Trying times

The Balkan economic climate continues to be stormy, but the arrest of Ratko Mladic and Serbia’s modernisation drive as it bids for EU membership are signs of better days to come. Joanne Harris reports

Serbia is hurtling towards a ­deadline. The country is ­seeking to confirm its candidacy to become a member of the EU by the end of this year, and the chances of this happening have been ­boosted immensely by the recent arrest of Bosnian Serb general Ratko Mladic on charges of genocide.

While Mladic’s arrest is not connected directly to Serbia’s economy, lawyers believe it will have an effect on the stagnant and ­difficult business environment they have been combating for the past couple of years.

“The Belgrade stock exchange isn’t ­something that can reflect major change but there was an increase in its value ­following the arrest,” observes Branislav Maric, managing partner of Kinstellar’s ­Belgrade office.

Borislav Boyanov, managing partner of Bulgarian firm Borislav Boyanov & Co and chair of regional alliance SEE Legal, agrees that there was an “immediate effect” on the markets after Mladic’s arrest.

Wolf Theiss Bosnia & Herzegovina ­partner Sead Miljkovic says the arrest is all part of Serbia’s attempt to join the EU.

“This is actually a positive movement,” Miljkovic notes. “Obviously this will ­contribute to the economic situation as well.

This is a good sign that the current ­government in Serbia thinks that the future of Serbia is in the EU, instead of being ­traditionally aligned with Russian politics.”

But Serbia is doing far more to bolster its chances with the EU. Most notably, its ­government is pushing through a large number of new laws – “zillions”, says Maric – designed to update and modernise ­elements of the country’s regulatory ­environment. Areas targeted include capital markets, corporate governance and IP.

The idea is to harmonise Serbia’s laws with those of the EU in readiness for its eventual accession. Surrounding Balkan countries are following suit, even though they are not yet fighting for EU candidacy.

“For us lawyers that means the legal ­environment is rapidly changing,” Maric says. “It means that there’ll be requests from clients for new legal provisions and guidance from lawyers on that. The candidacy is ­politically important for Serbia and it should result in a positive climate for the market in general.”
Welcome break
Any move that encourages business is ­crucial at the moment. The Balkan area has suffered as much as, and arguably more than, its Central and Eastern European neighbours. Local work in particular, say practitioners, has almost dried up.
“The economic crisis really hit these ­countries heavily,” notes CMS Reich-Rohrwig Hainz Serbia and Bosnia ­managing partner Radivoje Petrikic. “The economies are recovering but conditions are really very unfavourable.”

Miljkovic agrees. “These are difficult times – I would say that all of the law firms are feeling different challenges,” he says. “Firms doing only local work have really suffered. We also experienced a drop in ­foreign investments, which traditionally were something we relied on.”

Genc Boga, managing partner of Boga & Associates, says the environment in Albania has been similar.

“2008 was a peak and then the world ­crisis hit here so some projects were ­cancelled while others were left on standby, and we saw a lower rush of investments in the country,” says Boga.

Lawyers report an increase in restructuring work across the region as ­companies, particularly financial institutions, strive for security.

“We’re seeing an increase in the tax ­collection type of work,” says Miljkovic. “Clients such as the big banks are struggling to collect their receivables and stablise their business in the region.”


However, it is not just corporates that are wrestling with their budgets. The region’s governments are also trying to find ways to source cash and cut deficits. In Serbia this has played out through a lengthy, but so far unsuccessful, privatisation process of state telecoms company Telekom Srbija.

The privatisation was first mooted in 2009 and the bidding process got ­underway with a tender for the government’s financial adviser position in 2010. Citigroup was the only bidder for the role. The full tender process got underway later in the year, with seven companies – ­reportedly Deutsche Telekom, France ­Telecom, Telekom ­Austria, Mexican America Movil, Weather Investments, Turkcell and Vimpelcom – signalling their interest.

But by the beginning of May 2011 Telekom Austria, advised by Schoenherr, was the only remaining bidder. Deutsche Telekom, represented by Karanovic-Nikolic and France Telecom, advised by Gide Loyrette Nouel, had both pulled out at an earlier stage. Telekom Austria’s final bid for the 51 per cent stake was e1.1bn (£980m), e300m less than the government’s ­minimum of e1.4bn.

Matija Vojnovic, a partner at Schoenherr’s associated firm Moravcevic Vojnovic Zdravkovic in Belgrade, says that despite its failure, the process kept “at least four of the transactional law firms in town busy”.

“The general impression of the ­environment was that the government’s price expectations were not realistic,” adds Vojnovic.

The privatisation process itself could do with some improvement, lawyers add. “The conditions for Telekom Srbija were tough. I was quite sure that nobody would place any bids,” says Petrikic.

The government also tried and failed to privatise state pharmaceutical company Galenika last year. There are now indications that the Serbian ­government is looking to privatise other companies, such as state ­airline Jat Airways.

Serbia has also signalled its intention to issue a e1bn eurobond later this year. Banks have been invited to bid and law firms are looking for companies to advise.

“The fun part for law firms is to team up with banks and advise them on the issue,” Vojnovic points out.

Green light

In the meantime, although M&A activity remains sluggish there are prospects for activity in the energy sector. This stretches right across the Balkan region, with lawyers in every country reporting significant ­interest from local and foreign investors in the development of renewable energy ­projects.

“Recently, the acquisition of concessions in hydropower generation has been ­important in the volume of work,” Boga says of the Albanian market.

In Serbia, German energy company RWE Innogy and Serbian state energy utility Elektroprivreda Srbije (EPS) have just signed a joint venture agreement, split 51/49 per cent, to develop five hydropower plants in Belgrade. Schoenherr is advising ­longstanding client RWE.

“While hydropower in Germany has only limited development potential left, the potential in Serbia and other countries of south-eastern Europe for both run-of-river and pumped-storage power plants is ­considerable,” RWE Innogy CEO Fritz Vahrenholt said in a press release issued when the agreement was signed.

Kinstellar’s Maric adds that several wind farms are also under construction in Serbia, or are completed and awaiting someone to take over the concession. One attraction of Serbia for renewable energy projects is the feed-in tariff system introduced in early 2010 to support and promote these schemes.

Government subsidies and loans have also helped attract other industries to the ­country, say lawyers. One example is the financing provided to Italian car manufacturer Fiat. On 2 June Serbia approved e200m of loan guarantees to Fiat to ­develop an existing central Serbian factory, on top of e500m financing from the ­European Investment Bank to modernise the plant.

“That’s fuelling new investment,” reports Maric. “It caused the creation of a cluster of car producers coming to central Serbia where this is taking place.”

Petrikic agrees that government ­subsidies have made coming to Serbia attractive for industrial companies. The country is seen as the most attractive in the region by far, ­partly because of its efforts to bring itself into line with the EU and also simply because of its size.

Also, neighbouring countries all have individual problems that are potentially putting off investors. For example, Petrikic points to the lack of a government in Bosnia since last October’s elections, which has slowed down the markets and the country’s attempts at privatisations.

“The serious foreign investors are all ­trying to bypass these problems,” believes Miljkovic. “From a Bosnian perspective, once we get the government in place and start thinking about the economy we’ll see some progress.”

There are signs across the region that the end of the recessionary tunnel might be near. Maric suggests that proposals to upgrade Serbia’s PPP legislation could ­kickstart projects again following a lengthy period when infrastructure development was in limbo thanks to a dispute over a highway project.

Another area that seems to be thriving is IP, again off the back of new legislation. Mihajlo Zatezalo, director of IP boutique Petoševic’s Balkan regional office, says that although the local economies are ­admittedly weak, a focus over the past few years on IP and copyright enforcement has paid ­dividends across the region.

Zatezalo outlines a range of cases in which Petoševic has been involved, including ­representing well-known corporates on infringement cases against producers, importers and sellers of counterfeit goods. He says local authorities have clamped down much more heavily and are ­cooperating better with each other – for example, the police now work alongside customs authorities to catch smugglers at point of entry.

“We’ve had better results than EU ­countries in the past five years,” declares Zatezalo.

A legal ’soap opera’

While the various legislative moves in IP, companies law and capital markets are a positive sign for the wider Balkan economies, the legal market itself is still struggling with restrictions.

Last year, as reported in The Lawyer’s 2010 Balkan Special Report, a group of larger commercial law firms teamed up to push through their candidates for the board and presidency of the Belgrade bar ­association. While the lobbying effort brought record numbers of lawyers to the polls, the after-effects have been less ­positive.

Lawyers report a continuing stalemate in the association over the Serbian ­government’s proposals to reform the way law firms are allowed to practise.

A law passed a few weeks ago introduces concepts such as conflicts of interest and will make professional indemnity insurance mandatory for the first time. However, ­commercial lawyers still feel that it does not go far enough, and the law remains restrictive for foreign firms. Within the ­Belgrade bar association there has been deadlock, with nobody agreeing on whether the legislation is the right step.

Vojnovic says the whole process has been chaotic. “It’s a soap opera,” he remarks. “It’s hard to develop the legal profession when the professional association is paralysed.”

He says the law is a step forward, but not far enough. On the plus side, the process of arguing over it has at least brought larger firms closer together.

While the profession awaits the ­implementation of the law, the few ­international law firms in the Balkans are still forced to operate officially through ­associations and alliances – although ­partners such as Schoenherr’s Vojnovic or Wolf Theiss’s Miljkovic consider themselves part of the wider firm. Indeed, Vojnovic and fellow Belgrade partner Slaven Moravcevic joined Schoenherr’s equity in February 2011.

Last year saw the arrival and departure of some international firms in Belgrade. ­Kinstellar’s March 2010 opening has, says Maric, gone well despite the recession.

“It can only be viewed as a long-term investment,” he notes. “We know that ­Serbia’s already a developed legal market. We think there’s need for the type of profile we represent and we try to do high-quality, high-complexity work. We think we can add something to the market in that respect. We’re building our profile and it takes time.”

Meanwhile, French firm Gide pulled out of Serbia in late 2010 as part of its global strategic review. Despite this, the firm still retained its instruction from France ­Telecom on the Telekom Srbija privatisation, and continues to focus on the region from Budapest.

Lawyers in Belgrade do not think Gide’s withdrawal made a great impact on the market, some confessing that they did not really understand the firm’s model in Serbia anyway.

Other Balkan jurisdictions are also fairly quiet when it comes to movement within the market. Albania recently saw a change of hands, after the Eversheds Bianchini Tirana office moved en masse to CMS Adonnino Ascoli & Cavasola Scamoni.

Boga thinks the move is generally positive, although he notes that it is heavily Italian-driven and is unlikely to have much impact on more domestic Albanian practices.

“It shows that some international firms are having consistent work in the country,” he observes.

However, Boga does not think that ­Albania has room for many large ­international firms. Allen & Overy (A&O) used to have an office in Tirana, but pulled out in 2004, with Wolf Theiss taking over the operation.

“You can’t generate the fees to make it ­possible for a partner of A&O to develop the firm,” Boga says, adding that even during his time as a partner at accountancy firm KPMG he was the only partner in the legal team.

Equally, an influx of foreign law firms is not expected in other Balkan states. Despite the changes in legislation and the move towards the EU, firms continue to be ­cautious, keeping an eye on costs and staff numbers. Some of the big firms have added a few junior lawyers, but the lateral hiring market is quiet and looks likely to remain that way for the foreseeable future.

“Everyone’s aware that these are difficult times and that this crisis will sooner or later disappear,” says Miljkovic. “Even our clients are cost-sensitive these days. They’re always fighting for as much as possible. Law firms are struggling and thinking about cost ­savings and making some redundancies. We hope this situation is temporary.”

A successful privatisation, or more ­developments such as the Fiat factory, would boost the mood and activity in the Balkans. But lawyers all expect that tough times will continue for a few months yet.