SLOVAKIA CLAMPS DOWN ON GAS PRICES

C O N F I D E N T I A L SECTION 01 OF 02 BRATISLAVA 000547

SIPDIS

STATE FOR EUR/CE L. LOCHMAN AND J. LAMORE

E.O. 12958: DECL: 11/19/2018
TAGS: EINV ECON ENRG LO
SUBJECT: SLOVAKIA CLAMPS DOWN ON GAS PRICES

Classified By: DCM Keith A. Eddins, for reasons 1.4(a) and (b).

SUMMARY
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1. (U) A new law aimed at Slovak natural gas monopoly SPP
gives the government a veto over price hikes. The law is the
latest installment in a long-running dispute over SPP's
attempts to raise consumer gas prices, in which Fico has
publicly lambasted SPP's foreign shareholders, who hold
management rights to the company. The French and German
shareholders and their embassies here have been strangely
quiet in the face of this latest action, which may indicate
either that there is some private understanding with the
government or that they simply see no point in engaging
politically. The company is said to be weighing legal or
regulatory action in Brussels. End summary.


NEW LAW MAKES PRICE HIKES DIFFICULT
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2. (U) The bitter contest between Prime Minister Robert Fico
and natural gas monopoly Slovensky Plynarensky Priemysel
(SPP) has become even more heated in recent weeks as the
government changed corporate law to keep SPP from raising
prices to consumers. The new law--drafted, passed, and
signed in barely a week--requires public utilities to call a
shareholders' meeting in order to change prices. According
to existing corporate law, a 52 percent majority is required
to pass any measure at a shareholders' meeting. The
practical implication for the partially privatized SPP (51
percent of which is held by the National Property Fund) is
that the government has a veto over price hikes.


3. (U) The law is seen as a major new development in the
long-running battle between the government, vocally led in
the press by Fico, and SPP. The gas company has asked for
price hikes several times in the past six months to recover
the cost of steeply rising gas prices during the first three
quarters of 2008. (Gazprom is the sole supplier of gas for
SPP.) The requests have requested increases ranging from 16
to 24 percent. In each instance, the network utilities
regulator, URSO, has responded to heavy and very public
government pressure by denying the request.


BLAMING THE FOREIGN CAPITALISTS
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4. (U) Meanwhile, Fico has publicly blasted the company for
daring to ask for a price increase. "They should share their
profits with the people," he declared at one point, referring
to the rich stream of profits the company derives from
transiting about 70 percent of the EU's stream of Russian gas
(about 20 percent of the total gas imports of the EU). When
the company pointed out that its gas distribution must be
independently viable and that cross-subsidies of the kind
Fico is demanding are clearly illegal in the EU, Fico
grandstanded further. "If they are not satisfied with their
billions in profits, then let them sell it back to us," he
said in October. Fico cunningly specified that the offer was
good for the original 2002 sale price of about $5.35 billion.



5. (U) If one were to judge only from the public rhetoric, it
would be impossible to guess that the government is the
majority shareholder in the company, which passes most of its
profits through to its three shareholders. Instead, Fico has
gone to great lengths to accuse the "foreign
shareholders"--E.ON Ruhrgas and GDF Suez--of being greedy.
(SPP's sales totaled almost $3.3 billion in 2007, with
profits of about $730 million.)


JUST ANOTHER POSE?
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6. (U) Most analysts have chalked up Fico's posturing to
populism, saying that he will try to hold prices until the
next election, and that he strikes a different tone in
private. This attitude has held until recently; the new law
casts a somewhat different light on the struggle. The
business press, economic think-tanks, and the German Chamber
of Commerce in Slovakia have answered swiftly, condemning the
new law as an infringement of shareholders' rights and a
violation of the purchase agreement, which gave management

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rights to the minority shareholders.

(C) Oddly, though, SPP has been slow to react. It has said
only that it is reviewing its options. The French and German
embassies here have not been asked for advocacy help, and
SPP's lobbyists have told us that there is no chance of
swaying Fico politically on this issue. (One source told us
that when the subject of SPP was broached in a private
meeting, Fico's hands shook and his face turned red with
rage.) Apart from legal measures, they say, the only hope is
to pursue a competition case in Brussels, on the grounds that
Slovak businesses benefit from the artificially low energy
prices.


COMMENT: COMBAT...OR KABUKI?
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(C) The new law may be a clever end-run, possibly a temporary
one, around a purchase agreement that grants managerial
control to the foreign shareholders. Because the law
concerns only utilities regulated by URSO, it carries few
direct implications for other foreign investors in Slovakia.
It would be reasonable to suppose that the foreign investment
community here would be worried, but that does not appear to
be the case. There is wide talk of a private agreement
despite the public theater; if true, it would not be for the
first time. SPP remains curiously passive and
uncommunicative, which may indicate either that something is
afoot or simply that it sees no money in keeping the public
spat going.

(C) It is clear, though, that Fico continues to play on the
popular appeal of anti-capitalist rhetoric--a pose he has
also struck with respect to the private pension pillar, to
the proposed privatization of the Bratislava airport, and to
price controls around the Euro transition at the end of this
year. To the extent that this posture succeeds--and to date
it has succeeded brilliantly--we can expect more of the same.

EDDINS