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11 July 2013
Russian lawyers are anticipating an upturn in work as the government seeks to boost the economy. James Swift asks leading practitioners whether the country can offer firms more than just natural resources work
The past two or three years have been a triumph for all but one of the Bric countries (Brazil, Russia, India and China). Brazil, India and China all somehow managed to shrug off the worst of the crisis to become the most sought-after and talked-about investment jurisdictions in the world. Law firms, desperate to position themselves for eager clients, have been queuing up to open offices in Brazil and China and to beg the Indian government to let them open offices. In Russia, on the other hand, it has been tougher.
“In 2008 things were so quiet that we thought our phone lines had been cut,” says Baker Botts Moscow managing partner Steven Wardlaw.
So when the Russian government announced earlier this year that it would be embarking on a privatisation, shedding stakes in around 900 companies with the aim of raising $59bn (£37.74bn), you might have expected Moscow lawyers to start dancing a jig.
As usual, though, nothing is that simple in Russia, and lawyers have mixed feelings about just how lucrative the process will be.
The Russian government first announced that it intended to sell stakes in a hoard of assets in July 2010. The previous year it was revealed that Russia was faced with a budget deficit of 5.9 per cent. It was the first time the country had gone into the red in more than a decade. An asset sale, it was reasoned, would provide a means to plug the gap, as well as hike growth ahead of the 2012 presidential elections, in which prime minister Vladimir Putin has hinted that he may stand.
The current president, Dmitry Medvedev, said in his budget message that, apart from securing spending for the government and plugging the deficit, selling stakes in attractive companies would promote competition and boost the investment climate.
Of course the privatisation is welcome news, but whether lawyers can capitalise on it is a matter of debate. Those who were involved in the privatisations of the 1990s, which one lawyer describes as a “smash and grab”, are especially sceptical.
“The Russian government’s recently announced the planned privatisation of stakes in various well-known companies over the next year and revenues could exceed $60bn,” says Dewey & LeBoeuf Moscow managing partner Brian Zimbler. “The market’s eagerly anticipating these deals, although I’m not sure how much work it will produce for law firms.”
“It’s a tricky issue,” says White & Case Moscow partner Andrei Dontsov. “On the sell-side it’s not your typical M&A transaction. There’s not a lot to do from a structuring perspective and there are no presentations or warranties to worry about. Although, if any of the companies then go on to do an IPO, there may be some work for us”.
The biggest worry is corruption. Privatisation and corruption seem to go hand-in-hand whenever an emerging market state looks to raise capital by divesting assets. One reason for this is because privatisation often takes place, in these situations, in a weak regulatory environment.
“The initial wave of privatisations in the 1990s was like the Wild East, with lots of scandals and legal problems to address,” says Zimbler. “We advised on some of the share auctions at that time, and even acted for one client that was declared a winner, but competition was fierce and there were lots of disputes.
“Fifteen years on Russia’s become a relatively calmer place and we expect that these privatisations should be conducted in a more professional manner. But investors need to be cautious, so we lawyers still have a role to play.”
As well as a more placid environment there is a number of indicators that suggest this latest round of privatisations will be more orderly than the previous round. For a start, the privatisations are expected to take place over a longer period of time and the government is only selling minority stakes, not entire companies. One negative aspect of the latter point, according to some lawyers, is that because the sale is only in minority stakes, there will be less interest from international investors.
The investment banks’ involvement also lends more credibility to the proceedings. On 25 October the Russian government announced that 10 banks, including international players Morgan Stanley, Credit Suisse, JPMorgan Chase & Co and Deutsche Bank, had been selected to advise on the sales.
Bank of America Merrill Lynch has also been given a role. It was appointed by the Russian government as the main organiser on the sale of one of the most prestigious assets going under the hammer: a 10 per cent stake in Russia’s second-largest bank, VTB, to US fund TPG, which is expected to fetch around $3bn.
“I think that, unlike some of the prior privatisations, this round has the potential to both generate significant revenues for the Russian government and create a lot of interesting opportunities for advisers on both the investment banking and legal sides,” says Alan Kartashkin, a corporate partner in Debevoise & Plimpton’s Moscow office. “The government’s attempted to make [the process] more transparent and is using market-based mechanisms to organise the sales.
“The legislation in this area’s quite outdated and didn’t reflect reality, and there’s been consultation with leading investment banks and lawyers, where the government’s trying to amend legislation to make the process more market-based and competitive.
“The changes to legislation weren’t drastic, more surgical. They were small, but they’ve helped to create more opportunities for market-based practices. For instance, now the government can sell its assets through agents; and the government’s approved a list of 10 banks, both Russian and international, that can act as intermediaries in those practices.
“This opens the door for provisions based on international terms and international laws, because it may create opportunities for lawyers in international firms to participate in transactions where our expertise in doing international-style auctions will be required. I think this could become a very important part of our work for the next few years, but the main question is how quickly government will take the companies to market.”
Reasons to be cheerful
But while too many questions hang over the privatisation process to be certain of how much work it will bring, Moscow’s lawyers have plenty of other reasons to be cheerful. A number of market sectors are making tentative returns and firms and lawyers are beginning to have good news to report.
Russian firm Pepeliaev Group, for instance, announced that its half-year figures were up by 30 per cent on the same period last year, while UK-Russian tie-up Goltsblat BLP’s figures were up by 60 per cent at the half-year stage. Allen & Overy (A&O) global Russia head Tony Humphrey says his firm has also had a positive six months, closing around $12bn in financings since May.
“The consensus is that things are picking up,” confirms Zimbler. “The major international firms are getting busier. It’s spotty, but the overall trend is positive.
“We just closed $600m and $1bn Eurobonds for VEB Bank after doing its debut bond in the summer. And there have been a few developments in the IPO market, such as Mail.Ru’s floating, that show the trend’s real and not just PR spin.”
Internet company Mail.Ru’s $912m listing on the London Stock Exchange and aluminium group Rusal’s $2.2bn joint listing in Paris and Hong Kong were the major IPO events of the year. Although these have not been followed by a slew of smaller, mid-sized deals, a good number of firms are working on at least one or two, which is one or two more than most had in 2009, and lawyers are confident that next year will prove even more successful.
“The number of companies considering IPOs at the moment is enormous,” says White & Case partner Andrei Dontsov. “If you speak to investment banks, the pipeline’s full, but it’s not progressing because companies are waiting for the magic window because the market’s not prepared.
“There was such a window in March, but now people are waiting for the next one. It’s to do with international markets in relation to multiple IPOs and the perception of Russia as a country: some people tell us Russia’s not the most preferred for foreign capital to come into. Whether this is to do with the government, general environment or other Bric countries, we don’t know.”
There are regulatory issues too, making Russian IPOs less attractive than they should be, although there is hope that these barriers will be sidestepped next year.
“The FSFM [Federal Service for the Financial Markets] adopted a regulation limiting the number of shares that can be offered outside Russia,” says Glenn Kolleeny, a partner at Salans’ St Petersburg office. “For companies pursuing an initial listing the limitation’s 5 per cent, which effectively isn’t a sufficient number of shares for a successful listing. Consequently the Russian companies raising funds abroad are incorporated outside Russia, such as Rusal, which is a Jersey company.
“We expect an increased number of IPOs in 2011-12, particularly if the FSFM’s regulations are liberalised or it enters into bilateral agreements with the securities regulatory authorities in other countries. In any case, given the increased awareness of the need to attract additional foreign investment, it’s to be hoped that the artificial restrictions on Russian companies raising capital outside Russia will be eliminated.”
On top of IPOs the Russian government’s emphasis on technology as a means of reducing the country’s reliance on natural resources looks as if it may yield work for lawyers, even if most of the changes are only in draft form at the moment.
“Russia’s trying to modernise and statesmen have made the introduction of innovation into all spheres of the economy and society a political motto,” explains Alexander Khrenov, a partner at Moscow firm Yukov Khrenov and Partners Law Office.
One programme to come out of this is the innovation centre, Skolkovo, Russia’s first science town. It is hoped that this centre will create favourable conditions, both financial and technical, to enable the engagement of highly skilled specialists who will be able to advance the state’s technology. The project is only at a legislative stage at the moment.
According to Khrenov, Russia has been legislating for some time to bring its IP laws up to scratch to encourage its technologies sector. The fourth part of the Civil Code of the Russian Federation, which entered into force in 2008, has “organised norms of intellectual legislation”, while in September 2009 the Supreme Arbitration Court of the Russian Federation initiated the formation of specialised patent courts.
“The formation of special courts is particularly important for the purposes of innovation development,” says Khrenov. “It was not by accident that, while discussing formation of the Supreme Patent Court, it was proposed to locate it specifically in Skolkovo.”
According to Alex Woodfield, a partner in Field Fisher Waterhouse’s London-based Russia team, the government’s drive in the technologies sector is already beginning to yield work for law firms.
“Technology very much has government backing and is the buzzword at the moment,” says Woodfield. “Rosnano, the government-funded organisation whose objective is to develop further high-tech and nano technologies in Russia, is investing a lot of money. There’s substantial work potentially coming out of it, but competition for this is intense.”
“We’ve had a lot of pharmaceuticals and telecoms work this year,” agrees Vladimir Sokov, a partner at Pepeliaev Group. “I think these industries are growing up now, especially pharmaceuticals, and the government’s technology drive is definitely one of the reasons for this.
“What’s happening now has a lot in common with what happened seven years ago in the automotive sector, when state authorities pushed foreign producers to bring production means here.
“There’s been a trend in the previous year where large producers were made to understand that the government didn’t just want to see them here as dealers, but rather as major producers, and as a result we now have eight or 10 pharmaceuticals companies that came to the Russian market either buying existing Russian companies or starting greenfield operations.”
However, not everybody is convinced that Russia will be able to create an environment that is attractive to technology producers purely through legislation.
“Skolkovo is the government’s attempt to create a Russian version of Silicon Valley,” says Zimbler. “Russia has lost a lot of top people as great minds often go to the States or Europe for work. They needed to stop the brain drain and bring such people back to Russia.
“However, you can’t create a Silicon Valley by legislation alone. New technology companies often don’t care about tax breaks and favourable legislation. They’re usually start-ups and what they want is a good place to start a business - and that’s not necessarily Russia.”
As commodities rebound to the levels they were at before the downturn, some lawyers are sceptical as to whether Russia can really reduce its reliance on oil and gas.
“The increase in gold and oil prices means an increasing share of the Russian economy is concentrated in the oil and gas sector,” emphasises Kolleeny. “Of course, recently every government minister has to have an iPhone because Apple equals innovation, but really we’re more dependent than ever on natural resources.”
Although some lawyers have reported that IP specialists are coming at a premium at the moment, few established Moscow lawyers believe they are in any danger of having to switch focus.
“I’m sceptical about this attempt to create innovative sectors in Russia and to make Russia the new Silicon Valley; and I feel quite confident that, for the remainder of my career, and my partners’ careers, we’ll be quite successful in representing clients in the traditional areas of strength - mining, oil and gas and precious metals,” states Dmitri Nikiforov, Moscow managing partner at Debevoise. “It would be great if Russia does develop those sectors, although I doubt they’ll be as strong as the others.”