VZCZCXRO5113
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHSQ #0082/01 0301525
ZNR UUUUU ZZH
R 301525Z JAN 08
FM AMEMBASSY SKOPJE
TO RUEHC/SECSTATE WASHDC 6981
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE 0179
RUEAIIA/CIA WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASH DC
RUESEN/SKOPJE BETA
RUEHSQ/USDAO SKOPJE MK

UNCLAS SECTION 01 OF 02 SKOPJE 000082 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EUR/SCA 
 
E.O. 12958: N/A 
TAGS: ECON ENRG PGOV PREL ETRD MK
SUBJECT: MACEDONIAN GOVERNMENT AND GREEK OIL COMPANY SIGN 
SETTLEMENT AGREEMENT 
 
Summary 
-------- 
¶1. (SBU)  The GOM signed a settlement with Hellenic Petroleum 
on December 31, 2007 to pay 40 million dollars in penalties 
for Macedonia's past violations of the 1999 privatization 
agreement of the OKTA oil refinery, which is owned and 
operated by Hellenic Petroleum.  The agreement also extended 
the deadline for OKTA to meet more stringent environmental 
standards.  The settlement reached between the GOM and a 
large Greek investor, which is partially owned by the Greek 
government, demonstrated that commercial matters can move 
forward despite political disagreement between Greece and 
Macedonia over the name issue.  End summary. 
 
A Bad Deal Violated 
------------------- 
¶2. (SBU) In 1999, under then Prime Minister Ljupco 
Georgievski's VMRO government, Macedonia sold the state-owned 
OKTA refinery to Hellenic Petroleum for $32 million dollars. 
The privatization process was non-transparent and widely 
viewed in Macedonia at the time as a corrupt transaction. 
The terms of the twenty-year agreement were also criticized 
as unfavorable to the GOM, including obligations that the GOM 
purchase from OKTA 500,000 tons of heavy fuel oil annually or 
pay a $27 per ton penalty, and that the GOM ensure a minimum 
of one million tons of oil flow through the 
Skopje-Thessaloniki pipeline annually.  The GOM also gave 
OKTA the exclusive right to import oil, with a duty of only 
one percent.  Current Prime Minister Nikola Gruevski was 
Minister of Trade at the time the arrangement was concluded, 
but claims that he was not involved in the negotiation or 
approval of the deal. 
 
¶3. (U) The GOM, under previous and current governments, 
subsequently violated the terms of the privatization 
agreement.  It consistently failed to purchase the minimum 
500,000 tons of heavy fuel oil or guarantee the one million 
ton throughput for the pipeline.  The GOM also allowed other 
companies to import petroleum products, violating the 
agreement's exclusivity clause.  In 2004, OKTA filed suit in 
the International Chamber of Commerce's International Court 
of Arbitration. In August 2007, the arbitration court ruled 
in OKTA's favor, awarding it $53 million in damages. 
 
Environmental Regulations As Bargaining Tool? 
--------------------------------------------- 
¶4. (SBU) The GOM appears to have used fuel environmental 
standards in an attempt to gain leverage in the negotiations. 
In July 2007 the parliament approved new fuel standards for 
unleaded and diesel fuels.  Then, in September 2007, 
following the August arbitration court ruling, the parliament 
revised the law to significantly shorten the deadline for 
implementing the new fuel standards.  OKTA officials told 
Econoff in early December that it would be impossible to 
upgrade the refinery in time to meet the new deadlines for 
implementing the tougher standards. 
 
A Settlement Both Sides Could Live With 
--------------------------------------- 
¶5. (SBU) On December 31, 2007, the GOM and Hellenic Petroleum 
signed a settlement agreement that included the following 
provisions: the GOM would pay $40 million in damages for past 
violations through 2007, OKTA would transfer 20 percent of 
the ownership of the Skopje-Thessaloniki pipeline to the GOM 
(as agreed to in the 1999 agreement), and the GOM would 
extend the deadline for OKTA to meet the higher fuel quality 
standards.  The settlement agreement addresses only past, but 
not any future, violations of the 1999 purchase agreement. 
The agreement includes a specific provision that "immediately 
after closing" of the settlement agreement the sides will 
appoint representatives to negotiate "the modalities for 
avoiding" future violations of the purchase agreement. 
Opposition members criticized the GOM for not resolving these 
future obligations before paying the damages, thereby 
weakening its bargaining position on the remaining issues. 
In the future the GOM is unlikely to meet the targets of 
purchasing 500,000 tons of heavy fuel oil or the one million 
ton throughput for the pipeline, while it would be 
politically and economically costly to forbid other companies 
from importing oil. 
 
¶6. (SBU)  Aristides Vlachos, the president of the Macedonian 
International Council of Investors, (primarily an association 
of Greek companies in Macedonia), told Econoff that the 
settlement agreement was carefully constructed so that both 
sides could claim victory.  The GOM's spokesperson claimed 
 
SKOPJE 00000082  002 OF 002 
 
 
that Macedonia would have had to pay $94 million if it had 
paid the full damages with interest for all past violations 
of the agreement, so he claimed the GOM had saved tax payers 
$54 million by agreeing to the $40 million figure.  Hellenic 
Petroleum was able to tell its shareholders, including the 
Greek government which owns approximately a third of the 
company's shares, that it had recouped 80 percent of the 
damages awarded by the arbitration court and also changed the 
unrealistically short deadline for new fuel standards. 
 
Comment: GOM-Greeks Continue To Do Business 
------------------------------------------- 
¶7. (SBU)  The settlement agreement demonstrated two important 
points: first, that the GOM was committed to paying damages 
for its past contractual violations, no matter how flawed the 
original agreement, and second, that the GOM and an important 
Greek investor were able to reach a mutually satisfactory 
agreement regardless of the political strains surrounding the 
Greek government's threat to veto Macedonia's NATO invitation 
if Skopje does not agree to resolve the name issue before 
then.  The GOM has the cash to pay OKTA the $40 million 
settlement, thanks to better-than-projected tax collection in 
¶2007.  Now, however, the GOM will face difficult negotiations 
to resolve its obligations under the remaining 11 years of 
the original contract. 
MILOVANOVIC