jahnatek agreed to approve the transfer to
YI contingent on a YI sale to the GOS. Although he signed a
letter to this effect on August 10, approval of the
Transpetrol General Assembly is required to for the transfer
to YI. This has not yet taken place and could now be blocked
by Rebgun.) Still, YI is the beneficial owner of the
Transpetrol shares and also has physical possession of the
shares.


3. (S) Lawyers at the Ministry of Economy have held
conversations with YI lawyers to determine whether the GOS
can legally finalize the sale without the approval of YF.
According to the Slovak lawyers, the GOS can only repurchase
the shares from the company that is listed as the owner in
the Slovak Commercial Registry, which in this case is YF.
Furthermore, Slovak law does not recognize the concept of
beneficial ownership, although it appears English law governs
the Shareholder's Agreement. The MOE lawyers have asked for
clarification from YI on the difference between beneficial
and legal ownership of the shares. The YI lawyers are
willing to work with the Slovaks, but have been unable to
answer the Ministry of Economy (MOE) questions or develop an
alternative legal strategy for completing this transaction.
(Note: YI lawyers have explained to the GOS that they are
focused on other legal issues, including preparing a defense
for YI executives who are facing criminal charges in Moscow.)
Max Kaluzhny, a lawyer representing YI in the Netherlands,
believes that two provisions in the 2005 Share Transfer
Agreement between YF and YI support YI's ability to sell the
Transpetrol shares to the GOS. First, the agreement states
that YF is required to take the necessary actions to complete
the transfer of shares to YF. Second, YI has irrevocable
power of attorney over the shares. Ultimately, the Dutch
bankruptcy court would have to decide whether YI has the
rights to sell the shares.


WILL REBGUN PLAY BALL?
--------------


5. (S) Before moving forward with a deal that excludes YF,
Slovak and YI officials agreed that the MOE should reach out
to Rebgun and the new YF directors about a possible deal with
both YI and YF. A GOS deal with both Yukos entities (and
thus the nod of approval from Moscow as well) would provide
the greatest legal assurance that the sale would not be
challenged in the future. Even if such a deal is not
successful, reaching out to Rebgun demonstrates to the court
that the GOS made a good faith effort to work with YF.
(Note: Steve Theede and David Godfrey, two of the Yukos
officials named in the criminal case in Moscow, told us that
they doubt that Rebgun would be willing to negotiate with the
Slovaks. They expect Rebgun to use a "pocket veto" and wait
until the GOS loses its right of veto in April 2007. End
note.)


6. (S) Minister Jahnatek sent a letter August 16 to Rebgun
expressing the GOS' interest in reaching an agreement for the
Transpetrol stake and asking for a meeting to discuss this
possibility. The GOS sent a similar message to Sergei
Smelkov, a long-time Rebgun associate who was recently
appointed as the new Board Director of YF. Rebgun called
Jahnatek's advisor on August 24 to say that he would be
interested in discussing the transaction. Rebgun noted that
he was still in the middle of taking over YF and needed more
time to evaluate the company's assets. Rebgun tentatively
agreed to meet with Jahnatek in either Moscow or Bratislava
in two to three weeks. MOE received a similar expression of
interest from Smelkov.

GOS LOOKING TO BOLSTER ARGUMENTS, CREATE BACKUP STRATEGIES
-------------- --------------


7. (S) In a two and half hour dinner with the Ambassador on
August 24, Jahnatek outlined his strategy for negotiating
with YF. His goals for the eventual meeting with Rebgun and
Smelkov will be (1) to determine whether Rebgun is willing to
negotiate or already has a predetermined plan for the
Transpetrol shares and (2) to convince Rebgun that YF does
not have any other viable alternatives besides selling the
Transpetrol stake to the Slovak government. This second
position was clearly laid out in his August 16 letter to
Rebgun. To help build his case, Jahnatek will raise the
issue in Brussels when he meets with EU Energy Commissioner
Andris Piebalgs in early September. Jahnatek would like to
leave Brussels with an expression of EU support for his
government's desire to repurchase the 49 percent interest in
Transpetrol based on a desire for energy independence and
diversification of energy supplies, both for Slovakia and
central Europe in general. Jahnatek requested that we use
our influence with the EU to help solidify European support
for GOS independence by repurchasing the Yukos shares. BEGIN
ACTION REQUEST: Post requests talking points to be used by
USEU with appropriate counterparts in the EC supporting
Slovakia's efforts to repurchase the Yukos shares. END
ACTION REQUEST.


8. (S) Jahnatek asserted that the Slovak government was
willing to play hardball if Rebgun tries to run out the clock
and make a deal with a third party after April 2007. He
stated that according to Transpetrol's Articles of
Association the MOE, as the holder of 51 percent of the
shares, would have to agree to a change in ownership, and
that he would be willing to hold back the government's
approval of any future deal. Jahnatek suggested that he
would prefer a legal stalemate over a sale to Gazprom or
another company, at least until the GOS regains management
control of the company. He also warned that under Article 20
of the Slovak Constitution the GOS has the right to
nationalize the company. Finally, Jahnatek told us that he
met with Russian Foreign Minister Sergey Lavrov when he was
in Moscow in late July and had received his support for a
Slovak buyback of the shares from Yukos. If necessary,
Jahnatek suggested, he could ask Lavrov to weigh in with
Rebgun.


9. (S) If Rebgun is not willing to negotiate or appears to be
stalling for time, Jahnatek maintained that he would pursue a
deal with YI, assuming he could get a clear and defensible
legal opinion from a reputable Dutch counsel that YI has the
right to complete the transaction based solely on YI's
beneficial ownership of the shares. MOE officials have many
questions about how this would work, but are willing to
pursue this option if negotiations with Rebgun do not bear
any fruit.

FACTS AROUND SALE ALSO SHIFTING
--------------


10. (S) The Minister had learned of Oleksandr Todiychuk's
8/23 removal as CEO of Ukrtransnafta, the Ukrainian pipeline
operator, and recognized that this would delay progress
towards tranporting Caspian oil through the pipeline.
Jahnatek identified three other options that Slovakia should
pursue to diversify the supply of oil: 1) completing the
connection to Schwechat with the potential of purchasing oil
imported from Western European pipelines; 2) making the
connection to Adria functional; and 3) connecting to
Ingoldstadt through the Czech Republic. He noted that full
GOS control of Transpetrol is necessary to follow through
with these objectives. Jahnatek believes that the Russians
could not boost the throughput in Druzhba by more than 1.5
million tons of Russian crude per year, which still provides
enough "space" for other non-Russian oil before the pipeline
would reach its capacity of 17 million tons.


11. (S) Jahnatek informed us that there was positive news in
the government's long-running legal battle with Ignac Ilcisin
over his claim to 34 percent of the Transpetrol shares, which
account for two-thirds of the GOS shares (Reftel D). The
Slovak Supreme Court recently canceled the district court
ruling allowing Ilcisin to convene an extraordinary general
shareholder meeting of Transpetrol under Ilcisin's
leadership. The Supreme Court, acting on an initiative by
the Prosecutor General who lodged an appeal on behalf of
Transpetrol, returned the case to the district court.
Minister Jahnatek does not expect further problems from Mr.
Ilcisin.

COMMENT
--------------


12. (S) Minister Jahnatek, with the continued support of
Prime Minister Fico and President Gasparovic, remains fully
committed to regaining full control of the Shares of
Transpetrol. He is aware of the challenges, but also
believes that Slovakia has no other options if they are to
fulfill their strategic goals of diversifying supply and
further developing the Transpetrol pipeline. That being
said, the minister appeared exhausted, although still
confident, from being thrown into the political maelstrom
from his relatively stable life in the private sector. He is
concurrently engaged in a battle with the electricity and
natural gas companies over their monopoly pricing powers, as
well as the cancellation of the previous government's
decision to sell Bratislava airport to a consortium made up
of Vienna's Schwechat Airport and Slovak financier Penta.
Powerful forces are being disturbed, he noted, suggesting
that shady private equity firm Penta was behind recent SMS
threats to his person and demurring on Ambassador's request
to hunt due to his "safety concerns." He told us he was
under particular assault from some of his own legislative
party members, who were undermining him with PM Fico. He
requested subtle public support for his efforts, if possible.
While noting that "these are my negotiations," Jahnatek is
extremely appreciative of U.S. support, and will continue to
look to Steve Hellman and the Embassy for information and
guidance. End Comment

VALLEE