2007 REPORT ON INVESTMENT DISPUTES AND

UNCLAS TALLINN 000499 SIPDIS SIPDIS STATE FOR EEB/IFD/OIA CAROLINE ROBERTS, EUR/NB KATHERINE GARRY, AND EEB/CBA HELSINKI FOR SCO BRIAN MCCLEARY E.O. 12958: N/A TAGS: CASC EINV KIDE OPIC PGOV EN SUBJECT: 2007 REPORT ON INVESTMENT DISPUTES AND EXPROPRIATION CLAIMS - ESTONIA REF: A) STATE 55422 B) 06 TALLINN 501 ¶1. (U) The United States Government is aware of one (1) previously disputed claim of U.S. persons against the Government of Estonia, which was resolved in January 2007. a. Claimants A and B. b. The dispute began in 2005. c. Claimants A and B were U.S. corporations that owned 27.88 and 5.46 percent, respectively, of Baltic Rail Services (BRS),an Estonian corporation which owned 66 percent of AS Eesti Raudtee, or Estonian Railways (ER). A Netherlands investment company owned 33.3 percent of BRS. ER operates a vertically integrated railroad network in the Republic of Estonia and is the primary rail freight operator in the country. BRS gained controlling stock interest in ER as a result of the Estonian Government's privatization of Eesti Raudtee in 2001. At that time, the Government of Estonia (GOE) retained a 26 percent stake in ER. The remaining investors in ER were Estonian nationals. ¶2. (U) Claimants A and B, along with their investment partners, alleged that the GOE had adopted a series of measures that substantially impaired the value of their investments. The claimants said that the political turmoil surrounding the company had decreased the market value of the investment to a 2006 estimate of USD 35 million (down from an estimated total U.S.- originated investment value of 135 million in 2004). ¶3. (U) On April 20, 2006, the Estonian Cabinet of Ministers took a unanimous decision to give then- Minister of Economy Edgar Savisaar the mandate to start the process of terminating the 2001 privatization agreement which had allowed the claimants to buy their share of the railway system. The claimants, through ER, initially attempted to resolve these issues through a series of cases in local courts and two arbitration claims before the Stockholm International Arbitration Court, by involving the Directorate General for Energy and Transport of the European Commission, and by bringing claims under the respective Netherlands and U.S. bilateral investment treaties with Estonia at the International Centre for Settlement of Investment Disputes (ICSID). The claimants also requested, and received, advocacy from the U.S. Embassy in Tallinn for a transparent and equitable resolution of the dispute which would respect the interests of all parties. ¶4. (U) In October of 2006, ER and the Ministry of Economic Affairs and Communication announced that they were in the process of negotiating a commercial re-purchase of BRS' outstanding shares by the GOE. By December, the terms of the deal were finalized, with both parties settling on a purchase price, and on the termination of all outstanding legal procedures underway at the time in arbitration or with the ICSID. In January 2007, the re-purchase of BRS' 66 percent stake in ER was completed by the GOE for a final price of EEK 2.5 billion (USD 192 million) ¶5. (U) The United States Government is not aware of any other outstanding claim of a U.S. person against the Government of Estonia. PHILLIPS