Morgan Stanley’s (MS:US) sale of its physical oil unit to OAO Rosneft (ROSN) hasn’t been submitted for regulatory approval, and the companies will probably wait until tensions cool after the U.S. sanctioned Rosneft’s chief, according to a person with knowledge of the situation.
The deal would almost certainly be rejected if submitted now to the Committee on Foreign Investment in the United States, or CFIUS, said five people involved in previous national-security reviews, asking not to be identified because they aren’t directly involved in the transaction. The U.S. announced yesterday that Rosneft Chief Executive Officer Igor Sechin is on a list of people facing sanctions.
Regulatory resistance could threaten a sale that addresses concerns held by Morgan Stanley’s own banking regulators, who are considering whether to limit banks’ ownership of physical-commodities operations. Even if sanctions aren’t levied directly against Rosneft, clients’ hesitation to do business with the Moscow-based company may harm the value of the unit it’s buying.
“Just the threat of the U.S. sanctioning Igor Sechin might throw off this deal,” said Amy Myers Jaffe, executive director of energy and sustainability at the University of California-Davis. “That’s the power of these sanctions.”
Mark Lake, a Morgan Stanley spokesman, declined to comment on whether the New York-based firm has sought approval from CFIUS, an interagency committee headed by Treasury Secretary Jacob Lew. Holly Shulman, a CFIUS spokeswoman, also declined to comment.
The deal is being carried out according to a schedule agreed on by the companies, including submission for regulatory approval, a Rosneft press official who asked not to be identified in line with company policy, said by e-mail. Rosneft sees the deal closing in the second half of this year, he said.
CFIUS reviews the national-security implications of transactions that could result in a non-U.S. citizen controlling a U.S. business. Rosneft is state-run, and Sechin is part of President Vladimir Putin’s inner circle.
While escalating tensions between the U.S. and Russia over the crisis in Ukraine may make a deal politically untenable, the lack of hard assets such as pipelines should allow for approval if the situation is resolved, said the person, who asked not to be identified because the process isn’t public. The parties aren’t ready to submit the transaction for approval even aside from the sanctions, the person said.
CFIUS conducts a 30-day review to determine if any national-security concerns arise from a transaction, according to its website. While the panel can initiate an investigation that may take an additional 45 days, “the preponderant majority of transactions” are decided in the initial period, according to the website.
Morgan Stanley has said it expects the deal to be completed in the second half of this year, giving it as many as eight months to win approval. Chief Financial Officer Ruth Porat said yesterday that the bank’s plans haven’t changed.
“Our view is that we’re very much on track for closing in the second half of this year, that’s what we’re focused on doing,” Porat said in a Bloomberg Television interview. “It’s obviously subject to regulatory approval.”
The Federal Reserve is weighing more limits on banks’ trading and warehousing of physical commodities as Congress scrutinizes potential dangers to the financial system, conflicts of interest and manipulation in those markets. The potential mixed messages from Washington on the sale lead to “a curious situation,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co.
“This one is pure politics -– one theme is punish the banks by forcing them to sell businesses, the other theme is pressure the Russian government,” Hintz said. “I guess we will soon find out who is more unpopular on Capitol Hill: Wall Street bankers or Vladimir Putin. It’s a close call.”
Rosneft, the world’s largest publicly traded oil producer by output, agreed to the purchase in December, as political protests in Ukraine were heading toward an international crisis. John Mack, Morgan Stanley’s former chairman and CEO, was named to Rosneft’s board last year.
Porat, 56, has pointed to benefits of the Rosneft deal as commodities-trading revenue slumped in recent years and the capital needed for the business climbed. Morgan Stanley’s return on equity (MS:US) would increase with the sale, she said in January, adding that the oil-merchanting business broke even last year with $4 billion of risk-weighted assets.
Morgan Stanley has set a goal of a 10 percent return on equity in the fixed-income and commodities business, and said low returns in commodities and interest-rates-trading units kept it from achieving that level of profitability in 2013. Risk-weighted assets determine how much capital a bank must hold against certain activities under global rules set by the Basel Committee on Banking Supervision.
The business being sold includes oil terminal storage agreements in many countries; physical oil inventory and related purchase, sale and supply agreements; freight shipping contracts; and a 49 percent stake in Heidmar Holdings LLC, which manages about 100 oil and chemical tankers.
It also includes about 100 front-office executives in the U.S., U.K. and Singapore, or one-third of Morgan Stanley’s total commodities front-office personnel, the bank said in December. That number could fall as employees fear joining a firm that clients will be reluctant to deal with, said Jaffe at the University of California-Davis.
“People are going to be quite cautious about undertaking any new deals or transactions with Rosneft,” said Jason Bordoff, who heads Columbia University’s Center on Global Energy Policy and is a former energy adviser to the Obama administration. “Even though there’s some technical ambiguity because Rosneft itself wasn’t sanctioned, companies will be careful because it’s still early innings in this process. There are a number of other steps that could be taken to escalate sanctions.”
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