UNCLAS TALLINN 001014

SIPDIS

SIPDIS
SENSITIVE

STATE FOR EB/CBA
STATE PASS USTR LAURIE MOLNAR

E.O. 12958: N/A
TAGS: ECON PREL EFIN KIDE EN
SUBJECT: ESTONIAN RAILWAY DEAL HEADING INTO FINAL PHASE

REF: A) TALLINN 373 B) TALLINN 437 C) TALLINN 835


1. (U) Summary: On November 10, the Cabinet approved the
GOE's re-purchase of Baltic Rail Services' (BRS) majority
stake in Estonian Railways (ER). Although some Ministers
and Members of Parliament have voiced public concerns over
aspects of the deal, parliamentary approval is expected
before the end of the year. End summary.


2. (U) On October 18, BRS and the Ministry of Economy
agreed on the framework terms of a deal to sell BRS' 66%
ownership in ER back to the GOE for EEK 2.35 billion (USD
192 million). In addition to the sale price, Min Econ
agreed to pay BRS a dividend payment of EEK 150 million
(USD 12.2 million). The deal included provisions for both
sides to drop all outstanding legal claims (discussed Ref
C). On Friday November 10th, the GOE cabinet approved the
repurchase agreement. However, two cabinet members have
subsequently spoken out against the agreement. Minister of
Justice Rein Lang has stated that he thinks the agreement's
requirement that the parties drop all legal claims may
violate Estonia's Law of Obligations Act. This law
stipulates that sellers must give a three-year guarantee on
the goods they are selling. Finance Minister Aivar Soerd
has expressed his concern that the agreed upon price is too
high.


3. (U) The Estonian parliament now must approve both the
agreement itself and the funding for the purchase. This
will have to be done within the framework of a
supplementary budget for 2006. Heido Vitsur, an advisor to
Economy Minsiter Edgar Savisaar told us he is hopeful that
the parliament will pass the necessary budget measure
before the end of the year. The deal currently rests with
the parliament's Economic Committee, whose chairman Mart
Opmann has expressed his own reservations about the price,
and has invited Savisaar and Soerd to explain the deal on
Monday November 20. The full Parliament is scheduled to
discuss it on November 22.


4. (SBU) Senior ER officials continue to stress to us that
the transaction must be finalized by the end of the year or
it will lose the support of BRS's management and
shareholders. Christopher Aadnesen, Managing Director of
ER told us that while he does not think any of the major
parties in the GOE coalition oppose the deal, the longer it
takes to finalize it, the more incentive BRS has to simply
wait for resolution of the arbitration cases.


5. (SBU) Comment: The saga of the GOE's repurchase of the
railway has been protracted and at times rancorous, to be
sure. With Parliamentary elections coming in March 2007,
some politicking is understandable, but momentum still
seems to favor approval of the deal. End Comment.

WOS