VZCZCXYZ0000
RR RUEHWEB

DE RUEHTL #0634/01 1910924
ZNR UUUUU ZZH
R 100924Z JUL 06
FM AMEMBASSY TALLINN
TO SECSTATE WASHDC 8812

UNCLAS TALLINN 000634 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EUR/NB, EUR/ERA, EB/CBA, EB/IFD/OIA FOR 
MTRACTION AND NHATCHER 
 
E.O. 12958: N/A 
TAGS: ECON PREL ETRD EN
SUBJECT: ESTONIA: RAILWAY DEADLOCK UNNERVING GOE 
 
REF A) TALLINN 00437 B) STATE 72713 and previous 
 
¶1. (SBU) Summary.  On June 22, Baltic Rail Service 
(BRS) sent an official response to the Estonian 
government's letter of April 27 alleging that BRS had 
violated the terms of the Estonian Railways 
privatization agreement and threatening to revoke that 
agreement.  In its letter, BRS categorically rejected 
all the government's allegations.  On June 30 the 
Ambassador met with Minister of Economy Edgar Savisaar 
to discuss BRS' reply.  The meeting was at the behest 
of Savisaar, and unlike the last meeting (Ref A), his 
mood was far more conciliatory.  At our Fourth of July 
event a day earlier, both Prime Minister Andrus Ansip 
and Minister of Foreign Affairs Urmas Paet told the 
Ambassador they would be pressing Savisaar to return 
to the negotiating table.  However, as mistrust 
remains high on both sides, it is uncertain if either 
party will initiate a resumption of negotiations.  End 
Summary. 
 
 
BRS RESPONDS 
------------ 
 
¶2. (SBU) In its June 22 letter, BRS forcefully 
rejected all of the GOE's four principal accusations 
of alleged violations as grounds for the termination 
of the Privatization Agreement.  First, BRS denied the 
Shareholders Agreement (SA) gave the GOE any right to 
transfer the value of the rails acquired under the 
1998 Foreign Aid Agreement.  Second, BRS argued that 
it fully met and exceeded its investment obligation 
under the SA (approximately $207 million).  Third, BRS 
denied the GOE's assertion that it never gave its 
prior consent to BRS to pledge six percent of the 
shares for securing the performance guarantee.  BRS 
said that although prior consent was given BRS has now 
terminated the pledge of shares.  Finally, BRS 
continued to maintain that the government's golden 
share is invalid under EU law and violates BRS' right 
for redress through the courts.  BRS ended its letter 
by completely rejecting the GOE's reasons for wanting 
to terminate the Privatization Agreement and 
speculating that the GOE's real motivation may be 
nothing less than the hindrance of the free movement 
of capital. 
 
A GESTURE FROM SAVISAAR? 
------------------------ 
 
¶3. (SBU) On June 30, the Ambassador met with Minister 
of Economy Edgar Savisaar, at his request, to discuss 
the railway issue.  Unlike previous meetings with 
Savisaar, where he confidently defended the GOE's 
actions and attempted to draw us into the details of 
the negotiations, Savisaar took a more conciliatory 
approach this time.  While briefly outlining BRS' four 
chief responses to the GOE's allegations and defending 
the GOE's actions, Savisaar spent most of his time 
asking us for advice on how he should respond to BRS' 
letter.  We reiterated Ref B points, and encouraged 
both the GOE and BRS to return to the negotiation 
table in good faith rather than continue their 
acrimonious dispute publicly through the press. 
 
¶4. (SBU) Savisaar seemed genuinely concerned over how 
to affect a rapprochement with BRS.  In contrast to 
the confidence displayed in his past public comments 
about the GOE's actions, Savisaar made a surprising 
admission, saying that "Our lawyers are confident that 
if this goes to court we will win, but I'm sure BRS' 
lawyers are telling them the same thing...and in the 
end, who knows who'll win."  Savisaar was clearly 
unnerved by the forcefulness of BRS' response and 
resistance.  He repeatedly complained of the lack of 
"give-and-take" in BRS' letter that would allow the 
sides to work towards a compromise.  However, Savisaar 
stressed that his door was always open to negotiate 
further. 
 
DIVISIONS WITHIN THE GOE? 
------------------------- 
 
¶5. (SBU) At our Fourth of July event on June 29, PM 
Ansip and FM Paet approached the Ambassador to discuss 
her upcoming meeting with Savisaar.  They assured her 
that they wanted a speedy resolution and would be 
pressing Savisaar to negotiate.  Whereas at our 
previous meeting with Ansip on the railway issue he 
stood shoulder-to-shoulder with Savisaar, it now seems 
cracks are beginning to emerge within the GOE on this 
issue.  It was clear to us that neither Ansip nor Paet 
were being kept in the loop by Savisaar. 
 
BRS SKEPTICAL AND PREPARES FOR THE LONG FIGHT 
--------------------------------------------- 
 
¶6. (SBU) In our discussions with BRS, both CEO of 
Estonian Railways Chris Aadnesen and Chairman of the 
Supervisory Board Edward Burkhardt expressed their 
suspicions over Savisaar's conciliatory gesture. 
Burkhardt said that he would not be surprised if 
Savisaar was laying some sort of trap.  While 
Burkhardt said BRS was always willing to negotiate, 
his legal team was already preparing its case for 
arbitration. 
 
¶7. (SBU) BRS is confident that its efforts through the 
Estonia media and lobbying in Brussels to apply 
pressure on the GOE are working.  Burkhardt said that 
on June 29 at the funeral of former Estonian 
Ambassador to Finland Priit Kolbre, Ansip spoke with 
BRS Deputy Managing Director Riivo Sinijarv for over 
twenty minutes trying to persuade BRS to show some 
flexibility.  Unfortunately, Burkhardt believes that 
"gap between what the GOE can realistically offer 
politically and what BRS would accept has grown too 
large."  Burkhardt was still confident that BRS would 
"win hands-down in court." 
 
¶8. (SBU) Comment.  Having threatened to revoke the 
railway's privatization agreement, the GOE now seems 
to be uncertain about whether or not to act on that 
threat.  Savisaar's conciliatory tone seems to 
indicate that the window of opportunity for 
negotiations is still open.  However, the level of 
mistrust between the parties has made both BRS and the 
GOE leery of taking the initiative to restart 
negotiations.  End Comment. 
 
WOS