Rosneft headquarters located close to the Kremlin in Moscow Reuters

Russia's biggest oil producer Rosneft could pull out of a deal to buy Morgan Stanley's oil trading unit amid Western sanctions over the Ukraine crisis, Reuters news agency reported.

According to sources close to the state-run oil giant, the likelihood of the deal being completed is rated between "possible" and "highly unlikely," Reuters said.

Rosneft has struggled to finance its operations since it was targeted by economic sanctions by the United States and the European Union over Russia's behaviour in Ukraine.

Moscow annexed the Black Sea peninsula of Crimea from its neighbour in March and has been accused by Western leaders of fuelling the separatist rebellion in the country's east.

The deal in question relates to physical barrels of oil rather than contracts for future deliveries.

Morgan Stanley, the bulge bracket US bank held, has faced pressure from regulators to sell off its oil unit, which is deemed too risky for a major bank to own.

Rosneft and Morgan Stanley had initially reached an agreement in December but the geopolitical mood between Washington and Moscow has since soured.

The US and EU have imposed a range of incremental sanctions on Russia, in an attempt to de-escalated the fighting in eastern Ukraine. The targets of those sanctions have ranged from individuals with links to the Kremlin, to large companies, to entire sectors of Russia's economy.

Rosneft was barred from raising finance on American and European markets in July, a move that has forced the company to request aid from a Russian state investment fund.

While Rosneft has sufficient cash to buy the unit, but it would likely face trouble finding the credit required to run the operation, which would require billions of dollars.

Even if the company were able to source the credit required to operate the unit, questions remain over whether the sanctions would allow the deal to go ahead.