6 December 2010
Russia stands with Brazil, India and China as an emerging economic giant. Luke McLeod-Roberts looks at how their legal systems compare
When Goldman Sachs global economist Jim O’Neill coined the ’Bric’ acronym in 2001, arguing that the future drivers of the global economy would lie in Brazil, Russia, India and China, the greatest legal market buzz among this grouping was arguably over Russia.
As well as not being held back by onerous regulatory barriers to entry, firms were attracted to Moscow by a wave of privatisations in the 1990s, expectation of project finance activity, upstream and downstream oil and gas work and the prevalence of international law - something that remains true.
“The domestic market’s dominated by international law firms because the most popular law in Russia is English law,” explains White & Case corporate partner Andrei Dontsov. “In M&A 80-90 per cent of large transactions use UK law. In IPOs it’s all done under international law. Loan agreements are often in English law.
So UK law advice is in big demand.”
“Foreign firms brought knowledge, [improved] standards and a sense of the bigger picture,” comments Olga Baglay, a litigation partner at Watson, Farley & Williams. But this has also led to market saturation, she believes. “There’s a tendency for things to be overcrowded in Russia.”
The legacy of international firms is far from black and white.
“Sometimes you see people from the big firms and they’re completely detached from the commercial reality,” adds Baglay.
One of the ways this detachment manifests itself is extreme caution when it comes to interpreting often contradictory laws, resulting in a lack of pragmatic advice.
“[International firms] are covering themselves a lot because of [their] insurance [arrangements] abroad,” says Baglay. “They point to the risks, but Russian law’s confusing and it’s difficult to provide a solution.”
There has also been an inevitable impact on salaries. There is still a gap between the kind of money offered at international and Russian firms, but there has been a degree of salary inflation on packages provided by Russian firms, such as was seen in the City when US firms arrived (see ’What lawyers earn in Russia’ table).
A decade later and the rates of economic growth and legal entrants have both slowed somewhat in Russia from the heady pre-crash days. Indeed, Simmons & Simmons recently decided to exit the Russian market after a brief sojourn there. But interest in the other Bric jurisdictions of Brazil, China and India has never been greater.
Recently Cleary Gottlieb Steen & Hamilton, Davies Arnold Cooper, DLA Piper and Milbank Tweed Hadley & McCloy all launched in Brazil, while Clyde & Co has expanded its operations there. Eversheds and Simmons have articulated growth plans for China, while Allen & Overy (A&O) has opened in Australia, with a view to targeting investment flows with China.
India, admittedly, is the odd one out, remaining a closed shop for foreign firms following a 2009 Supreme Court ruling that decided against foreign firms operating liaison offices there.
evertheless, many international firms are circling. They hold best-friend relationships with local firms and many are using Singapore and Hong Kong as springboards from which to target the Indian market.
So, how do these four economies compare as places to do business for international firms? What are the relationships between international and local firms? And to what extent will the dynamic that has evolved in Russia of international firms driving up standards - but also salaries - be replicated?
The Chinese commercial legal market is relatively new. Firms only began to be established in their present form in the wake of the 1979 economic liberalisation. The licensing process for international firms can take up to 18 months, but excepting restrictions on practising Peoples’ Republic of China [PRC] law, there is little that foreign firms cannot do. And, thinks Ashurst Hong Kong-based corporate partner Lina Lee, even that latter point is ambiguous.
“International firms often give practical advice via a PRC associate, but the regulators don’t enforce [against] it strictly,” she comments.
“[Since] there are restrictions on what we can do, on just about any matter we’ll cooperate with PRC firms,” claims Beijing-based managing partner of A&O’s mainland China practice Peter Thorp. “There are referral relationships with them on domestic work, and we hope they’ll also send international work our way.”
However, as the Chinese economy grows, Chinese firms are becoming increasingly self-confident and projecting their power internationally.
“Chinese firms are growing in sophistication and scale and are taking on a fair amount of inbound investment work and even international work,” Thorp admits.
The challenge, according to Lee, is that PRC firms also “hold relationships with local corporates, state-owned enterprises and government regulators, as well as having language and cultural advantages”.
But Thorp does not think this increasing encroachment by local and international firms on each other’s patches will lead to salary inflation.
“People will join either a local firm or an international one for different reasons - I don’t think pay is the main issue,” he argues.
Steven Wardlaw, the partner in charge at Baker Botts’ Moscow office, argues that any major withdrawal of international firms from Russia would have a negative impact on foreign investment.
“Russian law firms pushing for a state of play where no international firms can practise would be a disaster for inward investment,” he states.
Thorp thinks this also rings true for China.
“In Asia the Chinese legal market’s one of the more open ones - this has been encouraged on the grounds of foreign investment,” he explains. “The presence of international firms has provided comfort for international clients.”
So far, though, the argument of increased foreign investment has not convinced the Indian authorities. The 1962 Advocates Act, which regulates the legal profession in India, stipulates that only those lawyers regulated by the Bar Council of India can practise law. And the council will not admit foreign lawyers.
“Foreign firms have been consistently lobbying the powers that be and are often reassured that things will happen,” argues Kian Ganz, publishing editor at LegallyIndia.com. “But people never say ’no’ in India, and hope is gradually waning.”
Hopes of setting up shop may have waned but interest has not, continues Ganz.
“India’s the least favourable Bric economy for foreign law firms to do business,” he says. “But it’s also where UK firms in particular are expecting the most. It’s a common law jurisdiction, there’s a big service industry, a big labour force and an LPO [legal process outsourcing] sector that’s flourished and almost completely escaped regulation.”
Part of the issue is that local firms have little incentive to open up given their current dominant market share. With little legal training and no requirement for ongoing professional development, foreign firms’ best hope may lie in their ability to convince their Indian counterparts that they have the knowhow and infrastructure in place to team up with local firms and offer high-quality training.
Give and take
China is pretty savvy when it comes to exacting knowledge and technology transfers from international business in return for lucrative contracts. And the ongoing negotiations around the World Trade Organisation’s General Agreement on Trade and Services (Gats) may see the rest of the increasingly powerful Bric economies make this a precondition for the liberalisation of their legal markets. Unlike China and Russia, Brazil has a longer-established market economy and a very well-developed cadre of domestic commercial lawyers.
As a result, protectionism continues in Brazil, where the Ordem dos Advogados (OAB), the Brazilian bar association, is tightly controlled by ’os grandes’, the elite Brazilian law firms: Machado Meyer Sendacz Opice, Mattos Filho Veiga Filho Marrey Jr & Quiroga, Pinheiro Neto Advogados, Siquiera Castro Advogados and Tozzini Freire Advogados.
The OAB mandates that foreign firms can practise in Brazil, but they are only allowed to work on international aspects of Brazilian deals and must maintain their structural independence from their Brazilian affiliates. Indeed, the OAB is currently investigating a number of international firms that are alleged to have infringed this, including DLA Piper and Mayer Brown.
John O’Donnell, a consultant at recruiter Hudson in São Paulo, says the international firms he works with are generally unfazed by the investigation, however.
“Some firms have expressed caution, but no firm that we’ve talked to has decided to pull out of Brazil based on the OAB investigation. There’ve been previous investigations into firms here, but the international firms are still here and doing quite well.”
The rates of growth in corporate and capital markets work in Brazil suggest that this legal market could become more crowded in the coming years, potentially increasing the levels of tension between local and international firms, perhaps spurring further investigations but also lobbying by international firms for greater liberalisation.
In contrast, discussions currently underway in the Russian Ministry of Justice concerning rights of audience could create previously unseen restrictions on international lawyers there.
The nature of the proposals are opaque, but new regulations are expected to stipulate that lawyers with rights of audience be advocates and register with the local bar.
The measure is being billed as improving regulation in the Russian legal profession, but it may also mean that in time Russia ceases top be seen as having the most liberal legal system of all Bric jurisdictions’.