Sanctions on Gunvor's Russian co-founder put oil traders on guard

NEW YORK Thu Mar 20, 2014 9:26pm EDT

NEW YORK (Reuters) - Minutes after the U.S. government said Thursday it would punish the Russian co-owner of the world's No.4 private oil trading firm Gunvor SA with crippling sanctions, traders and bankers active in global oil markets began asking urgent questions.

Could the sanctions, which prohibit U.S. banks, individuals and companies from doing business with Russian billionaire Gennady Timchenko or firms he controls, possibly freeze the Geneva-based trading empire that Timchenko co-founded out of global commodity markets? Skittish counterparties and financiers scrambled for details, fearing they could be left exposed.

By the evening, initial concerns dissipated: in a surprise twist, Gunvor said Timchenko had sold all of his 44 percent stake in the firm to Swedish business partner and Gunvor co-founder Torbjorn Tornqvist a day earlier, easing concerns that the firm could be blacklisted.

Gunvor said the measure was taken "to ensure with certainty the continued operations" of its activities.

Timchenko, 61, was listed by Forbes as the 61st richest person in the world this month, with an estimated fortune of $15.3 billion, but Gunvor is hardly a household name.

Relative to its rivals like Vitol and Glencore, it has a minimal U.S. presence. The firm doesn't operate a trading floor in the United States and sends only modest volumes of oil here, although it does hold a stake in a Montana coal mine.

Even so, the fact that such a major player in world energy markets has been dragged into a growing political standoff over Ukraine is adding to market tension, with risks both for oil prices, if Russia were to retaliate by cutting exports, and trading relationships, if Western sanctions begin to target major suppliers.

"Anyone in the business looking out at the horizon suddenly see clouds that look very serious, even if they aren't anywhere close," said Kevin Book, energy policy analyst at ClearView Energy Partners in Washington, D.C.

"I am sure that everyone in the energy trading business is now considering the Iran sanctions template," he added.

According to more than a dozen energy market sources who spoke to Reuters, after the new U.S. sanctions against 20 Russian individuals were announced on Thursday, hand-wringing and harried phone calls ensued among banks, traders and U.S. government agencies scrambling to determine what may come next.

Another U.S. energy consultant said he received several calls from clients asking if sanctions will affect Russia's oil shipments. His response: that's unlikely for now.

The jitters reflected Russia's massive role in energy markets and the impact that any escalating sanctions could have.

Brent crude futures rose modestly on Thursday, by 60 cents a barrel to $106.45, with traders citing a new risk premium on prices related to the broader sanctions the U.S. imposed on Russian individuals on Thursday, and reciprocal sanctions Russia announced against Americans.

U.S. and European sanctions on Iran's oil shipments, related to the country's nuclear program, have cut the OPEC country's shipments and led Western oil traders to avoid business with Iran.

THE $15 BILLION MAN

In global oil markets, Gunvor is a giant that handles around 3 percent of the world's oil. Its counterparties and banks include Goldman Sachs and Vitol SA. It trades commodities on U.S. exchanges, and enters into derivatives and swaps transactions with the biggest players in energy and banking.

According to several sources who spoke to Reuters on condition of anonymity, some banks determined they would tread carefully in doing further business with Gunvor until receiving clarifications from the U.S. Treasury Department. One senior trader said U.S. oil companies may be especially cautious.

"We need a better understanding about how deep this will go," said Carl Larry, CEO of consultancy Oil Outlooks. "If you can't deal with Gunvor, that's potentially a lot of belly-up positions."

By late Thursday, a new Treasury statement indicated Gunvor should not be considered a sanctioned entity, as "only entities in which a designated individual or entity owns a 50 percent or greater interest are blocked by operation of law."

But Treasury did offer a caveat, advising U.S. individuals to have caution in doing business even with non-sanctioned entities in which a person subject to sanction has a "significant ownership interest," or over which a sanctioned individual may exert control.

A U.S.-based commercial lawyer familiar with sanctions developments said banks and oil traders were "getting more comfortable" with continuing business with Gunvor after the firm announced Timchenko's divestment, and following the Treasury statement.

One line in Treasury's description of Timchenko on Thursday may carry the potential to rankle the Kremlin and escalate tensions.

"Timchenko's activities in the energy sector have been directly linked to Putin. Putin has investments in Gunvor and may have access to Gunvor funds."

Gunvor and Timchenko have repeatedly denied Putin has any involvement in Gunvor, which called the allegation "outrageous."

SMALL U.S. PRESENCE

Although Gunvor markets millions of barrels of oil and refined products every day, including some Russian oil exports, the company doesn't ship much into the United States.

Based on U.S. Customs data compiled by PIERS for the last year, Gunvor imported at least 4 million barrels of oil products into the U.S. over the period, and an additional 1.1 million barrels of crude oil, which came mostly from Colombia.

The sanctions targeting Timchenko come after Gunvor reported last year that a subsidiary, known as Castor, faced a Department of Justice investigation into its oil trading activities.

It was unclear whether that investigation, in which Gunvor says it has cooperated, is still active. A spokesperson for prosecutors at the Eastern District of New York, which Gunvor said was conducting the probe, declined to comment.

(Refiles to fix typo in headline)

(Additional reporting by Dmitry Zhdannikov and Selam Gebrekidan in New York and Jonathan Saul in London; Editing by Jonathan Leff)

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