LONDON/MOSCOW Morgan Stanley (MS.N) has sold the majority of its global physical oil trading operations to Russian state-run oil major Rosneft (ROSN.MM), becoming the latest Wall Street firm to dispose of a major part of its commodity business.
The deal represents a bold move into the U.S. market by Russia's top oil producer, which is headed by Igor Sechin, a powerful ally of Russian President Vladimir Putin. The Russian state owns almost 70 percent of Rosneft.
The deal includes more than 100 traders and shipping schedulers in London, New York and Singapore, over $1 billion worth of oil, and the bank's 49 percent stake in tanker company Heidmar.
The terms of the deal were not disclosed. Morgan Stanley said it was not expected to have a significant impact on its financial results.
The purchase will not include Morgan Stanley's oil storage, pipeline and terminalling firm, TransMontaigne Inc., which may help avoid significant scrutiny of the deal in Washington.
The United States has often been hostile to state-owned companies from countries such as Russia and China buying up U.S. energy and infrastructure assets.
News of the deal raised alarms in Washington. Senator Edward Markey, a Democrat who is a member of the Senate Committee on Foreign Relations, called on the U.S. government to "closely review" the deal to ensure that a Russian state-owned oil company "cannot manipulate our markets and harm the United States and its citizens."
Morgan Stanley plans to submit the sale for review by the U.S. Committee on Foreign Investment (CFIUS), an inter-agency executive branch panel that examines foreign investment for potential threats to national security, a source familiar with the matter said.
The sale is also subject to regulatory approvals in the United States, the European Union and certain other jurisdictions, the bank said in a statement.
The deal comes as U.S. relations with Russia have been strained in recent months over Moscow's decision to grant temporary asylum to U.S. spy agency contractor Edward Snowden and the conflict in Syria.
A spokeswoman at the U.S. Treasury declined to comment on the sale.
Morgan Stanley has been trying to sell or spin off its physical commodity business for over a year as it faces increased regulatory pressure and higher capital requirements. The bank said it would continue to look at "strategic options" for TransMontaigne.
Restrictions on proprietary trading introduced to prevent a repeat of the 2008 financial crisis have made commodity markets less attractive for many banks, with total revenues in the sector down sharply on Wall Street in the last five years.
Deutsche Bank announced two weeks ago that it was largely exiting commodities trading, while JPMorgan is selling its physical trading operations.
Goldman Sachs, which pioneered Wall Street's entry into commodity markets alongside Morgan Stanley almost three decades ago, has also looked at selling parts of its business, but has repeatedly said it remains committed to commodity trading.
"I think it's a confirmation of a trend that Wall Street is exiting the business," said Craig Pirrong, a finance professor at the University of Houston and an expert on commodity markets.
"Rosneft has indicated it was going to try to become more like an international player. This is a way for them to build out and become more like other oil companies."
In buying the operations, the Russian oil producer will get its first foothold in the United States and expand its modest trading business.
About 100 front-office Morgan Stanley personnel will transfer to Rosneft under the deal, including oil traders and shipping schedulers comprising about a third of the bank's total commodity team.
The bank will remain in other commodity markets including gas and power trading, agriculture and metals, according to a person familiar with the matter. The bank will also retain a client oil trading business that will be able to execute both physical and financial deals.
The majority of oil traders transferring to Rosneft are based in London, New York and Singapore but are expected to remain in their current cities.
The bank said in the statement it is targeting the second half of next year to complete the deal. Shares of Morgan Stanley closed up 0.2 percent at $30.93 on the New York Stock Exchange.
Rosneft became the world's biggest listed oil producer in March after the $55 billion acquisition of Anglo-Russian oil firm TNK-BP. Its oil output accounts for over 40 percent of the total in Russia, the global leader in crude production.
Rosneft has amassed assets abroad in the past few years, including refineries in Germany and Italy, but has bought no significant assets in the United States.
Rosneft has an oil trading division in Geneva, which helps supply its refining assets in Europe.
Antitrust experts don't expect the deal to hit any regulatory hurdles, but allowing a state-owned Russian firm access to oil terminals and the U.S. home heating oil market is likely to get a deep look from the U.S. government.
A Washington-based policy analyst said the government watchdog was sure to take a hard look, especially after it blocked a privately owned Chinese company, Ralls Corp, from building wind turbines in Oregon last year.
"If CFIUS flags wind farms to China, it's hard to imagine that commodity trading to Russia gets by without a blink," said Kevin Book, at ClearView Energy Partners, LLC in Washington.
(Reporting by Dmitry Zhdannikov and David Sheppard in London and Katya Golubkova in Moscow; Additional report by Jeanine Prezioso and Lauren Tara LaCapra in New York and Valerie Volcovici and Timothy Gardner in Washington; writing by David Sheppard in London and Josephine Mason in New York; editing by Keiron Henderson, Rosalind Russell and Leslie Adler)