As Londoners struggled under a deluge of Siberian snow in February, the City played host to the Russian finance minister, Alexei Kudrin. Michael Pugh, a capital markets partner at Lovells who has been working in the Commonwealth of Independent States region since 1992, flew back from Moscow to the Guildhall for the occasion.
‘A significant part of my client base is foreign creditors who I’m in touch with on a daily basis. Everyone wants to know what’s happening in that part of the world,’ he says. In particular, they wanted to know of ‘any action to be taken by the Russian government in respect of Russian-owned entities in default over foreign debt obligations’.
The problems for City firms and their clients at home in the era of the credit crunch have been well documented in the UK legal press, and neither are they immune from the impact of the global economic downturn in eastern Europe and the CIS, a part of the world that has recently witnessed a period of rapid expansion.
The world’s largest law firm, Clifford Chance, has about 160 lawyers in Moscow and 110 in Warsaw, as well as offices in Prague, Budapest and Bucharest. The City giant last year joined an emerging trend of international firms targeting Ukraine and became the first magic circle firm to open a Kiev office.
Despite the recent growth, the watchword now appears to be caution. ‘Business in Moscow has obviously been affected by the fact that foreign capital has effectively flown out and not flown back in,’ acknowledges Michael Cuthbert, Clifford Chance’s managing partner for central and eastern Europe. ‘Merger and acquisition activity is down, but there is still business around.’ Cuthbert describes the firm’s business in Moscow as ‘about 40%’ corporate-related.
‘This crisis is real for everyone,’ says Lovells’ Pugh. ‘My department was like the front of the ship hitting the crisis head on.’ But Pugh insists that, as one area of work recedes, other opportunities appear. Lovells’ Moscow office claims to be very busy advising creditors on the law regarding defaulting Russian companies – hence his visit to the Guildhall. Over the past few months the firm has been ‘at least twice as busy as normal in terms of defaults and rescheduling of debts’.
On New Year’s Day, CMS Cameron McKenna merged the Moscow offices of three of its CMS network firms – CMS Bureau Francis Lefebvre, CMS Hasche Sigle and CMS Cameron McKenna – creating one of the largest international law firms in Russia with more than 130 lawyers, including 22 partners. The firm now has 450 lawyers based in central and eastern Europe.
John Hammond, chairman of CMS in Moscow, says the firm has been talking about the three-way merger for a year: ‘The offices add up to what we think of as a real powerhouse in the Russian market.’ How is the firm coping with the downturn? There has been ‘some falling away of big transaction work, the headline M&A deals, as well as banking and real estate projects which are thin on the ground’, Hammond admits. But there have been no redundancies so far, despite the three-way merger.
Technology and media firm Bird & Bird also began looking east, albeit on a smaller scale than the larger City firms. As of the New Year, the firm formally announced the opening of four new offices, in Prague, Warsaw, Budapest and Bratislava in Slovakia, all led by Stephen Kines, who joined Bird & Bird from Linklaters where he had headed its Czech office. Bird & Bird’s new offices are headed by Andrea Simandi in Budapest, previously the Hungarian head of IT at Linklaters; Tomas Novak in Prague, who arrives from Clifford Chance; Martin Maxa in Bratislava, who joins from Stanford University; and Maciej Gawronski in Warsaw.
Kines argues that it is a good time to set up new offices. ‘The one nice thing about launching a greenfield site in this current market is that you save a lot of money on headhunter costs,’ he says. ‘The CVs are flooding in. It is very much an employer’s market.’ The firm has 20 lawyers across the four new offices.
Client needsWhy expand the firm now? ‘There was a gap for client needs in central Europe,’ Kines says. ‘We get a lot of pan-Europe and pan-Asian mandates, where clients look to us to address their needs throughout the area.’ He says the firm ‘lost a major panel appointment for not having a central European network’.
So why not push further east? Kines, who ran Linklaters’ technology practice from Moscow, reports that Bird & Bird considered how far it should expand and drew the line at Poland. But, he adds: ‘It is possible that in a different economic environment I would be opening up the firm in Russia, Ukraine [and] Serbia.’
Local lawyers in the region report that City firms are struggling. Timur Bondaryev, senior partner at Arzinger & Partners Ukraine, reckons Clifford Chance slipped up. ‘They entered the market too late,’ he believes.
Arzinger & Partners is a member of an alliance of law firms represented in eight countries and 10 cities in the region, including Prague, Budapest and Bratislava. CMS was the first City firm to move into Ukraine two years ago, which was, according to Bondaryev, ‘more or less the right time’.
‘The legal market has been hit by the crisis and a lot of people have been fired,’ he says, adding that the market ‘exploded’ as a result of the keen interest of international firms who ‘overpaid’ local lawyers. ‘Now they aren’t able to pay people salaries and the people are [out] on the street. The market is stagnating.’
Bondaryev argues that diversified law firms with local experience are well placed to weather the economic storm, especially those specialising in countercyclical areas of work such as insolvency, litigation and dispute resolution. ‘More than 30% of our revenue comes from this stuff, and we are quite happy with that,’ he says.
Next month Arzinger & Partners will effectively detach from its European network, reverting to its independent firm status. Bondaryev explains that the firm, which has 38 fee-earners based at offices in Kiev and Lviv, has outgrown the other firms. ‘We have been growing every year by a minimum of 100% because the market has been expanding so quickly,’ he says.
Leading eastern European firm Magisters has also been in expansionist mode, and on a similar scale. The firm has 130 lawyers across Moscow, Ukraine, Belarus and Kazakhstan, as well as a network of ‘of counsel’ relationships in other parts of the region, such as Armenia, Azerbaijan, Georgia, Kirgizstan, Moldova, Turkmenistan and Uzbekistan. Kiev-based partner Andrew Mac joined Magisters from PricewaterhouseCoopers Ukraine in 2004. ‘We had 20 lawyers in Kiev back then,’ he says. ‘We have since gone up by 500% or 600%. We have to consolidate because we simply cannot keep growing at the rate we have been growing.’
This year the firm opened a London office, as well as an office in Minsk following a merger with Belarus law firm Beljurbureau. ‘I am sure the crisis will have an effect on us because of the deal flow. Banking and financial work is drying up and a lot of M&A work is coming to a standstill,’ Mac says, adding that ‘obviously’ the firm will not be ‘growing by leaps and bounds this year’ because the market will ‘simply not allow for it’.
Why is there a need for a London office? More than two-thirds of Magisters’ clients are from the US or Europe. ‘We definitely don’t want to practise law in the UK,’ Mac says. ‘Over the last few years more than half of our work has come from the City one way or another, whether it is referral work from the law firms that we work with or from banking clients. Most of the work that comes into Ukraine is based out of London, and most of the private equity firms and deal teams that handle Ukraine are based in London.’ London is ‘a natural place for us to be’, he adds. According to research by Thomson Reuters last year, the firm advised clients in deals worth $965.6m, almost two-thirds of the total value of M&A deals done last year in Ukraine.
Where does eastern Europe fit into a global law firm model like that of Clifford Chance? ‘One of the firm’s strategies is to increase its footprint in the emerging and developing markets such as Brazil, Russia, India and China: the BRIC countries,’ according to Cuthbert. Russia and central eastern Europe ‘almost straddle the gap between an emerging market and the developed market’, a market he says ‘is still viewed as a market that has long-term potential’.
This year is ‘going to be a year where everybody stands still’, says Cuthbert. ‘If you compare Russia to the rest of the world it obviously has a banking crisis at the moment, but it is essentially a commodities-based country. When there is some improvement, an increase in the price of oil that will increase the price of commodities, then I believe you will see a flow of foreign capital back into Russia.’
Regional sensitivityThe volatile political relationship between Russia and its former Soviet neighbours means lawyers have to navigate sensitive relationships between commercial clients and the authorities. The most recent high-profile example of this is the gas disputes between Russian state-controlled gas supplier Gazprom and its Ukrainian opposite number, Naftohaz Ukrainy, represented by Magisters.
Are there pressures on a firm practising both in Moscow and Ukraine? Mac does not comment, other than to say: ‘We have managed to maintain our integrity as lawyers in both capitals, Moscow and Kiev. It is recognised we’re legal advisers and not decision-makers, so we service our clients’ interests in the best way that we can.’
DLA Piper Rudnick acts for Gazprom. Constantine Lusignan-Rizhinashvili, DLA’s regional managing partner of Russia and the CIS, says: ‘Obviously that continues to be a fairly demanding client relationship, both in Ukraine and Russia.’ He reckons that between the CIS, Stockholm (for the arbitration work) and London there is a team of 20 lawyers working on issues flowing from the dispute.
DLA has offices in both Moscow and St Petersburg, as well as Kiev and Tbilisi, Georgia. There are 110 fee-earners across the two Russian offices. ‘We work in a very integrated fashion, but at the same time St Petersburg is a very domestic practice,’ says Lusignan-Rizhinashvili. Why have an office in St Petersburg at all? It has been ‘a very attractive place for inbound activity’, he replies. ‘Historically, it has been one of the more liberal investment regimes. It has had all sorts of incentives and generally a much better reputation than the regional Russian market for inbound activity.’
DLA claims to be the only international law firm in Georgia. In terms of the firm’s client base, Ukraine is ‘a lot more interrelated’ with the regional practice. ‘We share a lot more of the clients with Ukraine than we would do with Georgia,’ Lusignan-Rizhinashvili says, adding that ‘for obvious reasons’ Russian business ‘has not been very expansive in Georgia and vice versa in recent years’. But, he says: ‘There are multinationals we service in all jurisdictions that would be in Georgia, as well as Russia and Ukraine.’
So politically volatile was the legal dispute over Yukos, the now bankrupt Russian oil company owned by Russian billionaire Mikhail Khodorkovsky, that Yukos had problems recruiting its legal team (see box). ‘We had to handpick firms that were able to deliver for us in our jurisdiction but either didn’t wish to practise or weren’t practising in Russia,’ explains Yukos spokesperson Claire Davidson. Otherwise, she says they would ‘literally be told they could not work on the business by their own board of directors who feared for opportunities in Russia’. ‘You have to understand the market,’ she recalls. ‘They were advised, in the most opaque terms, not to take on our business.’ Davidson adds that the same pressures were brought to bear on all professional services firms, not just lawyers.
Deregulated marketThat said, the Law Society reports that there are few obstacles in the region for foreign lawyers practising and for law firms setting up. ‘Things have been fairly deregulated since the fall of the Soviet Union and there have been no restrictions on the provision of legal services,’ says Mickael Laurans of the Law Society’s international department. ‘Qualified lawyers, as well as local advocates, have been able to provide legal services. So, within a deregulated framework, it has been fairly easy for foreign firms and foreign lawyers to practise and open offices.’
However, Laurans notes that there has been discussion in the Russian parliament ‘as to whether the provision of legal advice issues be restricted to Russian advocates only’, plus talk of an Advocacy Bill in Ukraine. Both developments are being ‘monitored’, as Laurans puts it, ‘especially in the current economic crisis, where people might feel more protectionist’.
Yukos drags on
Yukos had been Russia’s largest oil company before being declared bankrupt, hit by multibillion dollar tax assessments and having its assets sold off. Mikhail Khodorkovsky (inset), the company’s former chief executive and once Russia’s richest man, has been in jail in Siberia since 2005.
Gardner, a solicitor at the European Commission of Human Rights and the British Institute of International and Comparative Law for more than 20 years, has been involved in representing the company’s management for the last five years. He says that so far there has been litigation in 17 different jurisdictions. The first tax assessments against the company – ‘the ones that caused the damage’ – were raised at the end of 2003 and the first application was made to Strasbourg in April 2004. ‘It was integral to the company’s response that these tax assessments were to be viewed through the prism of the European Convention on Human Rights and proceedings in the European court.’
The Yukos managers claim to be pursuing the application ‘for the benefit of thousands of US, European, Russian and other shareholders who lost billions as a result of the expropriation of the company’.
So what has the Yukos case to do with human rights? It is not so much that the former management is having its human rights infringed ‘as the company which has had its rights infringed’, Gardner says. ‘In other words, it is an assessment of tax that the company says should not have applied as a matter of Russian law. Nobody would have known it was going to happen and so it was arbitrary and unlawful.’
He adds: ‘There was an ulterior purpose which was – the company argues – that it was a disguised expropriation of property. There were these very large tax assessments one after another and a very draconian process of enforcement.’ The Yukos legal team reckon that the Strasbourg action ‘could result in the biggest claim ever submitted to this or any other court in the world’. Gardner says the tax assessment could be ‘in the order of $34bn to $37bn’.
The former Yukos chief executive Steven Theede called Yukos ‘the poster child for the business evolution that was taking place in Russia – then politics took over’. He said in February: ‘Tens of thousands of stakeholders saw the company destroyed and the trust they put into it and Russia was taken away with the single swipe of a revengeful political hand.’
Claire Davidson, Yukos spokesperson, reckons more than 20 law firms have been instructed around the world – not, she is keen to stress, because the company is profligate, but because of the controversial and multi-jurisdictional aspects of the litigation. While Yukos was made bankrupt in Russia, the company uses a fighting fund for its legal defence, with the approval of the Dutch court, from the sale of the non-Russian assets. In the UK, the work has been handled by white-collar crime specialists Byrne and Partners.
Davidson explains that the management team decided to adopt an approach of cherry-picking law firms to pursue the legal action rather than going for one law firm with a presence on the ground in Russia. ‘It would have been very difficult for them to take on our trade because they would have a Russian office and there would be fear at partner level that people would be jeopardising huge opportunities because the Russian Federation might not give business to them.’
Jon Robins is a freelance journalist
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