Western law firms in Russia

In today’s Gazette, I’ve reported the position of Moscow’s UK and US-origin law firms in fairly dramatic terms – that there is a threat to the future of these firms’ 1200-plus lawyers.

This wasn’t just a bid to get an eye-catching headline. Several international law firms privately admit they were taken aback by the speed of events following Russia’s annexation of the Crimea.

Each day brings new sanctions news, and Russia’s Duma is considering a bill that would make legal the confiscation of property, assets and accounts of European and American companies, including private ones, were the US to impose sanctions against Russia.

So how might things play out for these law firms and their in-house clients?

In the short-term, of course, many will actually be busier. As Covington & Burling partner Marney Cheek tells me: ‘As the situation continues to deteriorate, companies have some important strategic decisions to make quickly.’

Companies, Cheek says, should assess the remedies available under applicable contracts and investment agreements in the event of breach of contract by current Russian or Ukrainian partners or adverse government action that directly or indirectly affects their investments. ‘Companies also will want to evaluate whether their investments are structured in a manner that affords them the strongest protections possible under international law,’ she adds.  

The big fear, of course, concerns confiscation of EU and US-owned assets. That may prompt satellite litigation. But Moscow’s 20 leading oil and gas practices in US and UK-origin firms, while they have good disputes practices, are not primarily in Moscow for arbitration and court work. The reasonably large offices they have built up – the largest, Allen & Overy, has 150 lawyers – are driven by the corporate, joint venture, infrastructure and finance deals that the oil and gas industry has delivered.

Just as ‘western’ joint venture partners deliver the engineering capability to assist with extraction and exploration, so these lawyers provide the legal technology to make the sector viable.

Russia has form on arbitrary approaches to ‘ownership’ and rights in oil and gas. In 2012 BP succumbed to pressure to sell its 50% stake in TNK-BP to Russia’s Rosneft in return for cash and shares, and had exploration projects effectively blocked. BP’s situation had a resolution, but the episodes shook industry confidence in Russia. And that was at a time when diplomatic relations were significantly better.

As Marney puts it: ‘Most companies are trying to understand what might come next and are grappling with the legal, financial, and business risks involved. What is the risk that Russia will move forward with confiscations of Western company assets? What sectors might be most exposed? What are the risks of energy supply disruption?’

EU sanctions to date have been criticised as too mild, targeting a shortlist of fairly low-ranking officials. The US has looked bolder on paper – but has a comparably small book of business with Russia.

For a number of reasons such timidity may count for little when it comes to retaliatory actions.

Most important, Putin’s government has become incredibly thin-skinned about a lack of respect for Russia’s traditional sphere of influence. That is, perhaps, not just paranoia. The faults of Ukraine’s deposed government are also those of Putin’s Russia – and Putin clearly dislikes the precedent that sets. It comes against a background of strengthened central control of ‘Russian institutions’ (a stated policy).

Part of this process is the merger of Russia’s Supreme Arbitrazh Court, which hears commercial cases, with the less well-regarded general jurisdiction equivalent, the Russian Supreme Court. The Supreme Arbitrazh Court respected foreign arbitrations and judgments from the London Commercial Court, but it is the junior partner in the merger.

But keep an eye on those US sanctions too. The US book of business with Russia may be small, but when it comes to sanctions, and compliance with ‘long-arm’ laws like the Foreign and Corrupt Practices Act it wants businesses who have an interest or office in the US to toe the line. And unlike the EU, the US has already been willing to announce sanctions against a company – in this case a bank.

Finally, watch gas as the most vulnerable sector. As one energy lawyer tells me, Russia is vulnerable on the gas it sells, because gas is hard to store. If the EU wants to cause maximum harm as quickly as possible to the Russian economy, it would choose gas.

None of this bodes well. What seems to be lacking in the Russian government’s calculations in all of this is judgement based on commerce and economics. Its members are maybe playing for higher stakes. Right now the business of Russia is not business, and that has to be bad news for business lawyers.

Eduardo Reyes is Gazette features editor