SLOVAKIA MOVES TO PROTECT "STRATEGIC ENTERPRISES"

UNCLAS SECTION 01 OF 02 BRATISLAVA 000464 SENSITIVE SIPDIS STATE FOR EUR/CE J. MOORE AND M. LIBBY E.O. 12958: N/A TAGS: ECON EINV LO SUBJECT: SLOVAKIA MOVES TO PROTECT "STRATEGIC ENTERPRISES" BRATISLAVA 00000464 001.3 OF 002 SUMMARY -------------- ¶1. (SBU) The Slovak Cabinet last week approved a controversial proposal by Minister of Economy Lubomir Jahnatek to enable the government to nationalize distressed companies, starting with the Novacke Chemicke Zavody (NCZ) chemical factory. The measure would allow the GoS to nationalize designated "strategic" companies with over 500 employees, whose shutdown would have a "wide social impact." The bill is being lined up for express passage through Parliament after being passed by the Cabinet on the same day it was introduced. The outcry from various business groups, who have criticized the bill's vague language and say they fear it impinges on private property rights, may move PM Robert Fico to step in and slow things down or soften the bill somehow. End summary. PROTECTING A PRICE-FIXER -------------- ¶2. (SBU) The proposal reflects the government's desire to protect NCZ's 1,500 jobs in the face of bankruptcy proceedings. The company is located in a relatively high unemployment area in central Slovakia; its financial troubles stem from the European Commission's July decision to impose a fine on a number of Central European chemical companies for price collusion. NCZ's EUR 19.6 million share of the EUR 61 million total fine--the largest share--forced the company to file for protection from creditors shortly after the judgment was handed down. NCZ is controlled by Cyprus-based Disor Holdings Ltd., having acquired its share from the holding company Penta Group. A number of observers see Jahnatek's proposal as a mechanism to bail out Disor from the public treasury and then re-privatize the company. ¶3. (U) Jahnatek's proposed measure, which now goes to Parliament for debate, would have distressed companies notifying government 120 days before liquidation. The government would then have the option of declaring the company "strategic," which would give it the right of first refusal for acquisition, presumably to pump cash into the enterprise to preserve employment or to avoid a domino effect on other large employers. Jahnatek has described the proposal as a temporary anti-crisis measure which would be in force only until the end of 2010. NOT OKAY WITH INDUSTRY -------------- ¶4. (U) Virtually every industry group and economic commentator in the country has registered disapproval of the proposed law, saying that it threatens private property rights in any number of ways. The Slovak-German Chamber of Commerce issued a strong statement on October 29, saying that because the draft law retroactively alters privatization agreements, it "is a bad signal to all investors.... With this step, Slovakia will seriously threaten its attractiveness as a place for investments...." Germany is a minority shareholder in SPP, Slovakia's only natural gas distributor and owner of an important transit pipeline handling 70% of Europe's imports from Russia. Prime Minister Robert Fico has on numerous occasions threatened SPP with re-nationalization for attempting to raise prices to consumers. ¶5. (SBU) Also among those protesting is the Federation of Employers' Associations, which criticized the government for not consulting with business before submitting the bill for approval. The association's president, Tomas Malatinsky, characterized the bill this way: "It disturbs the business environment and its content directly contradicts the principles of private law and the Constitution." Similarly, the National Union of Employers promised to demand the withdrawal of the bill. Even the government-friendly Klub 500, a group of 14 formerly state-owned enterprises that regularly belly up to the government trough, has offered sharp criticism of the bill. The U.S. Chamber of Commerce in Slovakia is formulating a critical statement, which it will likely release on November 3. ¶6. (U) Apart from attacking the very notion of nationalizing private businesses, critics have also gone after the bill's poor drafting. The criteria for designating a company "strategic" are said to be vague to the point of making any company vulnerable to takeover. Similarly, the idea of a government takeover as a right of first refusal is cited as very likely to violate a company's articles of incorporation, which often offer first refusal to its current shareholders. As well, the law's method of valuation for takeover candidates (to be determined by a "certified expert") is seen as peremptory and subject to BRATISLAVA 00000464 002.3 OF 002 abuse. Obviously, any single-source valuation will have enormous disadvantages compared with the usual market-based methods. COMMENT -------------- ¶7. (SBU) This proposed law is a typical first offer from Jahnatek, whose reflexes consistently steer him back to old command-economy solutions: state ownership, centralized "strategic" decision making, protection of jobs and the status quo at any price. That it went through Cabinet quickly is no surprise, and we would ordinarily expect it to go through Parliament on an express schedule, allowing little time for public comment. The outcry from business interests, which is unusually uniform and loud, may slow down the much-abused express legislative procedures that Fico and his Cabinet clearly have in mind. While it is still possible that the government will push it through, we are mindful that Fico has yet to weigh in on the issue, and that he is not above suddenly withdrawing his support and leaving his minister twisting in the wind. We can only hope that he senses real opposition and will find a better way to rescue NCZ. EDDINS