Local and international firms are scrapping for work in Europe’s ‘golden boy’. But the market is not without its risks, including from neighbour Ukraine
Poland had a good financial crisis. But then the country that has spent much of its history being pushed from pillar to post by Germany and Russia has had a good past 25 years.
Having shed the yoke of the Soviet bloc in 1989/90 the country’s position as one of the most populated in Europe ensured it was targeted for a glut of foreign investment. A major privatisation programme lured global law firms by the plane-load and Warsaw continues to be home to several big Western legal practices, with Dentons’ local office (formerly Salans) home to the most lawyers in the country.
Not even the seismic shock of the global financial crisis threw the country’s economy off course – at least at first glance. Poland never dipped a toe into recession, its pol-itical environment remained stable and it has an educated and value-for-money workforce. It is, in short, the golden boy of not just Eastern Europe, but, next to Germany, of Continental Europe.
So, fertile ground in difficult times for local, regional and global law firms alike? Things are never that simple. While it is true that in relative terms the Polish economy is still healthy, with GDP in the last quarter of 2013 running at 2.7 per cent growth year-on-year, that is still 0.2 points lower than forecast and considerably lower than the pre-crisis boom times.
And financial analysts have started twitching over several government policies, not least moves to overhaul Poland’s state pension system. Warsaw is transferring from privately managed funds to the state PLN150bn (£29.5bn) of government bonds and government-backed securities, which will then be cancelled. As the Financial Times recently pointed out, pensions experts are concerned the move is “a dangerous example of confiscation without adequate compensation”.
Then there is the euro. The Polish government had committed to joining the currency by 2012. The best part of two years later Poles are still paying for their morning paczki with zlotys as the country still has some way to travel before meeting Brussels’ euro entry requirements.
Perhaps the biggest headache on the horizon for Poland has sprung up in the past few months – and is literally on its horizon. Ukraine is next door and anything like a Russian invasion will play havoc with Poland’s economy, arguably consign talk of golden boy status to the archives and potentially send Western law firms rushing for the exit.
But it might never happen. And for the time being law firms are still as happy to be in Warsaw as just about anywhere else in Europe – although the legal market has become fiercely competitive.
In comparison with the rest of the EU there remains much to envy in the Polish economy. It grew by an average of more than 4 per cent annually in the decade before the financial crisis, managed a rise of 1.6 per cent in 2009 and then improved significantly in 2010/11.
But in 2012 growth slowed to 1.9 per cent, dipping to 1.3 per cent last year, with this attributed to falling demand and lower investment. Meanwhile, public debt rose to 55 per cent and the budget deficit was expected to rise as a result of lower tax revenues. Lawyers have by no means been immune to these recent economic shudders.
More firms, less work
“There’s less work than a couple of years ago due to both the global crisis and more business law firms,” says Gide Loyrette Nouel Warsaw partner Hugues Moreau. He points out that the legal profession could be a victim of the country’s economic success.
“Newcomers are competing harshly in the market,” he adds.
That view is reflected in the office of a prominent regional firm in Warsaw. Andrzej Tokaj is managing partner of the local office of Baltics-based Magnusson, which opened in Poland nearly a decade ago with seven lawyers and is now home to 28.
Tokaj claims Polish politicians and business leaders have “learnt a lot about marketing” since the Iron Curtain fell in 1990.
“The view of Poland during the financial crisis was a lot better than the true situation,” says Tokaj, who goes on to argue that while Poland avoided recession during the crisis, “the slowdown in the economy was fairly significant – dropping from above 4 per cent to 1 per cent. And that was felt in the legal sector. Law firms have been under pressure.”
But local law firm partners argue that relative to other Central and Eastern Europe (CEE) jurisdictions, Poland’s economy is a picture of health. According to Robert Gawałkiewicz, senior partner at Poland’s biggest local firm, Soltysinski Kawecki & Szlezak, domestic retail and wholesale businesses are still doing well, with companies continuing to enter the Polish market to expand their international distribution networks.
“The internal market is key,” he says, adding that equally crucial is “taking advantage of EU funds – they still flow in, giving extra drive to the economy”.
“Law firms in Poland really have no right to complain,” is the blunt assessment of Tomasz Wardynski, founding partner of one of the country’s biggest players, Wardynski & Partners. But then, he says, the profession is not much different from that in any European country. “Even in Spain law firms have not done that badly during the crisis.”
One key difference, however, is the relative youth of the modern profession. Wolf Theiss Warsaw co-managing partner Siegfried Seewald points out that “around 25 years ago Polish business law firms didn’t really exist. The profession was basically one-man firms and there was no experience of business law.”
In a generation the market has become intensely competitive. Clients are leaning heavily on fee rates and local partners claim global players are lowballing on fees in a bid to retain market share.
But it is not just the outposts of the English and US firms that are allegedly slashing fees. Marcin Krakowiak, a board member at local firm Domański Zakrzewski Palinka, says a big trend in the market is the rise of niche spin-offs, generally launched by defectors from global firms.
“The boutiques compete aggressively on price,” he says. “They work on rates as much as 70 per cent less than the fees of the bigger practices.”
The result, claim local partners, is that the global players in Warsaw are reducing their numbers, sometimes quite significantly.
“That trend is likely to continue,” says one senior local partner, “because there are too many lawyers at some of the international firms.”
That said, Dentons Warsaw managing partner Arkadiusz Krasnodębski says any suggestion that international firms will withdraw from the market is fanciful.
“It’s no secret that the Western firms are reconsidering their approach to the CEE region,” he acknowledges. “But that might mean they pull out of other locations while staying in Warsaw, because Poland is a relatively strong market that is still improving.”
Poland’s economy may have kept ahead of recession during the crisis, but its M&A market dried up more or less in line with all other advanced economies. However, lawyers say this year should see the start of a return of buyers. Krakowiak anticipates that “the big law firms will concentrate on a few practice areas such as M&A, infrastructure, project finance and banking”.
In general, lawyers envisage a combination of investment and litigation driving the business law market this year.
“Clients are recognising that they need to invest in production facilities and machinery,” says Krasnodębski. “Businesses have realised there are markets abroad – even beyond the CEE region.”
Illustrating that point are recent moves by Polish mining company KGHM for acquisitions in Canada and Chile, while a Polish road transport company is buying its largest French competitor.
Another trend is the need for significant infrastructure investment, notably in road and rail projects.
“As long as people were driving bad cars on poor roads,” says Krasnodębski, “no-one really thought twice and few complained. But when people started to buy decent cars and saw a few good roads they started to complain about the roads that were in poor condition.”
Litigation specialists can look forward to a spate of construction-related disputes this year. According to Wardynski, “there’s a substantial load of litigation in the pipeline in the common court that is blocking a whole range of infrastructure development”.
Then there is the hornets’ nest of the state pension system. Wardynski forecasts the reforms could be a seam of work for lawyers, although not acting for pensioners.
“There’s little chance of US-style class actions in Poland,” he explains. “However, the pension funds, which are managed by professional organisations, many of which come from abroad, may make claims under bilateral investment treaties.”
Key figures: Poland
Life expectancy at birth: 77
Sources: International Monetary Fund, Inflation.eu, Poland Central Statistics Office, Tradingeconomics.com, World Bank