SLOVAKS LOOK TO RUSSIA FOR TRANSPETROL SOLUTION,

C O N F I D E N T I A L SECTION 01 OF 04 BRATISLAVA 000040 SIPDIS SIPDIS E.O. 12958: DECL: 01/18/2017 TAGS: ENRG ECON EPET PREL PGOV LO RS SUBJECT: SLOVAKS LOOK TO RUSSIA FOR TRANSPETROL SOLUTION, ENERGY SECURITY REF: A. 2006 BRATISLAVA 972 ¶B. 2006 BRATISLAVA 927 ¶C. WARSAW 121 Classified By: Ambassador Rodolphe M. Vallee for reasons 1.4 (B) and (D ) ¶1. (C) Summary - In stark contrast to the strong concerns about Russia's reliability as an energy partner expressed this past week throughout Central Europe, Slovak Economy Minister Lubomir Jahnatek believes the Russian-Belarus spat illustrates the need to strengthen ties with Moscow. Jahnatek has spent much of the past week defending the GOS's courting of Moscow, and publicly declaring his intention to finalize a deal with Russian officials for the 49 percent Transpetrol stake before Prime Minister Fico travels to Russia in late March. Jahnatek admitted to us privately January 18 that the GOS is unlikely to complete a deal since he has had no communication with Moscow or Yukos Oil receiver Eduard Rebgun since mid-November. He nevertheless continues to believe that the GOS has only two options, approving a sale to a Russian company or completing a GOS buyback of the shares from Yukos Finance, the only Dutch Yukos entity that Jahnatek considers as having a legitimate ownership claim on the Transpetrol shares. Jahnatek specifically excluded any deal with an third party, especially if the deal was concluded with Yukos International, which Jahnatek views as an illegitimate entity with no legal Slovak law claim to the Transpetrol shares, although he admitted to the press that there were conflicting Dutch rulings which make control unclear. Polish energy company PERN therefore can not expect GOS support of any deal worked out with Yukos International. ¶2. (C) Summary continued - While stressing that energy security requires enhancing ties with Moscow, Jahnatek also acknowledged that after the recent pipeline shutdown the GOS needs to do more to develop transit alternatives. The Minister is in touch with his Hungarian and Croatian counterparts regarding enhancements to the Adria pipeline and additional storage options, and also with Ukraine regarding the possibility of receiving Russian crude via Odessa Brody (and thus bypassing Belarus.) End Summary. RUSSIA ALONE CAN PROVIDE SECURITY OF SUPPLY... -------------- - ¶3. (SBU) With both the southern and northern spurs of the Druzhba pipeline shut off and officials from Central Europe and the wider EU calling on Russia to end the crisis, Economy Minister Jahnatek gave a press conference on January 10 expressing the Slovak government's support for Russia and highlighting the strong ties between the two countries. To drive home this point, Jahnatek stressed, somewhat disengenuously, that Slovakia "had been the last country to have its oil supply turned off." He stated that Prime Minister Fico is planning a trip to Moscow in late March, during which Fico would finalize a deal for the Transpetrol shares currently owned by Yukos. Fico's Russia trip was later confirmed by officials at MFA. Jahnatek stated that Belarus was at fault for the shut down, and noted that the GOS may have to consider alternatives, such as an Odessa-Brody option tied to Russia through non-Druzhba pipelines connecting to Odessa through southern Ukraine pipelines, which would bypass Belarus while continuing to bring cheaper Urals crude to Slovakia. ¶4. (C) During a January 18 lunch meeting with the Ambassador, Jahnatek reiterated that the only way to ensure security of supply, at least over the short term, was to maintain solid relations with Moscow. According to Jahnatek, true security of supply will come if only one partner (presumably Russian) has an interest in both supply and transit assets. The minister was particularly critical of Poland, blaming the Polish government's antagonistic relations with Moscow as the primary reason for the difficulties it is experiencing in both energy and trade negotiations with Russia. As had been the case in our previous meetings with him, Jahnatek showed himself fearful of Russian retaliation if the GOS were to take a more aggressive stance in negotiations. ...IF ONLY THEY WOULD COMMUNICATE WITH THE SLOVAKS -------------- -------------- ¶5. (C) Despite the public statements praising the close BRATISLAVA 00000040 002 OF 004 Russian/Slovak relations, Jahnatek admitted in private that he has made no progress in negotiations over the Transpetrol stake since November. The minister has not communicated with Yukos Oil Receiver Eduard Rebgun or with GOR officials to reconcile discrepancies between the deal agreed to with Putin and the negotiating position taken by Rebgun. Jahnatek claimed to have a written agreement from his November visit to Moscow, yet observed that "Russians are not always disciplined" and had not yet followed through on their commitments. He noted several complicating factors including the dismissal of Gazpromneft's CEO Aleksandr Ryazanov and his subsequent replacement by two officials and the fact that his counterpart, Russian Minister for Economic Development Narishkin, does not control things "from top to bottom." WATCH WHAT YOU EAT -------------- ¶6. (C) The biggest obstacle, outside of the legal complications in the Netherlands, was Rebgun. Jahnatek stated that Rebgun was playing a dangerous game and that ultimately one of three things would happen to him: he would come out with his true negotiating position, would be dismissed, or would "eat sushi," an apparent reference to the death of Litvinenko in London. Given these complications, Jahnatek acknowledged that he would not be able to complete a deal before Fico travels to Moscow, dismissing his earlier comments as essentially "throwing a bone" to the media. NO OTHER OPTIONS FOR TRANSPETROL -------------- ¶7. (C) In an interview on January 14, Jahnatek said that the easiest solution would be if Yukos Finance and Yukos International came to an agreement to sell the shares to the GOS, with the understanding that the money would be held by the Amsterdam court until the various legal cases were resolved. Jahnatek again showed that these comments were essentially for the media and not based on any ongoing negotiations. He told us that despite previous claims, the Russians (it was not clear if this was only Rebgun or other officials as well) have no intention of returning the proceeds from any sale of the Transpetrol stake to the Amsterdam court for distribution to the Yukos Finance creditors. Yukos International has always claimed that it would be willing to go along with a sale to any party, even a Yukos Finance sale to a Russian entity, as long as the price was right and the proceeds went to the Amsterdam court. ¶8. (C) Based on the continued interest by Polish energy company PERN in the pipeline (Ref C),Ambassador outlined a scenario for Jahnatek whereby a third party (we were careful not to mention the Poles given Jahnatek's earlier reaction) would negotiate a deal directly with Yukos International based on its beneficial ownership of the Transpetrol shares and present the completed deal, upon Dutch court approval, to the GOS for its approval. Such a hypothetical deal would give the Slovaks everything they want from the Russians plus potentially an additional ownership interest above the 51 percent now owned. If nothing else, the Ambassador noted, the existence of such a deal would improve the GOS' negotiating position with the Russians. Minister Jahnatek strongly opposed any consideration of such a deal, stating emphatically that the only two options were a Slovak buyback or a deal with a Russian company that would give the GOS management control. He characterized Yukos International as an "illegal shareholder" and stressed that the GOS could never do a deal with them because they were not recognized by Slovak law. Jahnatek did not envision any court decisions in the Netherlands changing his standpoint on this issue. ¶9. (C) Jahnatek understands that the Transpetrol deal is not about money or the partial ownership of a relatively insignificant pipeline, but that is about political influence in the region. He therefore does not believe that any party other than the Slovak government or a Russian company can complete a deal. (Note: we have heard from other sources that Smer party "investor" Juraj Siroky is also interested in buying the Transpetrol stake. Jahnatek is widely known to have "received" his ministerial position from Siroky, and likewise nominated several people close to Siroky to the Transpetrol boards. (Ref B) End Note.) ¶10. (C) As we had heard previously from State Secretary Ziga BRATISLAVA 00000040 003 OF 004 (Refs A and B),Jahnatek believes that the Slovak government is currently in a good position with regard to Transpetrol. The Transpetrol board, three of four of which are Yukos International nominees, is considered to be friendly to the government, and right now all of the interested parties are "chasing" the minister. Jahnatek views Slovakia as Russia's most reliable partner in the region, and claimed that recent increases in oil deliveries to Slovakia while other countries are experiencing declines confirmed his belief. He does not expect the loss of veto authority in April to significantly affect Slovakia's ability to influence the sale of the 49 percent stake in Transpetrol. DIVERSITY IN TRANSIT ROUTES FOR RUSSIAN OIL -------------- ¶11. (C) In addition to generating interest in Transpetrol, the recent shutoff of supplies also highlighted Slovakia's precarious position regarding its oil reserves. Based on EU requirements, Slovakia was required to have 73 days of reserves of oil and oil products as of last year, building to a minimum 90-day reserve by 2008. According to local energy analysts, Slovnaft and the GOS together have less than three weeks of crude reserves, and the remainder of the 73 days would be covered, at least in theory, by reserves of refined fuel products. Slovnaft, together with the GOS, would therefore have only a couple of weeks to arrange alternative supplies if Druzhba was shut down for an extended period. ¶12. (C) Jahnatek told us that since the shutdown he has engaged with his counterparts in Hungary, Croatia, Ukraine and Russia to discuss possible alternatives. Energy security was high on the agenda when PM Fico visited with the Croatian Premier Sanader in Zagreb on January 16. The primary options include obtaining crude through the Adria pipeline, reversing Odessa-Brody and bringing in Russian crude from Samara, and completing the connection to the Schwechat refinery in Austria. Over the short term Adria, which is technically capable of supplying Slovakia with 3.5 million tons per year (4.5 million tons if a pumping station is restored) compared with the 5.57 million tons used by Slovnaft in 2005, would likely be the first option. Given the difficulties in obtaining commercial contracts for oil within a short period, together with Croatian resistance to increasing the capacity of the pipeline, Jahnatek opined that the best option would be to increase reserve facilities in Croatia. The GOS is in the beginning stages of negotiations with Hungary and Croatia on a three country agreement to encourage MOL to build additional storage capacity in Croatia. ¶13. (C) The minister suggested that a more practical and likely less costly option would be to pursue a reversal of the Odessa-Brody pipeline so that Russian crude could come from Samara and bypass Belarus. We had heard the same idea from the local UkrTransnafta representative Mikulas Rakovsky, who was recently appointed to the Transpetrol supervisory board (Ref B). Rakovsky claimed that bringing oil from Samara to Odessa and reversing the pipeline to Brody would provide sufficient supplies (approx. 12 million tons/year) for Hungary, Slovakia and the Czech Republic, at a lower cost than options that would require shipping oil to a Mediterranean port. The head of UkrTransNafta is scheduled to meet with Minister Jahnatek in late January to discuss this proposal in more detail, and the topic is also expected to be on the agenda when PM Fico visits Kyiv on February 6. ¶14. (C) Constructing a link between Slovnaft and Schwechat remains a long-term goal; it will not address the more immediate need for alternative routes. Jahnatek confirmed that the government is moving forward with plans to undo the environmental legislation that had halted the Schwechat project in the past, but did not provide a timeframe for completion. In addition, he noted that Slovnaft would need to build additional storage at its site in Bratislava to address the shortfall in reserves. It is also not clear that MOL/Slovnaft will be entirely supportive of the Schwechat connection, since they view OMV as a competitor and the short-term benefit of the project is to provide low-cost Urals oil to OMV in exchange for the more nebulous Slovnaft benefit of future energy security. COMMENT -------------- BRATISLAVA 00000040 004 OF 004 ¶15. (C) Jahnatek is clearly intimidated by Russia and unwilling to take a stance that would be viewed negatively by Moscow. At the same time he does not want to give up on greater Slovak control of the pipeline, and understands that the GOS must actively pursue alternative transit routes, even if they are only alternative pathways for Russian crude. The Polish government and PERN must now recognize that GOS will not support an outside deal between PERN and Yukos International, and build this into their risk-assesment for negotiating a contract. Post remains willing to support such a deal and advocate, as appropriate, but is not optimistic that our engagement would lead to a shift in thinking by Jahnatek. That being said, as Post did in convincing Jahnatek to keep the now friendly Yukos International directors, the existence of a deal which has received some blessing from a Dutch court coupled with sweeteners to the Slovak government could be the momentum needed to change thinking here and would certainly give additional negotiating leverage to the Slovaks in any future engagement with the Russians. End Comment. VALLEE