The Baltic triangle
18 January 2010 | By James Swift
8 January 2013
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Estonia, Latvia and Lithuania may be viewed as one by outsiders, and indeed often act as one when it comes to business, but each brings something different to the table.
Rightly or wrongly, the Baltic States - Estonia, Latvia and Lithuania - are viewed as one. With a combined population of less than seven million it is no surprise; and for investors, entering into one Baltic country is usually a prelude to entry into the others.
The effect of this has been that, over the past five years, law firms with ambition have increasingly felt pressure to align themselves with firms in neighbouring states to show the unity and reach that international investors expect.
“If you don’t have a pan-Baltic reach, then you’re nothing,” says Pritt Lätt, managing partner at Glimstedt Straus & Partners in Estonia.
But all three countries have developed discretely, with distinct legal systems, economic policies and cultures - for the most part using English as the common business language.
And with recovery taking place at different speeds in each state, in some respects the recession has shone a light on these differences.
So to what extent are these alliances mergers between equals? And with the traditional international investors from Scandinavia, the UK and other European countries reluctant to return to the Baltic markets, where are firms looking to plug the gap?
The power of three
The most recent Baltic law firm alliance was forged in December 2009 when Estonian firm Paul Varul cemented its pan-Baltic capacity by joining forces with Smaliukas Juodka Beniusis & Partners and Vilgerts, the latter two hailing from Lithuania and Latvia respectively. The firm now works under the single brand name of Varul Vilgerts Smaliukas.
“There’s a lot of work to and from Estonia, and the same goes for Latvia,” says Robert Juodka, managing partner at Varul Vilgerts Smaliukas’s Lithuanian practice. “There’s a lot of business interest between us and we’re very interlinked.
“But there was also an external reason for the alliance, which is the perception issue. The Baltic States are perceived as a single region and so we have to be seen [to be networked] like that. We always had the pan-Baltic capability, but until we announced the alliance we weren’t always seen like that. So the whole thing was more a formalisation of our previous relationships.”
Despite only being a formalisation of an established relationship, Ants Mailend, corporate, IP and competition partner at the group’s Estonia outpost, says the firm has already noticed the benefits.
“Although we’ve been working with the alliance firms for some time now, even since December we’ve had more clients coming to us - like one client in the banking sector that’s looking to do a bond issue in Estonia with collateral aspects in Latvia,” says Mailend.
All for one…
Of course, this is not a new trend. Pan-Baltic alliances have been springing up since the three countries joined the EU in 2004, and now, according to partners, nearly every firm of significance is tied up in a merger.
“This trend’s been going on for many years,” says Deividas Soloveicikas, whose former firm in the Lithuanian capital Vilnius, SMA Law Firm, joined the MAQS Law Firm network in November 2009. “Many local law firms have moved towards the Baltic concept and all the leading law firms in Lithuania have pan-Baltic issues and firms.”
Partners in the region estimate that there are now up to 10 alliance networks, but an exact number is difficult to come by due to the varying degrees of cooperation among firms.
“There’s been no corporate merging of our firms,” says Mailend. “It’s a joint venture operating under contractual terms. We thought it was best to start on a contractual basis, although we’re not excluding the possibility of doing a corporate merger.”
But it is rare for Baltic firms to integrate fully. Only one firm, Sorainen, has taken this approach so far.
“It’s very difficult to say why there are almost no corporate mergers,” says Jüri Raidla, managing partner at Raidla Lejins & Norcous’s Estonian arm. “Maybe the market’s just not mature enough for more concrete mergers - it takes time.
“We’ve always been considered to be one region, even looking back to the 1990s - although I’m not speaking about the legal systems here, which were very different, and so were the cultures. But then we started to negotiate with the EU and started the process of harmonisation of legislation; mostly it was EU legislation being harmonised, but there was some horizontal legislation being harmonised too, and so we moved closer together. Maybe in the future there will be fully merged law firms.”
Going all the way
One reason that Sorainen has taken a different approach is the firm’s unique development.
“The difference between our operations and those of the others firms is that we’ve started greenfield operations in every country and we haven’t had to do mergers,” says Aku Sorainen, the Estonia-based founder of Sorainen. “It’s a difficult issue because many of the firms that have created alliances have been very successful in their own countries, and so they probably think, ‘why should we change anything to incorporate into a group structure?’. In the Baltics some firms seem to lack some manpower at the leadership level to really integrate practices.”
Others agree that there is not enough will among managing partners to make the leap to full integration.
“It’s about personalities,” says Juodka, “and the people who run the business and their decisions and if these persons are really for that [full integration] or understand that and the culture of truly integrated business. Second, it’s differential: people find it difficult to agree on financial issues. I also think it can be attributed to the natural conservatism of lawyers, [who could be] afraid of losing their independence.”
But as competition in the Baltic States increases along with the integration of businesses and harmonisation of the legal systems, some firms are beginning to take seriously the prospect of further consolidation.
“Baltic Legal Solutions [BLS] has been operating as a pan-Baltic legal network for several years now,” says Valters Kronbergs, name partner at BLS’s Latvian representative, Kronbergs & Cukste. “[BLS] plans to unveil a fresh corporate identity initiative in the coming months to reflect its strength as a one-stop shop in the Baltics.”
“We want to be one firm with one name, doing everything under one name,” says Gints Vilgert, managing partner at Varul Vilgerts Smaliukas in Latvia. “But we have financial separation because we don’t know each other that well yet and need to get used to each other, but over the next few years that will all change. But this is quite a standard operation - I believe it’s also how DLA [Piper] and CMS operate. It makes no big difference.”
Consequently, full-on mergers still appear unlikely anytime soon. Bar restrictions in each country make complete integration difficult, but the most significant barrier is that the alliance model has been so successful.
“I think many of the alliances have been able to achieve what they want and show clients they can provide added value. So the real question is, how much value would be added by full integration anyway?” says Sorainen.
According to Raidla, the alliance model may also end up providing a niche for smaller practices in Baltic States.
“I believe that in the coming years we may see another trend,” says Raidla. “We have five or six players in the market that from time to time need national local independent firms to refer work to; and in the coming years maybe one or two small national players will get significant referrals from other networks, because with the alliance model conflicts tend to arise and so we have to make referrals. But as alliances we try not to give work to direct competitors. And at the moment there’s a shortage of strong national independent firms.”
According to some partners, though, there are a number of barriers to this happening.
“The top-quality lawyers are all in the firms with alliances and I can’t really see them jumping ship to a small firm,” says Filip Klavins, managing partner at Latvian firm Klavins & Slaidins. “Also, I don’t have any qualms sending work to competitors. We’re happy to do it when we’re conflicted.”
Whether or not alliance members are reluctant to pass work to competitors, smaller national firms would appreciate more referrals since, according to one partner, they were hit the hardest by the downturn.
“The recession’s definitely affected the smaller players,” says Vilgerts. “The solo players with local clients have been hit hard because a lot of projects here were real estate and construction-related and they’ve disappeared completely, so the spin-offs from larger firms have suffered.”
And while the fortunes of firms in the Baltic States tend to rise and fall in unison (partners in all three states report declines in M&A, real estate and corporate advisory work), each country has felt the recession to varying degrees.
Estonia, known for being the Baltic state closest to the Nordic countries and for its more conservative nature, exhibited prudence in its public spending and built financial reserves, meaning it has been affected the least by the downturn.
And despite fears that the country’s currency may devalue, the Estonian government’s frugality and efforts to find alternative sources of income (the most recent being the legalisation of online gambling) mean the country is expected to join the Eurozone in 2011, pending the EU decision, which is expected sometime this summer.
“It’s more or less a psychological phenomenon,” says Raidla. “But if we get to join the Eurozone the M&A market will develop quite quickly and by a significant amount, because it gives future perspective to foreign investors to come in. And we expect a significant development in the second half of 2010 if the decision’s positive.”
But according to one partner, it is one occasion where the Baltic States’ close relationships may prove a hindrance.
“Everybody’s optimistic,” says Lätt at Glimstedt. “We’re waiting for the official announcement that we’ll become a member of the Eurozone; and businesses believe that after a positive decision that foreign investors will come back to the market, because at the moment they’re afraid because of members like Latvia [whose recession has been more severe]. Our countries are considered the same, but we’re very different, and somehow the foreign press isn’t making this distinction.”
Even Latvian partners admit that their country has suffered the most.
“We’re suffering the worst because of governmental policies, because there was less frugality,” says Klavins. “And clearly we’re the hardest hit in both the Baltics and the EU.”
Lithuania is generally portrayed as suffering only slightly less than Estonia, but according to one partner the international perception of how each country has fared throughout the downturn is not entirely accurate.
“The crises in Estonia and Latvia started earlier, around the second half of ‘07,” says Juodka. “But in Lithuania it only really started in the second half of 2008, so in overall figures they’ve suffered more. The downturn did hit a bit steeper here because Lithuania’s always had a strong export markets economy, based on the classic production model, so our crisis was due to a downturn in the export markets.
“But Estonia is better at PR and everyone sees them as the least touched by the crisis - this is not so. Although the country didn’t spend its budget money, so in relation to its public finance there are some good things about the country. However, it did enter crisis early and will end up leaving at approximately the same time as others.”
Nevertheless, the effect of the downturn has been to force traditional international investors to look inwards and concentrate on solving their own problems, leaving Baltic firms looking for new sources of business. In Belarus, which announced in 2008 its plans to privatise 500 state-owned and around 150 part state-owned businesses, lawyers believe they have found it.
“Belarus is very interesting because they’ve started privatising,” says Ivars Grunte, senior partner at Latvia’s Grunte & Cers. “They’re improving their legislation and becoming more open to investors.”
“We’ve had a surprisingly large amount of business within Belarus, even when the market was declining,” says Sorainen, whose firm opened an office in Minsk in March 2008. “The problems in Belarus are political and bureaucratic, but things are improving.
“In the World Bank [Group] statistics the country’s ranking has gone from 115 to 58 in terms of ease of doing business, so it’s a much better place to do business than it was two years ago; and the improvements are ongoing. And with [a population of] 10 million, it’s bigger than the Baltics.”
And while the region still has the promise to be a lucrative market for Baltic businesses and law firms, there are concerns that the privatisation process in Belarus has stalled.
“Belarus is the market where the biggest players have a presence at the moment,” says Lätt. “Sorainen and Glimstedt both have offices there, and so do some of the other large players. But I think the firms were too optimistic, and due to all the red tape things have moved quite slowly there.
“But we still must be ready and have links there. It’s a good time for cross-Soviet countries to go there because we’ve already lived through what the country’s going through now some 15 years ago, and so we know how to privatise - that’s why we have to be there.”
“We’re definitely keeping an eye on it,” says Klavins about Belarus. “But the question is, when is the right time to enter there? There are a few firms there, but with varying degrees of seriousness - some are just post office boxes, whereas others are serious operations. The question is, do you set up now when there’s a slim chance of work, or wait until things are really rolling there?”
Others, however, believe the Baltic’s traditional investors - Scandinavia and the Nordics - will provide firms with the best hope for the future, even if for the time being these countries are mired in their own problems.
“The Nordic and Scandinavian countries are in same situation economically as the Baltic States, but they’re not showing it,” says Vilgerts. “But if you think long-term, many Nordic companies will probably buy out our region’s mid-sized companies. Around 50 per cent of Baltic State companies are owned by foreign capital, and half of those by Nordic countries.
“The most important strategic decision now is, who has the best partners outside the Baltics? Raidla has really good partners in Finland and Sweden and Glimstedt has a good footing in Sweden, and that’s what we see as a threat - pan-Baltic law firms with strong links to Nordic countries.”