TWO FORMER OFFICIALS Ivo Sanader and Damir Polancec, the former Prime Minister and Deputy Prime Minister respectively, kept the negotiations with MOL a secret from fellow cabinet members Nacional has learned details of how the negotiations on Podravka and INA were led from two sources in Hungary, one of which is a high-ranking official of that country's oil company MOL, and the other a distinguished consultant. Polancec carried out the negotiations, which Sanader oversaw, and the Hungarians had direct contacts with the former Prime Minister.

Nacional has also gained confirmation that the former Deputy Prime Minister, Damir Polancec, worked out a deal for a 34.2 million euro loan the company paid out to Podravka via the OTP bank. Polancec struck the deal with top MOL officials during the negotiations between Croatian Government and the Hungarian oil company on a new distribution of management rights at Croatian oil company INA, and Nacional's sources say that the entire arrangement was agreed upon with the knowledge and consent of former Croatian Prime Minister Ivo Sanader.

What is more, they claim that the Hungarian negotiators were afforded direct contact to former Prime Minister Sanader at all times, and that he was aware of all of the details of the negotiations.

This information directly incriminates the former Prime Minister and his closest aide of having carried out illegal activities in the privatisation of INA, Croatia's largest company. The agreements that Polancec concluded with MOL, with Sanader's sanction, could see Croatia short-changed for in excess of 5 billion kuna. On the basis of revelations concerning the loan that MOL paid out to Podravka in March of last year, and the statements given by witnesses to the effect that it was Polancec in fact who closed the deal, it is to be expected that Polancec and Sanader will soon be questioned in person in the frame of the investigation.

But, besides the two former top Croatian Government officials, the leading figures at MOL with whom Polancec and Sanader hammered out the controversial transactions could also find themselves facing serious criminal charges. As Nacional has, namely, learned, the Hungarian judiciary has already launched an intensive investigation into the role the MOL leadership played in the case, and the top man at MOL, Zsolt Hernády, will be questioned in the frame of the investigation, and will have to give a convincing explanation as to why he gave Podravka a multi-million euro loan.

In the first quarter of 2009, namely, when the deal was concluded, MOL recorded operating losses of 507 million US dollars and worked with reduced liquidity, and it is therefore difficult to comprehend the business logic of spending 34 million euro in a situation like that to help a foreign company in a completely different line of business, such as Podravka, with whom it had no previous business connections. Nacional's Hungarian sources feel that, besides a police investigation, Hernády and the other members of the MOL management will be faced with strong pressure from the company's shareholders to explain the move.

The only logical reasons to justify the transaction would be the possibility of MOL acquiring additional INA shares, which is indicated in the contract, but since Podravka does not have, nor has it ever had, any such shares, Hernády will have to explain on what grounds the deal was concluded on.

On the other hand, this kind of financial transaction, which is based on a non-existent loan, contravenes MOL's corporate ethical business principles and European Union regulations. Legal experts Nacional consulted feel that the Hungarian company could be subjected to an investigation by European Union institutions charged with combating corruption and money laundering as a result of the contract.

Some new details have been revealed in the investigation into the privatisation of INA that show that Croatia suffered millions in damages in its relations with MOL, an example of which is the purchase of the Okoli natural gas storage facility. And while Prime Minister Jadranka Kosor has told the press that Government did not adopt any decisions in connection with the contentious Podravka, INA and MOL financial transactions, and members of cabinet say that Polancec was completely on his own in leading the negotiations with the Hungarian company, that is not entirely the truth.

An important role in the sale of the Okoli natural gas storage facility, which the state-owned Plinacro company purchased from INA on the basis of a deal brokered by Polancec, was played by Environmental Protection, Physical Planning and Construction Minister Marina Matulovic-Dropulic. Plinacro paid 514 million kuna for the Okoli storage facility. At the time the price was deemed too high by some experts, saying that it made no sense that so high a price be paid for a facility whose book value during the first phase of the INA privatisation was 11 times lower, at only 47 million kuna, especially considering that the key part of the storage facility is an oil well that belongs to the state anyways, and for which INA only had a concession.

In Government they have defended themselves from these accusations claiming that the price was the result of an estimate made by the well known PricewaterhouseCoopers consultancy firm, but it a lesser known fact that the due diligence on Okoli was also carried out by Plinacro experts who estimated the value of the storage facility at between 260 and 300 million kuna.

In the end Government, at the proposal of Marina Matulovic-Dropulic, accepted the higher estimate, with a provision that Plinacro would, in the event of a shortage of funds, pay only 300 million, while Government would cover the difference. In the final tally the entire sum was covered by Plinacro using a loan from the European Bank for Reconstruction and Development, but in the context of the new revelations the case could be re-opened with the aim of finding out why the storage facility was paid 200 million kuna over its estimated value. The case is only one of many indications that Polancec discriminated in favour of MOL in the deal on separating the natural gas operations from INA. Based on the contract, namely, Polancec only separated the natural gas storage facility and the subsidiary involved in importing natural gas from INA, but not natural gas production itself.

DAMIR POLANCEC AND ZSOLT HERNÁDY at the signing of the contract between Plinacro, INA, MOL and Croatian Government Which makes no sense at all, because it was in fact through production that INA for years covered the massive losses incurred by the obligation it had under law to sell imported natural gas in Croatia under procurement cost. By separating only the natural gas trading company the state effectively agreed to absorb massive losses, leaving the very profitable part of the natural gas business to INA. In the process Polancec undertook the obligation that Government would, by 1 July of this year, buy up from INA its natural gas trading and storage companies. If Croatia fails to do so, the contract states that the multi-year ban on MOL's free disposal of the Croatian company's shares, and the pre-emptive purchase rights Croatian Government has on these same shares, are void. Government recently succeeded in agreeing with MOL on a one-year postponement of that part of the contract, but that fact is that the state will in 2011 again be faced with the massive costs the transaction will entail.

Taking over the natural gas business the way Polancec worked it out, namely, means that Croatia, above and beyond the 500 million kuna paid for Okoli, will have to shell out at least another 750 million kuna for the natural gas in the storage facility and assume the millions in losses arising from the inability to sell the imported natural gas at its market price. This price regime is to last through to 2013, when the price of natural gas should be harmonised with those in the rest of Europe, and until then the country could lose at least 3.5 billion kuna on the trade of natural gas. All in all, separating the natural gas business from INA will cost the state from 4.5 to 5 billion kuna, and that still leaves the price of domestic natural gas open, since production will remain in the hands of INA, i.e. MOL.

These massive losses as the result of the agreements on INA shareholder rights, on natural gas operations, and on the purchase of the Okoli natural gas storage facility. All three agreements were signed on 30 January 2009 and the negotiations that preceded them were led by Polancec. Based on the shareholder agreement concluded by Polancec, MOL is effectively yielded complete control over INA management, even though the Hungarian company owns only 47 percent of the shares, against the 44 percent still owned by Croatia. A premium, usually from 5 to 10 percent of the company's market value, is customarily paid for this kind of discrepancy in the relation between ownership stake and management rights, but in this case the state earned nothing. As MOL paid the loan out to Podravka three months after the new shareholder's agreement was signed, it is obvious why the possibility that this was in fact a part of the premium is being investigated, especially given that the loan agreement cites the option of Podravka paying the loan off with INA shares, even though the company does not own these shares.

The Croatian judiciary is now investigating whether the final premium for the concessions on the INA takeover was to have been Podravka, since the money from the loan was used by the Podravka management of the time to cover the problems that had resulted from their unsuccessful bid to take over the company. On the other hand, also under investigation are all cases in which there have been indications in the past that the national leadership discriminated in favour of MOL. One such case was the ruling of the Croatian Competition Agency, which had to issue a permit for the new distribution of ownership rights in INA Polancec had worked out. Nacional published documents a month and a half ago from which it can be concluded that the agency's positive opinion of the deal was secured after strong political pressure was put on the staff of the institution and its president, Olgica Spevec.

Sources from the agency itself then confirmed for Nacional that the pressure had been exerted by "persons no longer a part of the executive branch of government," which pertained to Polancec and the former Prime Minister Sanader. Their pressure was key in the agency's decision to chuck a number of conclusions out of the final version of their report, which indicated that the transaction was illegal, as it would allow MOL to acquire an inadmissibly high share of the Croatian oil and oil derivatives market, and criticised the decision by Croatian Government to yield to MOL almost complete management rights in INA, even though 44 percent of the company was still in state hands, and only 4 percent more in MOL's ownership. In the end the agency's final conclusion of in the report was altered, which had ordered the Hungarian company to sell off its Tifon chain of petrol filling stations or one of INA's subsidiaries with a market share similar to Tifon's, and now only imposed on INA the obligation to sell its daughter company Crobenz, which had a many times lesser value and market share than Tifon.

OLGICA SPEVEC, head of the Croatian Competition Agency, pressured in connection with MOL This allowed MOL to continue to develop its operations via a company as successful as Tifon in the event it sold off its INA shares. This concession to MOL remains valid to this day, in the context of the latest revelations on the dubious circumstances in the privatisation of INA. The Croatian media speculate that, if criminal intent and actions are proven in the process, the legal grounds could emerge for the State Attorney's Office to launch judicial proceedings to quash the agreement concluded by Polancec. Rescinding this contract would mean that MOL would, until a new deal is brokered, practically be bereft of influence in the Croatian company, regardless of its ownership stake. It can be assumed that the relations between the company's top management and Croatian Government, and MOL's image, would sour, and if the Hungarians opted to sell the shares, they would continue doing business in Croatia via Tifon.

On the other hand, this development depends on whether the Croatian judiciary will succeed in proving irrefutably that there was criminal intent on the part of Polancec and Sanader in the negotiations between INA and MOL. The loan issued by MOL to Podravka is the latest in a series of indications that this is in fact what happened, and that the privatisation of INA was not led in the best national interest, to which the former Prime Minister has frequently referred in his public statements.

If evidence or testimony that would link them directly with the loan arrangement between Podravka and MOL also emerged soon, Ivo Sanader and Damir Polancec, once the two most powerful people in Croatia, and the top people at MOL, the largest Hungarian company, could face concrete charges of criminal activity.