Orange alert

Ukraine is in the midst of legislative reform, with outside investment all but drying up. Joanne Harris finds out what effect the uncertainty is having on lawyers in the country

Tax increases are never particularly popular. And it is no ­different in Ukraine, where the government has found itself deluged by protests over proposals to reform the country’s tax code.
The protests, by thousands of small and medium-sized businesses, have caused chaos in Ukraine’s capital Kiev for weeks.

“There’s a lot of grass-roots protests ­popping up all over Ukraine,” notes ­Magisters managing partner Andrew Mac. He adds that his own journey into work was disrupted by the latest round of protests following the passing of the new code by Ukraine’s parliament on 19 November.

The bigger the better

But transport disruption aside, the code is likely to be profitable for lawyers. The draft legislation increases dramatically the tax payable for small and medium-sized ­businesses while reducing it for Ukraine’s big industrial companies.

“We already have a huge amount of clients trying to analyse the draft law,” says Oleh Malskyy, head of the M&A, corporate, ­international trade, energy and antitrust practices at Ukrainian firm Astapov Lawyers. Malskyy says uncertainty still reigns over how the code will come out in the end. Until Ukraine’s president Viktor Yanukovych signs off the legislation it will not become law.

The new legislation is merely part of a wider trend in the country. Since the ­election of the new government in March 2010 Ukraine’s laws have been under intense scrutiny. As well as the tax code, new construction, labour and customs laws are being drafted and a law permitting PPPs was passed in July.

Arzinger senior partner Timur Bondaryev says the PPP law in particular could ­stimulate business for Ukraine and generate deals for lawyers to advise on. “It’s very important for Ukraine because the ­infrastructure’s very old,” he notes. “There’s a huge, huge demand for improvement.”

Regulation and legislation will be a theme in Ukraine for the foreseeable future, says Bondaryev. “I believe we’ll be kept very busy by the legislators,” he adds. “This will be the year of adjustment in the environment of new laws.”

Beware the shadow

The way the new legislation pans out could affect Ukraine’s economy significantly. The country was particularly badly hit by the financial crisis, but has shown signs of ­recovery during 2010.

Some lawyers are warning that small businesses could retreat into the “shadow economy” as a result of the tax code. Any such moves could impact on the overall strength of Ukraine’s real economy and also dealflow, which remains generally slow. As a result, law firms have been forced to ­diversify into new practice areas.

“The type of work we do has changed from working primarily with foreign direct investors to working with a variety of clients. There’s much less transactional work in this market,” reports Magisters’ Mac.

The future’s bleak, the future’s orange

Lawyers are generally concerned that ­foreign companies are holding off from investing in Ukraine due to the political unrest of the past year, despite the ­economic recovery.

“Ukraine was the darling place to invest a couple of years ago and now some people feel it’s on a blacklist if it’s on any list,” says CMS Cameron McKenna partner Daniel Bilak. “I think business has got fed up with the general chaos that was viewed to be the legacy of the Orange Revolution.”

Although Ukraine’s politicians are trying to strengthen relationships with the EU, Russia is still an important neighbour for the country.

“We see more and more tendencies with regard to Russia than the EU,” says Malskyy, adding that he hopes EU integration will ­happen eventually. But he agrees with Bilak that the political risk present in Ukraine is still putting off investors.

“Most foreign business that’s already here will stay here, but we don’t see much new ­business coming in. That’s a worrying sign for many firms. The level of risk that’s acceptable for Russian bidders is unacceptable for ­foreign bidders,” Malskyy says.

Bilak is more sanguine. “Ukraine’s always going to be on a fault line between Russia and the EU, so that kind of risk is going to be ­perceived when doing business here,” he ­contends. “I’ve been here almost 20 years and it’s like being in a perpetual crisis.”

Law firms up for the agro

Despite all this, law firms are still reporting ­reasonable activity. Expanding practice areas, in addition to regulation, include energy and agrobusiness. Bondaryev says Arzinger is engaged “on a couple of very demanding ­transactions related to green energy projects”.

The economic and political uncertainty in Ukraine has led to a shake-up of the legal ­market. Smaller firms are beginning to pop up, such as Ulysses, founded by former ­Magisters tax head Oleh Marchenko in March. Marchenko says the firm is doing well and is set to expand, building up a full-service ­transactional and advisory practice.

RULG-Ukrainian Legal Group president and senior counsel Irina Paliashvili believes the restructuring many firms underwent during the crisis has ultimately been ­beneficial.

“My point of view is that in some ways the crisis was good because it really brought the market back to normal. During the boom time everything was just hyperactive and not really in line with the normal way of business,” Paliashvili says.

She and Bilak both say the employment prospects for younger lawyers in Ukraine are difficult at the moment. Some are trying to set up their own firms, with various degrees of success.
Ukrainian lawyers think the outfits that ­survive will be those best suited to respond to the opportunities presented by the ­country’s ever-changing political and ­economic ­climate. n