Losing £1m a year is a problem for any firm, magic circle or not. But what happens if the said firm is operating in an economy where there is little chance that it will recoup its losses, if the work has all but dried up and it is left with an empty shell of an office? And if that firm is Mayer Brown & Platt’s Moscow office, you would do the sensible thing – cut your losses and leave. While Mayer Brown had the courage to get out of Moscow in September 1999, and subsequently sold off other CIS offices in Bishkek and Tashkent to Chadbourne & Parke, there is still a high number of foreign offices operating in the CIS, which firmly believe that business is about to be rejuvenated.
Milbank Tweed Hadley & McCloy’s head of legal in Moscow Holly Nielsen is convinced that Russia is a country on the brink of revival. “I think that a lot of the offices here are profitable. I don’t think that the market has recovered fully, but it’s cyclical. After the crisis, consumer spending is back up to 1997 levels,” she says. Nielsen’s upbeat view on the future of the Russian economy is commendable, considering that Milbank is planning to close its Moscow office by the end of the year (The Lawyer, 18 September).
It appears then that lawyers are still happy to paint a picture of Russia as a lucrative emerging market, and there is some evidence to support this view. This year has seen the country’s first initial public offering (IPO) since the crisis of August 1998. Mobile TelecomSystems floated on the New York Stock Exchange in July, giving the Russian telecoms giant a market capitalisation of $2.1bn (£1.45bn). It was the US firms that won out on this deal, with Cleary Gottlieb Steen & Hamilton acting for the issuer while Latham & Watkins represented underwriters Deutsche Bank and ING Barings.
Also expected in the coming year is the flotation on Nasdaq of Information Business Systems, the country’s largest IT company. But Gennady Khareyn, head of McDermott Will & Emery‘s representative office in Moscow, remains cautious. “Security is coming back to the market, but very slowly. The work we’re doing is more for Russian clients in the US,” he says.
The all-important Western investors are slowly beginning to warm to the idea of pumping funds into the region again. After losing about $260m (£179.3m) in Russia in 1998, even the European Bank of Reconstruction and Development (EBRD) is looking positive, having already invested $700m (£482.9m) into the region this year, compared with last year’s $120m (£82.9m).
Are lawyers like Nielsen right? Is there light at the end of the tunnel, or is the promise of an upturn just an illusory dream? As one lawyer with experience of the Russian market says: “[The news of an upturn] is absolute rubbish. There’s an enormous amount of misinformation in that market. People are claiming that work is incipient, but the truth is that these are possible or ongoing deals which have been doing the rounds for two or three years and joint ventures which have been going on forever.”
A prime example of this is the Blue Stream project, under which Russian energy giant Gazprom is planning to build a gas pipeline under the Black Sea to Turkey. Cleary Gottlieb is acting for Gazprom and Norton Rose is representing the export credit agencies involved in the deal, while Clifford Chance P¸nder is representing joint arrangers Mediocredito Centrale, Banca Commerciale Italiana and Westdeutsche Landesbank Girozentrale (WestLB), which have now begun syndicating the loan. The firm is also acting for Fuji Bank, the lead arranger for two Japanese facilities. Richard Pettit, finance partner at Clifford Chance’s London office, is leading the deal.
And it is an impressive deal, as well as being a great example of the work that foreign firms hoped to gain when they flocked to the region at the beginning of the 1990s. However, the Blue Stream project began nearly three years ago. Pettit says: “It has suffered delays. It was delayed at the hands of Asia’s own [recession of] August 1998.”
Meanwhile, Freshfields is acting for the EBRD on its role as equity partner and lender to a $600m (£413.9m) joint venture between General Motors, represented by Clifford Chance P¸nder, and local company AO AvtoVAZ. But Jacky Baudon, managing partner of Freshfields’ Moscow office, admits: “I’m not too sure it’s going to happen this year.”
The M&A field, however, does at least have a slightly more positive story to tell. Following the flurry of privatisation that began under Yeltsin in 1991, the market is now consolidating, generating work for both US and UK firms. Paul Melling, founding partner at Baker & McKenzie‘s Russian practice, says: “Now that the privatisation process has closed, there are lots of privately-held companies which are a target for foreign companies to get into.”
But Dan Braverman, a partner specialising in M&A and capital markets at Cleary Gottlieb’s London office, says: “There’s a lot of work in itself, but the amount is too small to be significant because the companies handle [legal advice] internally. It’s a direct threat to the international legal community.”
Baudon is equally pessimistic. “I’m disappointed with the way it’s improving. We’ve been working on many deals, but the size of these deals has been relatively low,” he says.
Freshfields has been involved in some of the few major deals that are taking place, notably working alongside Coudert Brothers for Vector Group (formerly Brooke Group) on its $390.5m (£269.4m) sale of Liggett-Ducat to the Gallaher Group, advised by Chadbourne & Parke. However, the value of deals is generally much lower. Baudon says: “We’re working on acquisitions and joint ventures where the average is not more than around $60m (£41.4m). There is a possible deal in two weeks which could be around $100m (£69m), but the rest are much smaller amounts.”
The paucity of work on offer has affected the results for the first quarter of the year for Freshfields’ Moscow office. It made just £500,000 in the first quarter of this year compared with £1m over the same period last year.
In fairness, though, nearly every firm has suffered in Moscow. Eversheds went the whole hog and closed its small office in September. Linklaters & Alliance, in a very telling move, relocated securities and banking partner Philip Charlton to its Polish office in July this year. Allen & Overy (A&O) scaled back significantly after the crisis, cutting six lawyers from its practice immediately, although it has recently scored some potentially lucrative project work as part of a consortium that includes Arthur Andersen, advising the Russian government on the restructuring of Russian telecoms giant Svyazinvest.
Clifford Chance P¸nder has made nearly 30 staff redundant, including three local lawyers, and while the firm is working on the lucrative Blue Stream project, it is in fact being led by its London and Hong Kong practices. Despite the losses suffered, Clifford Chance still likes to paint itself as the largest foreign firm in Russia, but then again, size isn’t everything.
In comparison to the legion of US firms operating in the region, the UK practices are behemoths. Lovells has just taken on a tranche of lawyers from US firm Baker Botts, leaving the latter with just a handful of lawyers. Meanwhile, McDermott Will & Emery earlier this year closed its St Petersburg office, leaving it with just one Russian office in Moscow, staffed by just four lawyers.
For those firms aiming for the high-end work in the region, it is a dangerous path to tread. The firms that are gaining what this type of work there is are predominantly US firms, which are heading the deals from offices in the US or London while keeping the Russian practices small. A prime example of this is Cleary Gottlieb, which had acted on a high number of capital markets deals before the crisis and then picked up much of the scant opportunities on offer since the crash. It has kept its Moscow capacity to a bare minimum with just six lawyers, including a US special counsel and a Russian lawyer currently on secondment in London, and prefers to say it has a “presence” rather than an office there.
Braverman says: “We’ve kept our size small and have hired people we think can work there and in other areas. We’ve deliberately tried not to get to the stage where we have to lay people off. UK firms are a lot bigger and do a wider range of work than we do, but we do work on the bigger transactions. UK firms mainly do local and day-to-day work.”
Elsewhere, Akin Gump Strauss Hauer & Feld’s 13-strong office recently acted for Vimpelcom on its recent $95m (£65.5m) public offering of American Depository Receipts (ADRs) and the $75m (£51.7m) flotation of convertible notes on the New York Stock Exchange. Skadden Arps Slate Meagher & Flom’s six-lawyer office represented UBS Warburg, the underwriter on the deal, while LeBoeuf Lamb Greene & MacRae advised the EBRD, which purchased 3.2 per cent shares in the company. Coudert Brothers gained a slice of the action through its client Telenor, which purchased $51.9m (£35.8m) American Depository Shares (ADSs) in Vimpelcom.
On the M&A side, Baker & McKenzie, one of the first offices to launch in Russia in the late 1980s, recently acted for Merloni Elettridomestici on its $119.3m (£82.3m) purchase of local company Stinol. Novolipetsky Metallurgichesky Kombinat (NLMK), the owner of Stinol, was represented by Debevoise & Plimpton.
Melling says: “You have to look at what the [original] plan was for being here. When all of that is considered, it differs from firm to firm. There are some law firms that came here with a different game plan, focusing on the high end in the corporate markets. What surprises me most are the firms coming in. The market is already over-lawyered – there are about 60 or 70 firms here.”
Baudon says: “It was just a strategic decision that we had to be in Moscow. But when we opened here we knew that this particular road would be bumpy.”
Step forward Herbert Smith and Haarmann Hemmelrath & Partner, which entered the region in June 1999 and March 2000 respectively. Richard Fleck, practice development partner at Herbert Smith, says: “The reason was very simple. We have a substantial number of clients in all the emerging markets and Russia is one of the last areas of natural resources, so we wanted to support our clients there.”
Energy certainly remains one of the few strong areas of growth in the region, with both US and UK firms such as Lovells and Denton Wilde Sapte (Denton Wilde recently taking on the Tashkent and Almaty offices of CMS Cameron McKenna) being able to build successful practices.
While Fleck is confident about Herbert Smith’s performance in the region so far, he does, however, say: “Generally, the work has not been in corporate as we expected it to be.” Where, then, is the justification for firms chasing the high-end work – for example in corporate and capital markets – to be in the region? Is the moniker of “global law firm” more important than looking at whether the work justifies having a large presence in a difficult market?
The US firms have taken a much more opportunistic approach to the Moscow market, keeping their offices small and their eyes firmly on the work, rather than the coverage of the globe. Perhaps their UK counterparts would do well to follow suit.
As one lawyer who has spent time practising in Moscow says: “Many firms took the position that it would be more difficult to close an office and then reopen it. The fact is that people are still closing offices. Why would they be doing this if there was work there?”