SLOVENE BUSINESS LEADER ASSESSES CHALLENGES OF

C O N F I D E N T I A L SECTION 01 OF 02 LJUBLJANA 000602

SIPDIS

SIPDIS

EUR/NCE FOR TYEAGER, DOC/ITA FOR CRUSNAK, EUR/EEB FOR
RGARVERICK

E.O. 12958: DECL: 09/17/2017
TAGS: ECON EINV ENRG EUN PREL PINR SI
SUBJECT: SLOVENE BUSINESS LEADER ASSESSES CHALLENGES OF
HIGH-PROFILE U.S. AND RUSSIAN JOINT VENTURE PROJECTS

REF: A. LJUBLJANA 416


B. LJUBLJANA 113

Classified By: CDA Maryruth Coleman for reasons 1.4 (b) and (d)

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Summary
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1. (C) At a lunch hosted by CDA September 12, Viktor Baraga,
chairman of the supervisory boards of Slovenian energy
company Petrol and gaming company Hit, discussed the problems
these two companies have experienced in advancing joint
venture projects with Russian and U.S. partners. He stated
that Petrol's joint venture with Lukoil has stalled because
in the year since Lukoil made an offer for Petrol shares, the
stock value has more than doubled and the Russians are
unwilling to pay the higher price. On Hit,s proposed
entertainment center deal with Harrah's in Western Slovenia,
Baraga warned that the project is entering politically choppy
waters. Given local concerns about the mega project and
resistance from many Hit employees, he predicted that
government officials and parliamentarians -- even those
privately supporting the deal -- will avoid the issue until
after the 2008 parliamentary elections. Baraga said Harrah's
should identify key regional leaders and engage them soon and
often in dialogue to overcome local opposition and dispel the
myth that the U.S. conglomerate will eat up Hit as soon as it
has a foot in the door. END SUMMARY.

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Lukoil Underestimates Petrol
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2. (C) During the lunch, Baraga discussed the overall energy
picture in Slovenia and focused in particular on the status
of Petrol,s 2006 joint venture agreement with Russian oil
company Lukoil. He stated that the deal has stalled due to
Lukoil,s arrogance and unrealistic expectations that it
could swoop into small Slovenia and buy Petrol cheaply.
Instead, in the year since Lukoil made an offer for Petrol
shares, the company,s stock price has more than doubled,
from 425 to 955 euros. Baraga reported that Lukoil had
previously bought a Serbian oil company and had lost a lot of
money in that venture and now is unwilling to pay a big price
for Petrol. (Comment: CDA had heard from an MFA contact
that a senior EU official had told the Slovenian Government
to back away from the Lukoil deal given the EU,s larger
concern about Russian control of European energy companies.
Baraga said he had not heard of any such EU intervention.
End Comment.)



3. According to Baraga, the deal between Petrol and Lukoil
is not dead yet, but the two companies are drifting farther
and farther apart as Petrol,s stock price continues to rise
and Petrol looks elsewhere for strategic energy partners.
Petrol's aim has always been to become a regional player by
diversifying its energy portfolio and increasing its vertical
integration. In recent months, the Slovenian food, energy
and tourism conglomerate Istrabenz has been actively buying
up available shares of Petrol, with an eye toward buying a
controlling stake in the company. Baraga acknowledged the
advantages for Petrol of an association with Istrabenz since
it used to own retail gas stations and is currently active in
the electricity generation sector. On September 14, in a
surprise turning of the tables, Petrol announced that it
would make a bid to buy a controlling share of Istrabenz.


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Hit/Harrah,s Deal Reaches Critical Juncture
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4. (C) Turning to the 1 billion USD Hit/Harrah's proposed
entertainment center project in the Nova Gorica region of
Western Slovenia, Baraga suggested that the deal is facing
difficulties because of a combination of Slovenia's regional
focus, inherent conservatism, and political expediency on the
part of Slovenian officials. He said that in private, Prime
Minister Janez Jansa, Finance Minister Andrej Bajuk, Hit
President Niko Trost and Nova Gorica Mayor Mirko Brulc all
support the project. (Comment. At a presentation by a Hit
management board member, an audience member stated that
Minister Bajuk does not genuinely support the joint venture.
End Comment.) But Baraga revealed that many Hit employees
feel threatened by the Harrah's deal and worry that they
could lose their jobs. He explained that with parliamentary

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elections coming up in fall of 2008, politicians are
unwilling to express public support for the project for fear
of being perceived to be "rolling over dead and selling
everything for peanuts to foreigners."


5. (C) In his efforts to move the project forward, Baraga
called an all-hands Hit board meeting for Monday, September

17. He has invited all stakeholders, including union
representatives, Mayor Brulc, Economic State Secretary Andrej
Sircelj, representatives of the government investment funds
KAD and SOD, and academic experts on gaming, to come and
express their views once and for all. Baraga hopes that this
transparency will force people away from self-promoting
rhetoric and to see the value of the project for the
Slovenian economy as a whole. When asked by CDA what
Harrah's next steps should be, he recommended that Harrah's
identify the most influential regional people and "show them
the end of the tunnel" (i.e., show them that jobs and revenue
will be gained, not lost). (Note. A Harrah's team just
arrived in Slovenia for discussions with Hit and local
officials in Nova Gorica. End Note.) Also, mayors and
parliamentarians need to be reminded that Hit will own the
controlling share -- 51 percent -- of the joint venture.


6. (SBU) The first major hurdle for the project will be in
late September, when the parliament returns from summer
recess and will debate the proposed revisions to Slovenia,s
gaming legislation (ref A). Currently, the New Slovenia
Party (NSi) and the Slovenian People's Party (SLS) have
publicly declared their opposition to the legislative
changes. Baraga was cautiously optimistic that the law will
probably squeak through parliament even without the support
of NSi and SLS, but he said the vote will be close and could
go either way.


7. (C) Viktor Baraga is a successful businessman in his own
right, having founded a pharmaceutical company. He told CDA
outright that he attained his lofty positions on the Petrol
and Hit boards because he is a childhood friend of PM
Jansa,s. Both grew up in the Dolenska region of the
country, an area that is often viewed as backward by other
Slovenians. It seemed evident that Baraga,s loyalty and
similar resentment of being underestimated by other
Slovenians had forged a strong bond with Jansa. Baraga
traveled to Australia as a citizen of Yugoslavia, spent ten
years there, and came back to independent Slovenia with dual
citizenship. Since 1992 he has served has Australia,s
honorary consul and is now the most senior honorary consul in
Slovenia.

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Comment
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8. (C) While both projects could bring needed foreign direct
investment to Slovenia, the progress of both are in serious
doubt. Economic experts such as European Bank for
Reconstruction and Development director Francois Lecavalier
(ref B) have urged the GoS to speed up the privatization
process and open up to foreign investment, but economic
conservatism and concern about being dominated by foreign
interests have constrained the Slovene government, business
sector and the public at large from supporting such
opportunities. END COMMENT.
COLEMAN