Rosneft bid to buy Morgan Stanley’s oil trading unit wins approval

Oil company head’s presence on sanctions list will complicate final decision. Source: Reuters

Oil company head’s presence on sanctions list will complicate final decision. Source: Reuters

Russian oil company Rosneft’s offer to purchase Morgan Stanley's oil trading business has won antitrust approval from the U.S. Federal Trade Commission. However, the future of the bid, which will now be considered by the U.S. Committee on Foreign Investment (CFIUS), may be endangered by Rosneft head Igor Sechin’s presence on the U.S. sanctions list.

Russian oil major Rosneft, the world’s largest oil production company,faces one last hurdle in its purchase of Morgan Stanley's global oil trading business. The deal, which was first announced last December, received the approval of the U.S. Federal Trade Commission on June 17 and now goes before the Committee on Foreign Investment in the U.S. (CIFUS) for review.

The committee includes numerous critics of Russia's policies toward Ukraine, and the inclusion of Igor Sechin, the executive chairman of Rosneft, on the U.S. list of sanctioned Russian officials could also factor in the final decision.

The transaction process

Vasily Ukharsky, a macroeconomic analyst at UFS IC, said that the CIFUS review process is likely to take about 75 days. “The committee includes a total of nine members and is chaired by the treasury secretary. Furthermore, the U.S. intelligence agencies will be involved in evaluating what consequences the deal will have on national security,” Ukharsky said.

“Sechin's presence on the list of sanctions could present a significant obstacle to obtaining approval for the transaction,” he added.

According to Anton Soroko, an analyst at the investment holding company Finam, in light of the recent tension between Russia and the United States, U.S. authorities may come to the conclusion that the transaction will increase the influence of the Russian state-owned company, which would run counter to Washington’s current policy.

If the committee is unable to make a decision on the deal during the investigation process, the final verdict will have to be made by the U.S. president, who will be given 15 days to make a decision. According to the latest CFIUS report covering the period 2008-2012, the committee received a total of 538 applications, out of which 13 percent were withdrawn at some point during the process.

However, the committee has usually approved applications from Russian companies. Between 2008 and 2012, the committee considered a total of 14 applications from Russian companies regarding the purchases of U.S. assets. One of these was the purchase of messenger service ICQ by Russian fund Digital Sky Technologies (DST), which, according to Forbes, is controlled by Alisher Usmanov, Russia's wealthiest man. DST bought ICQ from AOL in 2010 for $187.5 million. CFIUS paid special attention to the transaction because DST was planning to relocate ICQ’s servers to Russia, but the deal was approved.

The point of the transaction

“For Rosneft, purchasing Morgan Stanley’s unit is an excellent opportunity to further diversify the company's assets by increasing its presence in areas of business where the company is currently not very well represented,” Soroko said. Besides that, according to the analyst, the terms of the contract also state that the oil company will receive the unit's entire infrastructure.

“Morgan Stanley has no use for this business right now, especially because of the Dodd-Frank act, which puts significant limitations on the rights of investment banks to trade commodities,” Soroko said.

Soroko added that it would be logical to expect that the credit organization would want to sell that part of its business in its entirety and receive a substantial profit, instead of gradually cutting down on staff numbers and liquidating the asset without making any money from it.

The deal will include the business’s international network of oil storage tanks, oil and petroleum products reserves, as well as direct contracts with consumers, prepaid contracts, logistics contracts, and stocks and shares in relevant subsidiaries.

If the committee approves the deal, over 100 oil traders from Morgan Stanley offices in the UK, U.S., and Singapore will be transferred to Rosneft with the assets, along with about 180 managers from supporting departments.

The total sum of the deal has not been disclosed, but in March 2014, analysts from the U.S. company Platts estimated the figure to be about $400 million.

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