ZUBKOV VISIT HIGHLIGHTS SLOVAKIA'S ECONOMIC TIES

C O N F I D E N T I A L SECTION 01 OF 03 BRATISLAVA 000160 SIPDIS SIPDIS E.O. 12958: DECL: 04/10/2018 TAGS: ECON ENRG PREL LO RU SUBJECT: ZUBKOV VISIT HIGHLIGHTS SLOVAKIA'S ECONOMIC TIES WITH RUSSIA REF: BRATISLAVA 35 Classified By: Ambassador Vincent Obsitnik for Reasons 1.4 b) and d) ¶1. (C) Summary - Russian Prime Minister Zubkov's April 3-4 visit to Slovakia primarily focused on strengthening the broader economic and energy relationship, but lacked a big announcement on gas or nuclear cooperation that many had expected. Trade between the two countries has increased considerably in recent years, but is still dominated by Russian energy exports. PM Fico has made improving relations with Russia a top priority for both political and economic reasons. His energy policy is based on the view that security is achieved by building and maintaining good relations with Moscow and seeking their concurrence on all energy-related decisions, an approach that is considered as out of date by most analysts and energy company representatives who view economic relations with Russia on commercial terms. Fico is nevertheless benefiting from the perception that he is balancing out the country's economic policies. End Summary. EMPHASIS ON ECONOMIC TIES LACKS SPECIFICS -------------- ¶2. (C) PM Zubkov's visit to Bratislava was billed as an opportunity to highlight the strong and growing economic and commercial ties between Russia and Slovakia. Trade between the two countries grew by 20 percent in 2007 to USD 6.5 billion, with Russia exports accounting for USD 5.1 billion due to its prominent position as an energy supplier. The trip follows a February visit by Russian Deputy Prime Minister Narishkin and PM Fico's May 2007 visit to Moscow. Economy Minister Jahnatek has been a regular visitor to Moscow during his tenure. Despite the build-up to the trip and expectations for significant announcements of new areas for cooperation, especially in the energy sector, the deliverables lacked specifics and did not break much new ground. Key initiatives outlined during the visit included: - GAS: In advance of the visit the media had speculated about a possible gas deal related to the ongoing negotiations between Gazprom and the Slovak Gas Company (SPP) for a long-term gas supply contract from January 1, 2009. Economy State Secretary Peter Ziga told Econoff on 4/7 that the GOS has hoped to sign a memorandum on long-term cooperation, which is not necessarily the same as completing a long-term commercial contract, but that the two sides had not been able to reach agreement in advance of the visit. Ziga did not indicate whether negotiations will continue towards such an agreement. - TRANSPETROL: Fico reiterated the Slovak Government's position that it is actively pursuing the 49 percent stake in the Transpetrol pipeline that is owned by the Netherlands-based Yukos subsidiary Yukos Finance. However, an article in the Russian daily Vremja Novosti on April 3 reported that Fico and Zubkov had agreed that if the GOS regains control of the 49 percent stake the shares would eventually end up in Russian hands. Ziga, who has been intimately involved in the Transpetrol negotiations, claimed that there are no such plans, noting that the first reports of such a deal came out before the Zubkov-Fico meeting. Other sources in the Economy Ministry have also told us that there is no such deal in the works. (Comment: GOS denials aside, flipping the asset to a Russian company after completing negotiations with Yukos Finance is certainly possible, though there are several reasons for the GOS to keep Transpetrol under their own control, as will be outlined in more detail in a Septel cable on recent developments in the Transpetrol negotiations. End Comment.) - NUCLEAR: Fico and Zubkov agreed to enhance cooperation in the nuclear realm. This could include nuclear fuel deliveries, disposal of nuclear waste, completing blocks 3 and 4 at the Mochovce nuclear power plant, and possibly cooperation on a new reactor at the Bohunice plant, although this last item was not mentioned specifically. Regarding contracts for nuclear fuel assemblies and completion of blocks 3 and 4 at Mochovce, Enel Slovenske Elektrarne's Communications Director Michael Bologna told Econ Specialist that the company "is not aware of any decision about Russian companies supplying technology or nuclear fuel to Slovakia." Ziga said that nothing could be done at Mochovce 3 and 4 until the European Commission finished an environmental review of the project. He also noted that his ministry will present criteria to the Government Council in two to three weeks regarding the proposed new reactor project, which is not expected to be completed before 2025. BRATISLAVA 00000160 002 OF 003 - URANIUM ENRICHMENT: The Russian side invited the Slovaks to join the International Uranium Enrichment Center in Angarsk, East Siberia. According to a nuclear expert at MOE, Slovak researchers would be trained at the enrichment center before returning to Slovakia. Canadian mining company Tournigan holds several licenses for uranium exploration in eastern Slovakia, and Russia is interested in providing technology and know-how for this project. This is a new proposal and the GOS has not yet developed a policy on the issue. - RAILWAY: Zubkov once again reiterated Russia's desire to extend the wide-gage rail tracks from Kosice to Bratislava with access to Vienna at an estimated cost of Euro 4.3 billion. The deal should be finalized in the fall, including arrangements for financing the project, with the goal of beginning construction in 2010 and completing the connection by 2014. GOS interlocutors noted that Ukraine still needed to be brought into the discussion. - CYCLOTRON: Russia offered to build a cyclotron or particle accelerator to be used for medical purposes. The technology will be provided by Russia as a payment for debt owed to the Slovak government. NATURAL ECONOMIC PARTNERS WITH GROWING TIES -------------- ¶3. C) It is logical that the visit would focus on commercial issues given that the economic relationship has expanded significantly in recent years, though it remains heavily biased towards Russia. Russian exports have expanded by 19 percent since 2005 to SKK 136 billion (USD 5.1 billion) while Slovak exports to Russia have more than doubled to SKK 32.2 billion (USD 1.3 billion). Despite the strong growth on the Slovak side, the trade deficit has actually increased by 5 percent over this period. The expansion of Slovak exports is based on increased manufactured exports and investments in the construction sector. ¶4. (C) Energy remains the key factor in the economic relationship due to Slovakia's almost complete dependence on Russia for oil, gas and nuclear fuel. This is primarily based on the historic fact that it is a major transit country for both gas and oil and relies on Russian technology for its five functioning 440 MW VVER reactors. The Dzurinda government privatized most of the energy assets during its second term from 2002 to 2006. Generally 49 percent of the energy assets plus management control were sold to private entities, while the GOS maintained a minority 51 percent stake. (The sale of Slovenske Elektrarne to Italian power producer Enel did not follow this model.) OLD FASHIONED APPROACH TO COMMERCIAL TIES -------------- ¶5. (C) PM Fico and Economy Minister Jahnatek have argued privately and publicly that the privatizations were a mistake and that the government should have a larger role in the economy writ large, and more specifically in strategic energy assets. The efforts to buy back the 49 percent stake in Transpetrol would allow them to achieve this objective for oil, which is not available in the other energy sectors due to EU regulations and a potential investment backlash. Separate efforts to pressure Enel, SPP and the regional energy producers to lower prices have met with partial success, but have required compromises by the government as well. This government-led vision includes the belief that business should continue to be transacted as it was under the former system, namely the means to obtain favorable treatment is close alignment with Moscow. Throughout our almost two years of discussions with Minister Jahnatek, he has regularly reiterated the need to get Russian Government concurrence on significant decisions related to pipeline discussions. Jahnatek even felt the need to get GOR permission to restart negotiations with Yukos Finance this Spring (reftel),despite the fact that Yukos Oil auctioned off its claim to the asset to American-led Monte Valle last August. At the time the GOR said the Slovak government could go ahead with the negotiations as long as the proceeds from an eventual sale are put into an escrow account until the Dutch legal disputes are settled. ¶6. (C) Post has spoken in recent weeks to a number of local experts on this topic. Sasha Duleba, a respected Russian expert at the Slovak Foreign Policy Association and regular interlocutor with Embassy officials, recently told EconOff that Fico's focus on rebuilding strong relations with Russia is based on his practical desire to ensure energy security and maintain price stability in Slovakia. Taking a view that BRATISLAVA 00000160 003 OF 003 is in line with Jahnatek's approach to energy issues, Duleba noted that given its dependence on Russia Slovakia has no choice but to remain on Moscow's "good side." Peter Weiss, a local academic and former head of the post-1989 Communist Party, argued the opposite view. His personal experiences in Moscow as a member of the Slovak government in the 1990's demonstrated to him, even at that time, that economic deals were just that - economic. He conceded however, that Slovakia might obtain a few small benefits from its pro-Russian position, but not on the major gas and nuclear deals currently under consideration. Head of Business Concept Development at EUSTREAM (the gas transit company that was formally part of SPP),Milan Sedlacek, has told us on numerous occasions that the ongoing gas supply negotiations between SPP and Gazprom are being conducted on a commercial basis, and that there is no real role for the Slovak government beyond exercising its rights as a minority shareholder. He expects negotiations with Gazprom to go down to the wire and understands that gas prices are likely to increase by approximately 10 to 15 percent over current rates, which are reported to fall somewhere in the range of USD 250 to 260 per 1000 cubic meters. Even Fico's energy advisor, Vladimir Praznovsky, recently acknowledged to EconOff that Moscow now views energy through a commercial lens, adding that the GOS is unlikely to receive "special treatment" by cultivating stronger ties with the Kremlin. COMMENT -------------- ¶7. Fico has been very clear in his desire to strengthen ties with Russia, a position that was highlighted by Foreign Minister Jan Kubis at a January news conference when he noted that, "Relations with Russia have considerably improved under this government." It is also evident in his stance on key foreign policy issues, such as missile defense and Kosovo, as outlined Septel. Although he is not able to point to specific achievements on the economic front, beyond the increase of trade that likely has more to do with the country's booming economy than any current initiatives, Fico is clearly attempting to magnify the relationship to show that he is responsible for renewing ties to the east. As is the case with the booming economy, he is benefiting politically from his good timing. In the end, he may not have to lower gas prices to benefit at the ballot box as long as he is perceived as having tried. End Comment. OBSITNIK