Morgan Stanley & the Making of Rosneft

Morgan Stanley's John Mack chillin' with Putin back in the day.

The recent (re-)isolation of Russia after coming in from the cold after the end of the Cold War is having interesting repercussions for its Western financiers. From an IPE standpoint, the fate of the giant oil conglomerate Rosneft will be pivotal. Not only is it a gargantuan oil firm, but it is also a creation made possible through Western bankers providing the investment necessary to put it together.

Today's case in point is Morgan Stanley's involvement in the formation of modern-day Rosneft. It remains quite a reward for Igor Sechin's fealty to Vladimir Putin--the world's largest oil company by output is certainly nothing to sneeze at:

Putin and Sechin have a lot more to thank Morgan Stanley for. The American investment bank helped transform state-owned Rosneft from a business the Russian government failed to sell three times in 1998 into the world’s biggest publicly traded oil producer by output. Morgan Stanley played a key role in saving it from being acquired, and Rosneft hired three consecutive chief financial officers from the bank. In 2013, Putin approved Mack’s appointment to Rosneft’s board.

Since the Soviet Union broke up a quarter-century ago, Russia has become so closely entwined with the global economy that doing anything to unwind those ties -- or successfully impose sanctions for misbehavior -- is proving difficult for the U.S. and its allies, and awkward for western businesses that embraced Putin’s Russia. With Sechin and his oil company both under U.S. sanctions, a look at the courtship, marriage, and now separation between Morgan Stanley and Rosneft is a telling microcosm of this turnabout.

Indeed, while American trade relations with Russia are not especially large, chickens notwithstanding, investment is another matter as Western finance being limited to Rosneft and other state-owned firms closely aligned with Putin marks the end of an era:

Under the Putin regime, the line between business and government is often blurred, especially with state-controlled companies. As Rosneft expanded, in part by buying assets that Putin had forced an imprisoned political opponent’s company to sell, it became one of his favorite tools for extending Russian influence abroad.

“Rosneft was obviously not just an ordinary market participant,” said Daniel Treisman, a professor of political science at the University of California at Los Angeles and author of several books on Russia, most recently “The Return: Russia’s Journey from Gorbachev to Medvedev” in 2011.
“Sechin had been President Putin’s sidekick for years,” Treisman said. “This was a company with very good connections that was prepared to use them. I imagine the analysts at Morgan Stanley understood this.”

With the advent of a new Cold War, the U.S. barred Americans from doing business with Sechin in April, citing his “utter loyalty to Vladimir Putin -- a key component to his current standing.” Last month, the U.S. restricted companies from providing long-term debt financing to Rosneft, as Morgan Stanley and other western investment banks used to do.

The rest of the Bloomberg article delves into the nitty-gritty details of the Morgan Stanley-Rosneft relationship. Rest assured that Rosneft in its current form would not exist had it not been for Morgan Stanley providing the cash and legitimacy--both of which Rosneft has in rather short supply nowadays.