Special report: Russia – Feeling the chill
19 May 2014 | By Jonathan Ames
8 August 2013
25 November 2013
14 March 2014
28 October 2013
21 February 2014
It’s a nervous time for international law firms in Moscow, as Russia’s rift with the West threatens to throw their businesses off course – possibly for good
A quarter of a century after the first international law firms moved into Moscow, booming workflows for both domestic and foreign practice have suddenly been affected by president Vladimir Putin’s aggressive moves towards neighbouring Ukraine, and the US and EU sanctions imposed on Russian individuals and companies.
“Six months ago, my view would have been that Russia was the only high-growth market in Europe,” says Paul Melling, who founded Baker & McKenzie’s Moscow office (see box, page 24) in 1989 and is still based there. “It was a high-priority market for many multi-national companies, particularly in the pharmaceutical and medical devices sectors. GDP was set to grow this year by 2 to 3 per cent, and most companies here were budgeting for considerably higher growth than that – with some anticipating 15 to 20 per cent growth.
“So for all the right reasons, it was the most exciting time to be a lawyer in Russia in all the 25 years I’ve been here. We’ve seen tremendous strides forwards in terms of compliance and business ethics in Russia. Local companies are trying to build their own compliance structures. But I would also have said, in Russia you never know.”
You never know, indeed. With sanctions kicking in and prime minister Dmitry Medvedev – himself a lawyer – understood to be gearing up to challenge the measures at the World Trade Organisation, the environment for international businesses and their legal teams does not look bright.
But some argue that Western-imposed sanctions – along with the possibility of the Kremlin hitting US and European businesses with reciprocal measures – could actually boost local law firms at the expense of their international rivals. As one domestic law firm partner explains bluntly: “Russian law firms don’t have the impression that they will have less work because of the Ukraine crisis. To the contrary – there will be more work for Russian law firms because of these events.”
The rouble in trouble
Lawyers at domestic and international firms in Moscow maintain that so far, international clients have not bolted for the door, though they acknowledge that investors have put plans on hold.
“It is clear that some projects will be cancelled because of the political situation,” says Alrud senior partner Vassily Rudomino. He predicts that schemes awaiting board of director approval, or those with heightened risk, such as having an element of government involvement, will be especially vulnerable.
“What will be the percentage of cancelled projects?” he asks. “Who knows? We’ve not yet seen any of our clients cancelling or withdrawing from Russia. However, in the past few weeks we’ve seen postponed instructions – for example, some big M&A transactions with international involvement.”
Rudomino maintains that commerce will win out over politics. “Business is business, and many projects have been discussed for a long time, so in general we expect people to continue,” he says.
His counterpart at Capital Legal Services, managing partner Vladislav Zabrodin, agrees. “Over the next couple of months, we’ll definitely see those foreign companies that are already in Russia staying,” he says. “We don’t anticipate any drastic moves from them. They’ll be used to Russia and will understand that politics is politics, and business is business.”
But Zabrodin points out that sanctions are already having an impact on the Russian business environment, with the rouble declining in recent weeks.
“Companies that were considering a move to Russia are unlikely to come because the situation is so uncertain,” he muses. “Importing to Russia is going to become a lot more difficult – not least because of the dip in the exchange rate. And also, the Russian government is going to make a big push to encourage the use of locally produced goods.”
So far, the US and EU have clobbered Russia with two rounds of sanctions in response to Putin’s annexing of Crimea in March and more recent alleged incursions into eastern Ukraine. Members of the Russian-backed former Ukrainian government have been targeted, as have mid- to high-ranking Russian officials.
The US and EU were relatively unified in round one of the sanctions, with both focusing on individuals. But the second round has seen divergence, with the US black-listing high-profile corporate entities such as Bank Rossiya.
“The US has added more corporates and individuals to its list, while the EU has so far held off,” explains a partner at an international law firm. “We think the US will continue to do that; the EU is being more circumspect because it has more to lose.”
Establishing who qualifies as what the US calls a ‘specially designated national’ and the EU a ‘designated person’, and whether a business has had anything to do with those people, involves a lengthy process of building corporate trees and compiling other intelligence.
Once a link is discovered, Western businesses needs legal advice on what the sanctions stipulate.
“Clients must understand to whom the sanctions apply,” explains Ross Denton, a partner in Baker & McKenzie’s London-based European Community, competition and trade department. “They don’t apply to subsidiaries of EU corporations incorporated in Russia – and the same is true of the US. We’ve seen lots of legal advice that has been wrong on that point – saying you are a US corporation, therefore you can no longer deal in Russia. That isn’t right.”
Rumours suggest the sanctions regime will hit international law firms particularly hard. Indeed, Hogan Lovells is understood to have been forced to jettison several high-profile clients because they feature on the sanctions list. The firm declined to comment but Russian lawyers point out that despite foreign firms having little choice, those clients will feel jilted.
Dimitry Afanasiev, chairman of Egorov Puginsky Afanasiev & Partners, suggests Russian firms will be the ultimate beneficiaries.
“Russian national law firms are picking up some of the work previously done by the international law firms,” as a result of the crisis, maintains Afanasiev. “Several Russian clients told me they cannot trust foreign law firms who abandon them under pressure.”
Afanasiev and other Russian lawyers forecast that the current crisis will have several other positive impacts for local legal practice. Existing Kremlin moves towards ‘de-offshorisation’ and ‘domestification’ – the process of returning offshore business to Russia – will be accelerated. Indeed, those oligarchs on the sanctions list are already understood to be returning capital to Mother Russia.
Afanasiev also sees a move towards “de-dollarisation”. He explains: “International contracts are generally denominated in US dollars and in most cases, payment is routed via a correspondent bank in the US. US sanctions require that any funds in the US belonging to a sanctioned person are transferred to a blocked account. Solutions to this are to transact in a currency other than dollars, or route payments via a dollar settlement system outside the US where sanctions do not apply – for example, Hong Kong or a newly established Eurasian settlement system.”
As a result, Russian lawyers also envisage moves away from the use of English law in Russian business contracts and therefore a shift from UK and US venues for dispute resolution. This has been predicted for several years but the crisis might accelerate a slow process.
“Foreign law firms have tried to lure clients by saying that the use of Russian law is bad and that Russian courts are bad,” says Pepeliaev Group managing partner Sergey Pepeliaev. “Our political leaders don’t like that, and they are encouraging Russian businesses to draft contracts under Russian law and to refuse to instruct foreign law firms.”
Pepeliaev was recently approached by a local general counsel, keen to join his firm. “I asked why he didn’t want to go to an international law firm. He said he didn’t think they had good prospects in Russia and that they will shortly be reducing in size. And I agree with that view.”
Another by-product of the Ukraine crisis that could have a negative impact on global firms in Moscow is the Kremlin’s increasing desire to look east rather than west. Russian political commentators have said for some time that Putin has become increasingly frustrated with what he views as a patronising and sanctimonious attitude from the US and EU on a range of commercial and social issues. Leaders in India, China and other developing economies in the East are, he reckons, much more respectful of Russia’s global position.
“The EU and US sanctions will push Russia to turn east towards India, China, South Korea and other Asia Pacific countries,” says Pepeliaev. “And Eastern businesses will be inclined to use Russian law firms. Why should a Chinese investor instruct a US or UK firm when there are Russian firms that can do the same work more efficiently and for less money?”
Alrud’s Rudomino is less dogmatic. “It depends on the firms,” he says. “Those global practices in Moscow that have East Asia offices will benefit. We have Chinese-speaking lawyers in our team and we are working with local Chinese firms and global firms with offices in China. And we’re competing with global firms in Moscow to work on Chinese projects in Russia. One of the benefits the globals offer is having an office in China as well as Moscow. Chinese clients are quite prepared to instruct an international firm because they are brand-driven.”
Alrud has no immediate plans to open in China, but Rudomino says some Russian practices could soon be weighing options as “they may think there is political capital in doing so”.
But Western lawyers in Moscow are more sceptical about any shift east. “Russia may not be completely European, but it is definitely not Asian,” says Dentons Moscow managing partner Florian Schneider. “It’s still closer to Europe – certainly as far as the people are concerned. Russia wants to be recognised as an independent power in the world, but on the other hand, its leaders have to understand that the people are closer to Europe. So they will not cut links to Europe and the US.”
A history of opportunities
Paul Melling joined Baker & McKenzie’s London office in 1980 when the Cold War was just about at its most glacial.
He became a partner in the firm’s East-West Trade Department – a title that could feature in any number of John le Carré novels. And indeed, there were jokes aplenty from the rest of the firm about ‘the KGB mob down the corridor’.
“It was a fun practice,” he recalls. “We did a bit of international commercial arbitration, some litigation, lots of contract negotiations. We acted for lots of Soviet-owned companies in the UK, and we did a lot of work for the Soviet trade delegation in Highgate.
“But not in anyone’s wildest dreams could it be called a front-burner practice for the firm. Around the firm we were regarded as those slightly odd people who spent a lot of time in Moscow and nobody really knew that much about what they did.”
All that changed in January 1987 when Mikhail Gorbachev kicked off his perestroika programme with a joint venture law, which for the first time allowed multinational companies to invest directly in the Soviet Union. At the same time, Gorbachev dismantled the state monopoly over foreign trade.
Two years later, Melling packed a dozen large trunks full of books and office equipment and caught a flight to Moscow, where he launched the firm’s office in what was effectively a nine-square metre hut. He was joined by one other lawyer.
He remains in Moscow – having spent only one year away, to launch the firm’s outpost in Almaty, Kazakhstan – but the operation is unrecognisable. The firm now has more than 100 lawyers in Russia, with most of them being locals, compared with the first six years or so when the office was dominated by expats.
“It’s been fascinating to see the growth of the Russian legal profession,” says Melling. “There was a reason why we had no local lawyers at the office for so long – there weren’t any. Or at least there weren’t any with international commercial experience. In the old Soviet Union, there was no history of doing business by way of contract – it was all state-run businesses. And to make a profit was a criminal offence when I arrived in 1989. It was called speculation and you went to jail for it.
“Now Russian law firms compete successfully with the international firms. Some seem to have limitless business development budgets and are very professional. They model themselves primarily on City of London firms because those firms were the first firms here. And their billing rates also seem to be very similar these days.”
25 years of Russian and international launches in Moscow
Coudert Brothers (closed on dissolution in 2006)
Baker & McKenzie Zapolsky & Partners
ALM Consulting Chadbourne & Parke
LeBoeuf Lamb Greene & MacRae (merged with Dewey Ballantine in 2007, Moscow office left for Morgan Lewis
Yakovlev & Partners
Andreas Neocleous & Co
Milbank Tweed Hadley & McCloy
Monastyrsky Zyuba Stepanov & Partners
Salans (merged with SNR Denton in 2013)
Andrey Gorodissky & Partners
CMS Bureau Francis Lefebvre
Olevinsky Buyukyan & Partners
Pünder Volhard Weber & Axster (merged with Clifford Chance in 1999)
Reznik Gagarin & Partners
Akin Gump Strauss Hauer & Feld
Hogan & Hartson (merged with Lovells in 2010)
Andersen Legal (closed on dissolution in 2002)
Lovells (merged with Hogan & Hartson in 2010)
Egorov Puginsky Afanasiev & Partners
Delacour (association with local firm Avista)
Haarmann Hemmelrath (office split up in 2006 on firm’s dissolution, with the majority joining CMS Hasche Sigle)
Konnov & Sozanovsky
Khrenov & Partners
Muranov Chernyakov & Partners
CMS Hasche Sigle
Clyde & Co (closed 2013)
Haynes and Boone (closed 2010)
Magisters (merged with Egorov Puginsky in 2011)
Conyers Dill & Pearman (closed 2013)
Simmons & Simmons
Korelskiy Ischuk Astafiev & Partners
Nektorov Saveliev & Partners
Prime Advice Consulting Group
King & Spalding
Quinn Emanuel Urquhart & Sullivan
Arendt & Medernach
Yukov & Partners
Scheckin & Partners
Source: Legal Success
Key figures: Russia
Life expectancy at birth 69
Source: International Monetary Fund, Russian Federal Statistics Service, Tradingeconomics.com, World Bank