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C O N F I D E N T I A L SECTION 01 OF 03 BRATISLAVA 000613 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 07/27/2016 
TAGS: ENRG ECON EPET PREL PGOV LO RS
SUBJECT: TRANSPETROL: SLOVAKIA FEELS PRESSURE FROM ITS 
RUSSIAN BROTHER 
 
 
Classified By: Ambassador Rodolphe Vallee for reasons 1.4 (b) and (d) 
 
¶1. (C) Summary.  The new Slovak government feels under 
increasing pressure to strike a deal with a Russian firm on 
Transpetrol before Yukos International initiates bankruptcy 
proceedings, now scheduled to begin on August 10.  On July 
25, the same day that Yukos creditors decided to commence 
bankruptcy proceedings, the Slovak Ministers of Economy and 
Foreign Affairs traveled to Russia to negotiate with Yukos, 
Russneft and Gazprom.  The Minister of Economy met with 
Ambassador Vallee on July 27, and gave the impression that he 
believed he held a weak hand, and would have to give up his 
plans to buy back Yukos shares in order to achieve other 
objectives.  On further review, we believe that the Minister 
is giving the Russian position too much credit, and may be on 
the verge of making an unnecessary mistake.  End Summary. 
 
The Yukos Bankruptcy: What Does It Mean? 
---------------------------------------- 
 
¶2. (SBU) On July 25 in Moscow, Yukos International creditors 
rejected the company's proposed recovery plan since it could 
not repay its debts in the time alloted by law.  In the 
process, the Russian court valued the company's after-tax 
assets at $15.4 billion, less than half of what Yukos' legal 
team had claimed.  Steve Theede, CEO of Yukos, resigned from 
his post on July 20, saying that the process would be rigged 
by those intent on carving up the pieces of Yukos.  (Note: 
Theede's resignation is not official until August 1 -- it is 
unclear if he is still involved in company management during 
his last few days on the job.)  The decision clears the way 
for the Russian government to commence liquidation of Yukos 
assets, setting up the possibility of a firesale auction of 
Yukos assets to well-connected Russian oil interests. 
Liquidation proceedings, originally scheduled for August 1, 
were postponed (on July 27) by Russian courts until August 10. 
 
¶3. (SBU) It is doubtful, however, that any Russian court 
decision concerning Yukos International is legally binding 
for Amsterdam-based Yukos Finance, which actually holds the 
49 percent share in Transpetrol.  According to legal analysts 
with close knowledge of the case, attached liens on 
Transpetrol shares and any disposition of Yukos Finance and 
its subsidiary Yukos International would need the approval 
the Dutch court.  Any decision taken by Russian courts on 
August 10 would be subject to further review by Dutch courts 
later this year.  Experienced energy analysts suggest that 
Russian firms are trying to pressure Slovakia to reach a deal 
before August 10 because the Russians are worried about what 
the Dutch court will decide, and want to play on the new 
Slovak government's fears that bankruptcy proceedings could 
leave them with nothing. (see paragraph 9) 
 
Off to Moscow, Enter Gazprom 
---------------------------- 
 
¶4. (C) Also on July 25, Minister of Economy Lubomir Jahnatek 
and Minister of Foreign Affairs Jan Kubis traveled to Moscow 
to meet with Yukos leadership and various Russian businessmen 
and government officials.  These included separate meetings 
with Viktor Geraschenko, Yukos Chairman of the Board; Mikhail 
Gutseriyev, President of Russneft; representatives from 
Gazprom; and Sergei Narishkin, Minister of Economic 
Development.  Prior to these meetings, Jahnatek reportedly 
sent letters to all stating that any prospective partner 
needed to agree to the following four conditions and show the 
financial and technical capacity to make them possible: 
 
* Slovakia must re-acquire management rights to Transpetrol 
(Slovakia does not currently own management rights even 
though it holds a 51 percent share); 
* The existing pipeline must be extended to Schwechat 
refinery in Austria; 
* The pipeline must be made available for 
Odessa-Brody-Bratislava usage; 
* Pipeline capacity must be increased from 10.7 to 16 million 
tons per year. 
 
Jahnatek left Moscow the following morning without striking 
any deal. 
 
¶5. (SBU) Meanwhile Yukos and Gazprom began serious 
negotiations.  On July 26, Yukos International 
representatives in London announced that they had rejected an 
offer from Gazprom to buy a significant percentage of the 
company's holdings, most notably Yukos' shares in Gazprom 
Neft and Arcticgas, but also Yukos' 49% stake in Transpetrol. 
 Wire reports on July 27 indicate, however, that the two 
sides are close to reaching a deal, and some sources suggest 
they may have already done so.  According to one Russian 
newspaper, Gazprom valued Transpetrol at $105 million; 
another Russian newspaper said between $80 and $100 million. 
By comparison, in February Russneft had agreed to purchase 
Yukos' shares for $103 million before then-Minister of 
Economy Jirko Malcharek nullified the transaction. 
 
Perspectives from Slovak Government: Kondrot 
-------------------------------------------- 
 
¶6. (C) For additional perspective, Emboff met with Maros 
Kondrot, Chairman of Economic Committee in Parliament, on 
July 26.  Kondrot, like Jahnatek, is an ex-HZDS member who 
recently switched to SMER; the two are tied to many of the 
same financial backers and are quite close.  Kondrot believes 
that Slovakia must buy back its Transpetrol shares from 
Yukos, and sees it as an ominous sign that Jahnatek had 
traveled to Russia to meet not only with Yukos, but also with 
Russneft and Gazprom.  He said that Jahnatek was originally 
willing to go forward with the buyback plan negotiated by 
outgoing Minister Malcharek, but, after his personal lawyer 
had reviewed the documents, decided against this option and 
persuaded Fico to seek another solution.  Kondrot had not 
seen the exact details of the agreement but was told that the 
financial terms of the buy-back negotiated through Credit 
Suisse First Boston were unclear, suggesting that Slovakia 
would have only gained a back a fraction of the 49 percent 
share, with the rest going to private interests.  Based on 
Malcharek's close ties with Penta and Credit Suisse First 
Boston's long history with the company, it appears that Penta 
would have been the primary beneficiary.  Kondrot is 
presently in Ukraine, representing the Slovak government on 
the Transpetrol issue, where he is meeting with EU 
representatives. 
 
Perspectives from Slovak Government: Jahnatek 
--------------------------------------------- 

¶7. (C) On the afternoon of July 27, Ambassador Vallee met 
with the new Minister of Economy, Mr. Jahnatek, for the first 
time.  Jahnatek opened by listing the four conditions listed 
in paragraph 4.  He seemed to be rather frazzled by the 
pressure of the situation, and convinced he had only a 
three-day timeframe to strike a deal before August 1 (now 
extended to August 10) in order to attain some of the 
conditions he listed.  The Minister seemed to believe that we 
were meeting with him primarily to make the case for the US 
investor M.E. Zukerman Investments (MEZI), which had written 
him on July 13 to express interest in purchasing the 49 share 
in Transpetrol.  Jahnatek told us that he had received 
investment counseling from a London-based firm on the 
capabilities of MEZI, and had decided that the company did 
have not a financial position that made it viable to 
undertake the pipeline investments that the GOS requires. 
 
¶8. (C) At one point, after relaying USG goals of transparency 
and open access, Ambassador Vallee asked him why Slovakia 
couldn't just buy back the shares directly rather than work 
out a complicated deal with Credit Suisse or Gazprom. 
Jahnatek gave a resigned look and said, "It is a complicated 
situation.  Our Russian brother is sitting on the source." 
He spoke of the veto power that the Ministry of Economy holds 
on any Transpetrol deal, and lamented that this authority 
runs out on April 1, 2007.  He also spoke of Slovakia's 
nuclear fuel and gas contracts with Gazprom that run out in 
2008, and said that he didn't want to take any decisions that 
"maybe in six months would seem stupid."  In short, Jahnatek 
seemed resigned to the fact that he had a bad hand and that 
some sort of deal with Gazprom was inevitable and needed to 
be reached before liquidation procedures begin. 
 
 
Another View: Karol Hirman -- Why This Doesn't Make Sense 
--------------------------------------------- ------------ 

¶9. (C) We subsequently contacted leading Slovak energy expert 
Karol Hirman for perspective.  He believed that a lot of 
Jahnatek's reasoning was flimsy at best. Hirman noted that 
Russian firms have no incentive to give management rights 
back to Transpetrol, so the GOS is highly unlikely to receive 
such a concession from Gazprom.  Secondly, the Schwechat 
pipeline connection erquires the consent of Schwechat, which 
is not yet convinced of the economic wisdom of such a 
project.  Thirdly, unlike the situation in Ukraine, Slovakia 
holds gas and nuclear fuel contracts at world market rates, 
so Slovakia has little to gain by forfeiting Transpetrol 
shares to Gazprom in order to get a future deal on gas 
contracts.  Also, Hirman agreed with our views on the strong 
position of the Dutch courts, and added that, according to 
the terms of the 2002 Transpetrol-Yukos transaction, if Yukos 
shares are turned over to a third party in a bankruptcy 
procedure without approval by the Slovak government, then 
management control of Transpetrol must legally revert to 
Slovakia.  Hirman said that Jahnatek was panicking due to 
inexperience, and believed that the Russians had done a 
number on him with their pressure tactics. 
 
Next Step 
--------- 

¶10. (C) In a scheduled meeting tomorrow morning with Foreign 
Minister Kubis, Emboff will press the point that Slovakia 
should not rush into a hasty deal with Russian firms on 
Transpetrol, and that a further review of options is needed. 
VALLEE