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INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHMO/AMEMBASSY MOSCOW PRIORITY 0596
RUEHVL/AMEMBASSY VILNIUS PRIORITY 0128
RUEHWR/AMEMBASSY WARSAW PRIORITY 3325
RUEABND/DEA WASHDC PRIORITY
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RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
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S E C R E T SECTION 01 OF 03 BRATISLAVA 000673 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 08/10/2016 
TAGS: ENRG ECON EPET PREL PGOV LO RS
SUBJECT: SLOVAKIA TO REPURCHASE TRANSPETROL SHARES FROM 
YUKOS 
 
REF: A. BRATISLAVA 657 
     ¶B. BRATISLAVA 618 
     ¶C. BRATISLAVA 613 
     ¶D. VILNIUS 727 
 
Classified By: Charge D'Affairs Lawrence R. Silverman for reasons 1.4 b 
) and d). 
 
¶1. (S) Summary - On August 9, Minister of Economy Lubomir 
Jahnatek reached an agreement with Yukos Finance 
representatives Steve Theede and Bill Shoff on a deal that 
allows Slovakia to repurchase the Transpetrol shares from 
Yukos Finance and thereby obtain greater energy independence. 
 A "share purchase agreement" for the sale was signed by both 
sides in Bratislava in the evening on August 9, though the 
final selling price and several other details still needed to 
be worked out.  Discussions continued on August 10 with a 
specific focus on measures to ensure that the agreement will 
hold up in New York and Netherlands Bankruptcy courts, as 
well as withstand the pressure that is expected to come from 
Moscow.  There is no guarantee that the deal can cross these 
hurdles, but the Slovak government appears determined to do 
so, a position it did not have only a week ago.  Special 
Advisor Steve Hellman was present throughout the negotiations 
and provided critical technical and strategic information to 
the GOS negotiating team. End Summary. 
 
 
SLOVAKS AND YUKOS CAME PREPARED TO CUT A DEAL 
--------------------------------------------- 
 
¶2. (S) Both the Slovak delegation and the Yukos 
representatives arrived at the August 9 negotiation with the 
goal of coming away with a deal for the GOS to repurchase the 
49 percent stake in Transpetrol from Yukos.  Minister 
Jahnatek recognized that for Slovakia to meet its four 
strategic criteria, outlined in Reftel A, its only option was 
for the state to repurchase the stake.  Jahnatek told us 
before the negotiations that Gazprom Neft had sent him a 
letter promising to meet all of the Slovaks conditions, but 
that he recognized that it was against the interests of the 
Russian oil and gas company to provide access to Caspian oil, 
and therefore he could not accept the sale to Gazprom Neft as 
a viable alternative.  Jahnatek made it clear from the 
beginning of the talks with Yukos Finance that there were no 
other options and that Slovakia would use its veto authority 
to negate any other proposed deals. 
 
¶3. (S) In separate conversations with Ambassador Vallee and 
Hellman prior to the negotiations, former Yukos CEO Steve 
Theede, who still represents Yukos Finance and Yukos 
International, noted that his preferred option was to sell 
the Transpetrol stake to Slovakia (Reftel A).  This is a 
practical position for Yukos Finance as Slovakia holds two 
cards that are critical for any deal to sell the shares. 
First, Slovakia maintains veto authority of any deal until 
April 2007, except in cases of bankruptcy proceedings.  This 
veto authority prevented Yukos Finance from finalizing a sale 
to Russneft in May 2006. 
 
¶4. (S) Second, and more important for ensuring that the 
present deal goes through, the Ministry of Economy never gave 
its consent to transfer the ownership rights for the 49 
percent Transpetrol stake from Yukos Finance to Yukos 
International in 2005.  Yukos Finance, the Netherlands 
subsidiary of Yukos Oil, initiated the transfer of the shares 
to Yukos International to protect them from eventual 
bankruptcy proceedings in Russia.  According to the 2002 
purchase agreement, Yukos Finance needs the approval of the 
Slovak Government to legally transfer the shares to another 
entity.  Yukos Finance sent three letters to the MOE in 2005 
requesting such approval, but never received Slovakia's 
consent.  According to Theede, until the GOS gives its 
written approval, Yukos Finance remains the "legal owner" of 
the Transpetrol shares, while Yukos International is only the 
"beneficial owner."  (Note: Yukos Finance promised to provide 
the GOS with a more detailed explanation of the difference 
between legal and beneficial ownership.) Getting Minister 
Jahnatek to sign a letter approving this transfer of shares 
appeared to be Theede's primary motivation -- it was the 
first issue he raised during the negotiations -- and the 
reason making a deal with Slovakia became his preferred 
option. 
 
 
THE DEVIL IS IN THE DETAILS 
--------------------------- 
 
¶5. (S) The discussion over the selling price, which was the 
easiest part of the whole negotiation, lasted less than five 
minutes.  Theede had received a written offer of USD 110 
million for the Transpetrol shares and needed to get a higher 
bid in order to convince any courts reviewing the case that 
he had gotten good value for the creditors.  (Note: Hellman 
heard separately that Gazprom Neft was now offering USD 120 
million for the Transpetrol shares, but Theede apparently did 
not have this offer in writing at the time of the 
negotiations.)  Theede opened with a suggested selling price 
of USD 115 million.  Jahnatek came back with an offer of USD 
111 million, which Theede accepted with the understanding 
that he would have to get the approval of his board.  Theede 
expected to have an answer by COB August 10.  (Comment: 
Jahnatek was careful not to tell us how high he could go, but 
we learned from other sources in the Finance Ministry that 
Jahnatek had authority to spend up to USD 120 million on the 
shares.  After spending more than an hour August 9 going over 
Transpetrol's financial statements with their Deputy CFO, 
Hellman determined that the company is in excellent financial 
health (with minimal debt and USD 73 million in cash) and 
that the 49 percent stake is a bargain at USD 120 million. 
End Comment.)  Discussion of the language in the Share 
Purchase Agreement, which was modeled on the Russneft deal, 
was similarly straightforward and non-controversial. 
 
¶6. (S) The real debate centered on how to structure the GOS' 
approval of the 2005 transfer of shares from Yukos Finance to 
Yukos International, and how to protect the deal against 
court orders in New York and bankruptcy proceedings in 
Holland.  After much discussion over two days, Minister 
Jahnatek signed a letter in the presence of Yukos's local 
representative, Jan Kridla, that provides the Slovak 
government's consent for the 2005 transfer of shares. 
Jahnatek did not give a copy of the letter to Yukos at this 
time, and based upon the verbal agreement made with Theede on 
August 9, will not do so until the deal is finalized and the 
GOS has taken possession of the shares.  Jahnatek is 
concerned that with this letter in hand Yukos International 
could turn around and begin negotiations with a third party. 
 
¶7. (S) Once an agreement is reached on the wording, Minister 
Jahnatek will sign a second letter later in the day on August 
¶10.  This letter states that the Slovak MOE will "not consent 
to the transfer of said shares to any party other than the 
Slovak Republic (represented by the Ministry of Economy) due 
to the clear decision of the Slovak Government to regard 
Transpetrol, a.s. as a strategic asset of the Slovak People." 
 The letter is designed to clearly acknowledge that Yukos 
Finance and Yukos International did not have any other viable 
options other than selling the shares to the Slovak 
Government. 
 
¶8. (S) Transpetrol must also get the approval of its General 
Assembly before the deal can be finalized.  The MOE stated 
its intention to put out a notice of the next meeting of the 
General Assembly on August 10.  According to the rules, the 
meeting cannot take place until 30 days after it is called. 
The GOS had been planning to call a general assembly so that 
the new government could appoint new board members. 
 
LEGAL AND OTHER EXTERNALITIES A THREAT TO THE DEAL 
--------------------------------------------- ----- 
 
¶9. (S) Minister Jahnatek is very aware that the deal to 
buy-back the shares will be challenged from several fronts. 
He told us August 10 that shortly after signing the deal the 
previous day "representatives of Russian interests" came to 
the MOE for discussions.  From his earlier trip to Moscow 
(Reftel B), Jahnatek realized that the Russians will pull out 
all of the stops to make sure that the Transpetrol stake 
returns to Russian control.  In response to our question as 
to how he would handle the pressure, Jahnatek noted that he 
had a "sweetener" that could be used with the Russians.  He 
did not provide any additional information on what this might 
involve. 
 
¶10. (S) The most immediate threat to finalizing the sale is 
the beginning of bankruptcy proceedings in the Netherlands on 
August 11. (Note: this is the main reason MOE is working to 
sign all agreements and accompanying letters by COB August 
10.)  Yukos Receiver, Russian Eduard Rebgun, is attempting to 
gain control of Yukos Finance through these proceedings.  If 
Rebgun is successful Yukos would be able to replace the board 
members of Yukos Finance as well as the Yukos' 
representatives on the Transpetrol Board, if Transpetrol is 
still legally owned by Yukos Finance.  (Note: The assets of 
Yukos International are protected even if Rebgun is 
successful.)  Jahnatek is certainly concerned about the 
possibility, but noted that according to the 2002 purchase 
agreement Slovakia would resume management control of 
Transpetrol in the event that ownership control of Yukos 
Finance is transferred in Bankruptcy proceedings. 
 
¶11. (S) The agreement between the GOS and Yukos must also be 
reviewed by U.S. bankruptcy judge Robert Drain in New York. 
As was the case for the sale of the Lithuania refinery 
Mazeikiu Nafta, the judge will review the deal to ensure it 
provides sufficient protection for the creditors.  Both MOE 
and Yukos Finance representatives expect Rebgun to argue 
against the transaction using letters of interest from other 
investors, of which there are many, to argue that Yukos 
Finance could have gotten a better deal. 
 
COMMENT 
------- 
 
¶12. (S) Minister Jahnatek approached the negotiations with 
much more confidence and authority than he had shown in 
previous meetings.  He clearly has the support of both Prime 
Minister Fico and President Gasparovic, and after much back 
and forth on which path to pursue, took a very firm line with 
the Yukos Finance representatives that there were no other 
options outside of selling the shares to the Slovak 
Government. This is a significant turnaround from the end of 
last week when Jahnatek and other senior GOS officials were 
resigned to Gazprom Neft's purchase of the shares and felt 
their was little they could do to influence the situation. 
 
¶13. (S) Jahnatek is aware of the threats to completing the 
transaction and is actively developing strategies with his 
staff to head them off. Jahnatek is clearly appreciative of 
the input provided by Hellman, and will continue to look to 
him and the U.S. Embassy for information as he faces the 
challenges to the deal in the coming weeks.  (Note: We have 
made it clear to all parties that we do not want to publicize 
our role as technical advisors, and to date none of the media 
accounts have mentioned our involvement.)  End Comment. 
 
Note: Special Advisor Steve Hellman did not have the 
opportunity to clear this cable. 
SILVERMAN