Linklaters is looking very much like the cat that got the cream after winning its first ever instruction for Gazprom, the world’s largest gas producer, on its northeastern gas pipeline project.
Led by Moscow partner Dominic Sanders, the firm triumphed in a competitive tender against the top UK firms in Moscow: Allen
& Overy, Clifford Chance, CMS Cameron
McKenna, Freshfields Bruckhaus Deringer.
After pitching last year, Linklaters won out in February to advise on the proposed 1,189km pipeline that will run across the Baltic Sea bed from Vyborg on the Russian-Finnish border to the German coast, and then to the UK. With an estimated cost of around $5bn (£2.83bn), it is the largest project in the Russian market.
The Gazprom deal is another coup for Linklaters, following a string of key Russian instructions. Last year, it advised longstanding client BP on its £4.2bn acquisition of Russian oil and gas company TNK. The deal alone accounted for around 50 per cent of inbound investment into the country last year. The firm also advised Morgan Stanley on a rare equity fundraising – Lukoil’s listing on the London Stock Exchange.
But on Gazprom, it is understood that Cleary Gottlieb Steen & Hamilton, a firm with a long association with Gazprom, was not invited to pitch. This is despite the fact that Cleary has acted as primary counsel to Gazprom for years, advising on its many eurobond issues. And it is not as though Cleary lacks experience on major projects – its Moscow office acted for Gazprom on its last major pipeline project through the Black Sea.
It seems Gazprom wanted a UK firm to advise on the pipeline, and having worked with Linklaters on most of its eurobond issues (where Linklaters was advising the underwriters), it plumped for familiarity.
The deal is illustrative of two key trends in the Russian market: the growing importance of Russian corporates to foreign law firms in Moscow; and the flightiness of many Russian companies when choosing their legal advisers. Despite its relative stability, the Russian legal market remains, in this respect at least, unpredictable.
High oil and commodity prices have propelled the Russian economy into activity, and many Russian companies are looking to invest. Also, around $250bn (£141.5bn) of so-called Russian ‘flight money’ is languishing in overseas banks. This is the cash that wealthy Russians took out of the country, and, according to Doran Doeh, head of Denton Wilde Sapte’s Moscow office, “a lot of that money now wants to come home”.
So where the bulk of the UK and US operations entered the Russian market, on the strength of their advice for institutional investors into Russia and for underwriters on Russian eurobond issues, they are now chasing work from local clients on M&A, real estate and projects. And they are expected to pitch for it.
While 10 years ago the attitude of many Russian companies to international law firms may have been “why bother?”, today Russian companies are expected to meet international standards of management and documentation, and international firms are being drafted in to help them.
Throwing work out to tender is the latest craze for Russian companies keen to drive down legal fees. Clifford Chance, led by capital markets rainmaker Arthur Iliev, last month advised on the Russian initial public offering of aircraft manufacturer Irkut, a company once key to the Soviet Union’s military strategy. Skadden Arps Slate Meagher & Flom, following another competitive tender, advised Credit Suisse First Boston.
White & Case Moscow managing partner Hugh Verrier attributes the change to a larger and more sophisticated market. “There is now wider use of international firms and a greater understanding of how to use them,” he said. He believes the result is, relative to five years ago, a legal market full of opportunities, where “anybody can grab a good deal if the price is right”.
At last count, around 65 foreign law firms have offices in Russia, but the premier firms in the market – Clifford Chance, Freshfields, Link-laters and White & Case – all have a considerable presence in Moscow and an impressive Russian clientele.
In 1998, international clients made up 90 per cent of White & Case’s Moscow clients. The firm has since sought to diversify its Russian client base, and today Russian clients make up roughly half of the office’s practice. Among its key deals, this year the firm advised Norilsk on its $1.16bn (£656.6m) cash acquisition of Anglo American’s 20 per cent stake in South African gold producer Goldfields.
Clifford Chance, too, is expanding its Russian clientele. Moscow senior partner Michael Cuthbert admits that the firm’s strengths are advising on capital markets and financing, “but we’re moving beyond the traditional pre-export trade finance deals and more into projects and derivatives. We’re building on local client relationships,” he added.
However, while the Russian market is fevered, the international firms – still bruised from the 1998 crisis – remain cautious. Moscow offices are among the most highly leveraged in the world and lateral movement is rare. White & Case, with the largest office in Moscow, has just six partners to its 56 lawyers. This year it made a rare lateral raid for Clifford Chance legacy Pünder partners Hermann Schmitt and Irina Dmitrieva. It affords White & Case the Russian tax practice it has long desired and, it hopes, will help consolidate links with the important German market.
Elsewhere, the premier players all have fewer than six partners in Moscow – Cleary, for example, has none. But like Linklaters (which made a rare Moscow partner promotion in the latest round), it leverages off a team of lawyers outside Mos-cow, relying on three London and Brussels capital markets and finance partners.
Although it missed out on the Baltic pipeline instruction, Cleary continues to work for Gazprom on its eurobond issues. Elsewhere, the firm’s anchor client, and the reason it set up in Moscow in the first place, is the Russian Ministry of Finance, for which Cleary has advised on all eurobond issues and debt restructurings.
It may be booming in Russia, but firms continue to exercise caution in what remains an unpredictable and tough legal market.