USA VS ROSNEFT: PRESSURE UP
WSJ. Russia's intervention in Ukraine signals trouble for OAO Rosneft's bid to buy Morgan Stanley's oil-trading unit, according to people involved in the deal and others familiar with the U.S. government's approval process.
The proposed acquisition by Russia's biggest oil producer, which is state-controlled, needs U.S. government approval by the Committee on Foreign Investment. CFIUS, a secretive government body, weighs national security risks and can sink deals.
One person familiar with the deal said that if U.S.-Russia relations deteriorate further the companies would reassess whether they can proceed.
Rosneft is paying several hundred million dollars for the business, the person familiar with the deal said, adding the companies are still months from seeking official U.S. government approval.
A Rosneft spokesman said the companies "are working together according to an agreed schedule." Morgan Stanley said it wasn't deterred. "We intend to submit the transaction for all necessary regulatory approvals, and are targeting a close in the second half of 2014," a Morgan Stanley spokeswoman said.
The U.S. already has severed trade talks with Russia and threatened sanctions and other responses to Moscow's military intervention in Crimea. Rosneft is controlled by the government of Russian President Vladimir Putin, and the deal is liable to face opposition from within the U.S. Congress.
While the value of the proposed Rosneft-Morgan Stanley transaction is relatively small, it would allow Morgan Stanley to cut about $4 billion in risk-weighted assets from its balance sheet, helping free up capital for other uses or for shareholders, according to a person familiar with the plans.
Except in rare cases when the president takes action, CFIUS doesn't disclose its decisions or even the cases it reviews. Officials from agencies that make up the committee say they strive to base decisions on commercial factors and seek to avoid political influence. Still, since a foreign government controls Rosneft, U.S. law directs CFIUS to scrutinize the case at length, with higher-level officials weighing in unless an exception is granted.
Top administration officials would likely take into account broader Russian economic and security factors that go beyond the specific risks of the business being sold, according to former CFIUS officials and Washington lawyers who work with CFIUS.
"If it's turned down, it could look like they're bending to political will," said Mark Plotkin, a Washington lawyer who specializes in CFIUS cases at Covington & Burling LLP. "I think it's a bad case either way."
With the full takeover of what was formerly a joint venture with the U.K.'s BP PLC, Rosneft is the undisputed leader of the Russian oil industry, which is about the size of Saudi Arabia's. The Russian government owns a majority of Rosneft's shares and exerts significant control, with private investors holding minority stakes traded on stock exchanges. Exxon Mobil Corp. has a major Arctic joint venture with Rosneft, and BP is a big shareholder, complicating the international politics.
The apparent national security risks of selling an oil-trading business to an overseas company are relatively small, the former officials and lawyers say, especially since Morgan Stanley isn't including sensitive physical-delivery infrastructure in the proposed deal.
Russia is often accused by European energy importers of using its oil and gas supplies for strategic purposes. But it sends little fuel directly to the U.S., which has diverse suppliers, and thus Rosneft wouldn't likely be in a position to significantly affect U.S. supplies with or without the purchase.
With the Crimean conflict, however, top officials would likely come under pressure to reject the deal, even if it sends a message that the U.S. isn't open for certain kinds of foreign investment, according to two former senior officials involved in the CFIUS process. A green light could lead to criticism that the administration isn't single-minded in using economic levers against Mr. Putin, the former officials said.
Theodore Moran, a CFIUS expert and professor at Georgetown University's School of Foreign Service, said he doesn't think the committee would formally bar the deal, although it could become a problematic transaction, depending on potential sanctions against Russian officials and other factors.
Sensitive Russian deals have been approved before. In 2007, Evraz Group SA, controlled by a Kremlin-friendly tycoon, said CFIUS cleared its deal to buy Oregon Steel Mills Inc., which supplies armor plating for the U.S. military.
Rosneft and Morgan Stanley have been aligned on flashpoint deals before. In 2006, Rosneft won approval to go public on Moscow and London stock exchanges, despite criticism in the West that it had unfairly acquired the oil assets of Yukos. Rosneft has said it never violated Russian or British law. Morgan Stanley was in the group that coordinated the initial public offering, which raised $10.4 billion.
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