RUSSIANS WAITING FOR CLOCK TO RUN OUT ON

C O N F I D E N T I A L SECTION 01 OF 03 BRATISLAVA 000972

SIPDIS

SIPDIS

E.O. 12958: DECL: 12/17/2016
TAGS: ENRG ECON EPET PREL PGOV LO RS
SUBJECT: RUSSIANS WAITING FOR CLOCK TO RUN OUT ON
TRANSPETROL

REF: A. BRATISLAVA 927


B. BRATISLAVA 917

C. VILNIUS 1111

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


1. (C) Summary - The Slovak government has made little
progress towards its stated objectives of regaining control
of the Transpetrol pipeline since the November 20
shareholders meeting. Economy ministry representatives have
not communicated with either the Yukos Finance officials or
the Moscow interlocutors on how to move forward with the
agreement that was reportedly reached with Russian President
Putin in early November. By arguing that the loss of Slovak
veto authority over any deal in April would not change the
GOS negotiating position, Economy State Secretary Peter Ziga
essentially acknowledged that the Russians are pursuing a
strategy to run out the clock and that there is little the
government can or will do to stop it. The GOS was surprised
when one of the two newly appointed Transpetrol board
members, Vladimir Balanik, resigned. Jahnatek has made a
deal with the other Transpetrol board members to put off
another extraordinary shareholders meeting to replace Balanik
due to concerns that Yukos Finance representatives would use
the meeting to change their own board members. With renewed
cooperation with the remaining board members, the GOS would
like to begin moving forward with plans to connect
Transpetrol with the Schwechat refinery in Austria. End
summary.

WAIT AND SEE
--------------


2. (C) Ambassador met December 13 with Economy State
Secretary Peter Ziga to get an update on developments in the

SIPDIS
Transpetrol negotiations since the November 20 shareholders
meeting. Ziga told us that the MOE had not been in touch
with either Yukos Finance (YF) representatives or Russian
government officials on how to move forward with the
agreement reached in Moscow in early November whereby the GOS
would allow a sale to Gazpromneft in exchange for management
control and a commitment by the Russians to further develop
the pipeline. This contradicts Ziga's statements immediately
after the shareholders meeting when he asserted that Minister
Jahnatek had already sent a message to Moscow complaining
that Yukos Finance director Sergei Shmelkov was not abiding
by the agreement reached by the Presidents of the two
countries. (Note: Transpetrol board member Jan Kridla, who
was appointed by the current Yukos International (old Yukos
Finance) directors, suggested that the deal reached in Moscow
in early November may no longer be valid since one of the key
negotiators at the time, Gazpromneft CEO Aleksandr Ryazanov,
was dismissed on November 16. This would also explain why
Shmelkov felt he did not need to abide by the agreement in
negotiations with Minister Jahnatek in advance of the
November 20 shareholders meeting. End Note.)


3. (C) Ziga does not expect to hear from Yukos Finance until
late February when YF Director Sergei Shmelkov receives a
valuation of YF's assets, which primarily consists of the 49
percent Transpetrol stake now that the deal for Lithuania's
Mazeikiu Nafta oil refinery has been completed (Reftel C).
Ziga mentioned that he expected to resume negotiations with
Shmelkov at this time, though he did not sound as if he truly
believed this to be the case. He also noted that he was not
aware of any plans by Jahnatek, who has the lead in the
negotiations, to re-engage with his Moscow interlocutors.


4. (C) By failing to push for further talks with either the
Kremlin or YF, the GOS has essentially accepted that the
Russians will run out the clock on Slovakia's veto authority,
which expires on April 27. Ziga explained that the deadline
does not mean all that much in the long-run since the Slovak
position remains the same under either of the two most-likely
scenarios: (1) The GOS would not be able to veto the sale of
Yukos Finance (the whole subsidiary, not just the Transpetrol
stake) either before or after the April deadline; and (2) the
GOS could block the appointment of new board members if YF
sold the Transpetrol stake without Slovak consent.


OTHER OPTIONS?
--------------


5. (C) In a separate meeting with Prime Minister Fico,
Ambassador asked if the different positions taken by Shmelkov

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and the GOR officials that Jahnatek met with suggested that
Russia was playing games with Slovakia. Fico was
surprisingly uniformed of recent Transpetrol activities,
saying he would soon ask for a Jahnatek briefing. He relayed
a conversation he had with Putin in a pullaside back in
October, where, after Fico had received many "emissaries"
representing Putin, he asked Putin about Transpetrol.
Putin's response, Fico noted in Russian, was "What is that?"
Fico still believes a buyback is the best option, because it
would "make you Americans, us, the Czechs and the Poles all
happy." He just isn't sure how to get there legally.


6. (C) Ziga acknowledged that other parties beyond the GOS
and the Russians remained interested in purchasing the
Transpetrol stake, noting that Ukrtransnafta in Ukraine was
the most recent group to express interest. Ambassador raised
the possibility of an approach by a third party - most likely
from Poland or the Czech Republic - to purchase the
Transpetrol stake from YI based on YI's beneficial ownership
and a power-of-attorney. Ziga expressed his doubts that YI
could complete a deal and, undercutting his lack of concern
for the April 27 deadline, questioned whether YI could
complete such a deal before April. He cited YI's inability
to stop Rebgun and regain control of YF through the Dutch
courts as evidence that YI was not up to the task. While
continuing to express his legal skepticism, Ziga nevertheless
did not rule out the GOS approving a transaction between YI
and a third party if it met all of the government's
conditions. Ironically, the April 27 expiration also gives
opportunities to interested non-Russian parties to test the
legal waters.


7. (C) Ziga pointed out that Shmelkov had brought a new
power-of-attorney (POA) to the Nov. 20 shareholders meeting,
which Shmelkov claimed superseded all previous POAs,
including the irrevocable POA that YI claims gives them the
right to complete the transfer of legal ownership of the
Transpetrol shares from YF to YI. YI's Jan Kridla
acknowledged that Shmelkov was "waiving around" such at POA
at the shareholders meeting, but noted that it was drawn up
by a Russian lawyer who lacks an understanding of Dutch and
Slovak law.

EASY COME, EASY GO
--------------


8. (C) On December 4, only two weeks after he had been
appointed as one of the two new Transpetrol board members,
Vladimir Balanik resigned his position citing "family
reasons." According to media speculation the decision may
have more to do with questionable deals at Plastika Nitra,
where he previously served with Minister Jahnatek. Ziga told
us that normally the GOS would have to call for an
extraordinary shareholders meeting within 30 days to appoint
a replacement for Balanik. Due to concerns that Shmelkov
would use such a meeting as an opportunity to replace the
Yukos members on the board, as had been attempted at the
November 20 meeting, Ziga said that the GOS would instead
take advantage of ambiguous wording in the Articles of
Association and put off naming a replacement until the annual
shareholders meeting in April, 2007. This was a further
indication that ministry officials do not trust Shmelkov and
have thus settled on a wait and see approach to the future of
the pipeline.

NO REASON TO DELAY EVERYTHING
--------------


9. (C) The GOS would like to move forward with plans to
develop the pipeline. Since three of the four remaining
Transpetrol board members, and a majority of supervisory
board members, are willing to cooperate with the GOS, Ziga
believes that Transpetrol could make some progress over the
intervening months before the fate of the 49 percent stake is
decided. Jahnatek and Ziga traveled to Kyiv December 12 and
13th for meetings with their Ukrainian counterparts. Among
the issues discussed was the potential for Caspian oil being
delivered through Druzbha and Transpetrol. Ziga
characterized the discussion as more focused on the broader
challenges to bringing any Odessa/Brody project to fruition
rather than specific proposals.


10. (C) Ziga was more hopeful that the GOS could make
progress on the project to connect Transpetrol to OMV's
Schwechat refinery in Austria. He noted that in addition to
OMV's strong support the Austrian government was committed to

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completing the project before its permits expire. Ziga was
confident that the GOS could overcome the political hurdles
that had previously stalled the project on the Slovak side,
in particular the opposition by the Ptrzalka mayor. The new
mayor, according to Ziga, is willing to reconsider the
proposal. Jan Kridla was much more coy about the prospects
for moving forward with the Schwechat connection, indicating
that the board has recently discussed the issue with Minister
Jahnatek and OMV, but unwilling to comment on the likelihood
of making progress in the next few months.

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


11. (C) It is difficult to explain the GOS' passive
wait-and-see approach to the sale of the Transpetrol stake
considering that just last month Ziga had said that Jahnatek
was disturbed by the mixed signals that he was receiving from
Moscow and YF. The best guess is that Jahnatek feels that he
has run out of options. He genuinely fears Russian
retaliation if the GOS approved any other deal, yet is not
willing to yield on his conditions for the development of the
pipeline. Given the recent uproar over his nominations to
the Transpetrol boards (reftel A),Jahnatek may have decided
the best course is to remain quiet until he is forced to take
action. We have certainly heard other theories, including
speculation that Jahnatek was told in Moscow that YF would
never meet his four conditions, but that the GOR would
promise to support other investments in Slovakia in the
future.


12. (C) While progress on the future of the 49 percent stake
is on hold, it is encouraging that the GOS is working with
the Transpetrol board and at least considering taking action
on their own. Improving the pipeline is in the interest of
both the Slovaks and YI, so there is no reason either should
continue to wait for a final resolution in the sale of the
Yukos stake. End Comment.
VALLEE