Retreat from Moscow

Moscow's expatriate lawyer community has been a hotbed of rumour for months. Lawyers swapped stories, and calls to practices in the city threw up half a dozen tales of sackings, closures and firms in their death throes.

Yet until recently little tangible evidence had emerged to indicate how the major firms were dealing with the financial chaos in Russia. Things had officially been quiet on the Moscow front.

But last week, in the first reported major bloodletting since last September, The Lawyer revealed that Freshfields had axed three of its Russian lawyers and 10 of its support staff. And the firm added that more redundancies could follow.

With Russia's economic and political problems still hitting the headlines – and no sign of an imminent recovery, despite the economic rescue package put together last year – what will be the fate of law firms that have embraced the Russian bear?

The Russian crisis came to a head in August last year as the result of fiscal imbalances and structural weaknesses in the enterprise and banking sectors. Among the more alarming consequences was a 70 per cent depreciation of the rouble against the dollar over five months as foreign direct investments fell from $6.2bn in 1997 to $1.2bn in 1998. In the same period, GDP fell from $446bn to $329bn, external debt rose from $12.9bn to $17.6bn and a host of other indicators showed an economy in crisis.

Things look as if they are going to get worse before they get better with the IMF predicting a continuing fall in GDP and rise in prices.

Before last August, Moscow had been booming, with law firms mopping up fees from banking and capital markets work as eager foreign investors poured money into Russia. There was a huge demand for Russian-speaking lawyers, and assistants at US firms were reported to be earning New York-size salaries.

But the events of late summer hit investor confidence hard, and the “glory days”, as one source dubs them, ended abruptly.

The first major firm to react to the crisis was Allen & Overy. In a move that was either courageous or crude, A&O slashed six of the 32 lawyers at its Moscow office last September.

The clearout's swiftness and severity surprised A&O's rivals, but managing partner Chris Roberts says others have admired its decisiveness.

He says: “Clients have expressed surprise that others haven't cut, and the reaction from other firms in London has been, 'You bit the bullet early' and wondering why their lot haven't done so.”

Sources say A&O has gained a reputation for ruthlessness in Moscow that will not serve it well when work picks up and Russian lawyers are once again in demand. But Roberts is unconcerned.

“It may have an effect and I would rather it didn't, but I don't think the number of people applying for jobs is going to diminish. You are still going to get people of the quality you need, and after a year or two it won't be any different.”

Cameron McKenna also made cuts last November in its Moscow office which have gone unannounced until now. Three Russian lawyers, including the lawyer who headed the office when it opened in 1993, were made redundant, while another was relocated to London.

Head of Camerons' CIS group, Elena Kirillova, says: “We considered which of the lawyers had the broadest range of experience, because we couldn't afford to have people who were specialists, so the ones we tried to keep were the ones with the broadest experience.”

This need for staff with general know-how reflects the huge change in the type of work available since August. Kirillova says that, like other UK firms, Camerons' pre-crisis clients had been foreign investors and banks, “so it was all about money coming in”.

Post-August, firms have found themselves involved in litigation and bank restructuring as companies and institutions seek legal help in salvaging their businesses. Roberts justifies A&O's cuts succinctly: “If you are writing prospectuses and doing due diligence you need bums on seats, but for restructuring work you need people who are more senior.”

Other big firms have resisted the temptation to slash and burn. Clifford Chance managing partner Tony Williams insists any staff changes would have been made whether there was a boom or a slump. It has redeployed at least 10 banking and financial markets lawyers to litigation.

“We spent a hell of a long time building up the Moscow team and one of the advantages of being a firm of our size is we can do this, and the billings justify that,” he says.

But even those firms that are reluctant to make swingeing cuts are finding other ways to reduce numbers and costs. Some firms' staff have been encouraged to take leave of absence, while others have been told: “Go and do some studying and we will come and get you when things pick up,” says one source.

“Expats are being replaced with more junior people in law firms and institutions generally. People are seeing that they can apply expensive resources elsewhere – London is still booming and the Americans are getting to grips with the euro,” says the Moscow managing partner of a UK firm.

In September a London-based senior partner told The Lawyer: “Anyone who says they are making money in Moscow is lying.”

But Williams says Moscow is passing “the key test” of making money, while Kirillova says Camerons' Moscow operation has met the budget set for it during the optimistic days of April last year. A&O claims it is “just about covering our operational costs”.

Many in Moscow think there will be further redundancies in the coming months and perhaps a number of closures, with the smaller US offices likely candidates.

The Lawyer reported in February that senior US partners were pulling out of Russia, with Akin Gump Strauss Hauer & Feld managing partner Michael Waller the third to leave in two months.

Generally, UK and US firms in Moscow are there for different reasons and they have different levels of involvement.

UK firms tend to have more lawyers and provide a broader range of services, whereas many of the US operations have been set up to serve particular clients with interests in Russia and have fewer, more specialised staff. Consequently UK firms have been better prepared to adapt to the changed environment of the crisis.

Bruce Bean, a partner at Clifford Chance in Moscow, was previously at Coudert Brothers and has seen both sides at work. He thinks US firms are not as well organised as their UK equivalents. US firms do not tend to push work through to their Russian offices and this adds to the offices' isolation.

“[US firms] don't feed each other and each partner stands alone and if you are in London you don't have any incentive to send work to Moscow,” says Bean. “I think some of those American firms are wondering what they are going to be doing next week.”

But Bean picks out US firm LeBoeuf Lamb Greene & MacRae as a long-term player, in part because managing partner Brian Zimbler is a “strong leader who brings in business”.

Zimbler says the firm has found a balance between the growing market for major projects and work generated by the crisis. “Broad-based firms are most likely to survive,” he says. “We do a range of work including corporate finance, capital markets, litigation and IP. The breadth helps to balance the practice.”

Russia is a tough market for all firms. Taxes and overheads are high, and there is more bureaucracy and paperwork than in other jurisdictions. Cash-strapped clients, hit by the freefall of the rouble, are squeezing rates, and firms are having to accept that they may not get paid.

Roberts expects to be hit by bad debt and unrecoverable bills at year end, but is taking measures to minimise risk: “We have tightened up on credit control. We are loath to do work for clients who might not pay, and there is an emphasis on money up front.”

Baker & McKenzie's Moscow managing partner Carol Patterson says: “Some clients, especially in the consumer goods area, have had trouble with collection on accounts. We have to be more understanding of the clients.”

Of course the economic crisis that hit the headlines last year was not the first Russian crisis. Old Moscow hands like Patterson and Kirillova talk of a string of political crises including the coup that ousted president Gorbachev in 1991 and the siege of the White House in 1993. There is a sense that “this is Russia, crises happen”.

Both argue that the country's problems remain as much political as economic. This autumn's elections to the Duma are followed by next June's presidential election, after which there will be a period of confidence building. That is, analysts argue, providing there is any political reason for confidence.

So firms uncertain whether to stay in Moscow must wait until the end of next year before there is any chance of the political stability sought by foreign investors.

Confidence is, of course, also influenced by culture, and the image of a crime-ridden system, presided over by a weak leader, adds to the unease of potential investors.

“What everyone's hoping for here is a clean broom to sweep out the corruption that is plaguing the economy now,” says Eversheds' Moscow managing partner Britt Shaw.

A mass exodus of firms is not expected. Indeed Herbert Smith is due to open an office, presumably to capitalise on increased litigation work.

Those which opened offices to cash in on the boom will be the main casualties, while firms with a long-standing presence in Russia, or the international profile that makes Moscow an essential part of their business, will remain.

People who know the country well think that although Russia is in the midst of financial chaos, it remains a proud nation and does not take kindly to fair-weather friends.

Seasoned observers of Moscow's business community argue that Russians value relationships and need to know that their advisers will be there in the long term. Firms cannot expect to flit backwards and forwards according to the economic indicators.

“If you pull out now, you pull out for ever,” says Kirillova.