‘We’re using sanctions as a catalyst for change’ – Russia’s lawyers on winning back investors

                                                        In association with 

Kazan

Russia has been through a wave of change in the past few years. Conscious that business is being lost to overseas jurisdictions because of the way local laws work, the government has reformed first the country’s civil code, then the arbitration system.

At the same time, the conflict that unfolded between Russia and Ukraine in 2014 has led to the imposition of sanctions by the US, EU and other Western nations. Those sanctions have contributed to a fall in investor confidence and a drop in the value of the rouble.

Within the Russian legal community, there is a clear acknowledgement that sanctions have had an impact on business – but also a desire to use the situation as a catalyst for change. Speaking at a recent conference in Kazan, the head of Russia’s Federal Antimonopoly Service (FAS) Igor Artemiev told delegates that the sanctions “are waking us up”.

His comments were echoed by many at the forum, hosted by CIS firm Egorov Puginsky Afanasiev & Partners (EPAM) together with the Republic of Tatarstan (for facts on the Republic, see below). While the focus of the forum is firmly on Russia – and especially Tatarstan – being open to business and keen to welcome investors, some sessions discussed why recent reforms are yet to bear fruit.

(L-R): Nina Bystrova, Russia-China Investment Fund; Joanne Harris, The Lawyer; Sergei Ostrovsky, Ashurst; Robin Wittering, EPAM

Although sanctions are the elephant in the room for any transaction in Russia, lawyers recognise that they are unlikely to disappear soon so instead are working to make the best of the situation.

“The sanctions regime is unlikely to disappear in the short term,” said Diana Vinokurova, legal director for Carrier Commercial Refrigeration Russia, at a session focusing on compliance.

“Sanctions are political,
not legal. You need lawyers who understand how Washington works now” 
Andrew Mac, EPAM

EPAM Washington DC managing partner Andrew Mac agreed, saying businesses need to take the right approach to dealing with sanctions, while noting that it is common for corporates to be treated more harshly for circumventing sanctions than for simply not complying.

“Sanctions are political, not legal,” Mac says. “You need lawyers who understand how Washington works now.”

Civil code throws a curveball

Arguably to do business in Russia you also need lawyers who understand how Russian law and business function – as well as English law. The choice of which law to choose for corporate transactions has been made harder since the 2014 introduction of the new civil code which means, according to EPAM partner Robin Wittering, that Russian law now allows “80 per cent of the technical things English law does”.

Despite this, Wittering thinks English law will continue to feature in the Russian legal system. “It’s said that there’s only two kinds of people who’ll never be unemployed in Moscow: sushi chefs and English lawyers. English law will survive because of its flexibility and how it can be arbitrated.”

Other panellists agreed that English law has more flexibility and predictability than Russian law, but that the Russian system will eventually gain popularity.

“The system has a lot of momentum, but some time will pass before these principles start working”Artem Karapetov, M-LOGOS 

“The system has a lot of momentum, but some time will pass before these principles start working,” said M-LOGOS Law Institute director Artem Karapetov.

The new Russian system of arbitral fora is a similar picture. EPAM litigation co-head Dmitry Dyakin explained that the system was implemented only a year ago and introduced the concept of permanent arbitration institutions to the Russian system, as well as bringing clarity to the rules on what disputes can be arbitrated. The system is still in its early days and panellists said users should be patient as it develops.

“It took the London Court of Arbitration 100 years to achieve this level,” pointed out Vitaliy Bezbakh, chairman of the Independent Arbitration Chamber.

Sberbank COO and litigation head Nadezhda Tretyakova said the reforms are welcome: “We had a lot of pressure on the system of Russian commercial (arbitrazh) courts. We believe it will foster the development of arbitration processes.”

However, Tretyakova adds that there remain some disadvantages in the new system, including its need to embrace technology and improve its speed and efficiency.

Bureaucracy inherent in picking arbitrators is another flaw of the reformed system, said Russian Arbitration Association secretary-general Roman Zykov, with experienced arbitrators put off by requirements to produce evidence of their qualifications and other documents.

Rupert Boswall, RPC

Despite the reforms, taking disputes out of Russia remains popular with many businesses and oligarchs. RPC senior partner Rupert Boswall said the UK is “emphatically still the venue for Russian fair hearings”, and pointed to several cases brought to the High Court with no connection to the UK.

Nevertheless, Clemens Trauttenberg, head of disputes for Austrian firm Wolf Theiss, stressed the need for a Russian law professor to advise on the intricacies of Russian law when handling a case overseas.

Legal revolutionaries

At the plenary session, where the 650 delegates were welcomed by the president of Tatarstan Rustam Minnikhanov and a note from Russia’s prime minister Dmitry Medvedev, EPAM chair Dimitry Afanasiev said the legal community is playing a key role in the development of the rule of law and the use of Russian law in the country.

“Law is the bloodstream of the economy,” Afanasiev says. “Problems in business are connected with a lack of blood.”

There has been a threefold increase in the number of significant deals governed by Russian law since 2012 – proof that reforms are beginning to take effect, he said.

“Law is the bloodstream of the economy. Problems in business are connected with a lack of blood” Dimitry Afanasiev, EPAM

FAS head Artemiev said the development of competition is a “great stimulus” for business, later adding: “Big monopolies aren’t always good. Usually they act by putting pressure on everything around them.”

He used FAS’ ruling over Google (where the American company had to stop requiring Android phone makers to install its apps and services and instead offer Android users a choice of default search engines), two years before the European Commission made a ruling on a similar issue to show how it was forward-looking in its decision-making.

Meanwhile, digitalisation has become a key issue for regulators and there is a “fine legal balance between antitrust rights and digital rights,” according to Artemiev. “You can’t put robots into jail,” he said.

Dimitry Afanasiev, EPAM

FAS is also looking at its own use of technology, having launched a pilot project last year with Sberbank to exchange documents using blockchain. Blockchain was another recurring theme of the conference.

On one such panel Moscow Stock Exchange legal head Alexander Smirnov claimed that automation is now addressing “80 per cent of lawyers’ needs”.

“I think a lot of routine work will disappear and be overtaken by the robots,” predicts Artem Podshibyakin, head of legal for the Russian arm of fashion company Inditex. “But for more creative work I doubt technology will replace the human brain.”

Although legal technology companies are rarer in Russia than in the US or UK, the panel predicted that such start-ups are ripe for growth across the world.

Throughout the conference there was clear acknowledgement that lawyers can play a leading role in the development of strong business practices, building the economy and developing technology in Russia and elsewhere.

And while the event may have focused on Russia, the presence of delegates from 30 countries shows a willingness by the global legal community to share and learn from each other for everyone’s benefit. The future holds challenges, but also opportunities.

Tatarstan: going all-out for foreign investment

Kazan is the capital of the Republic of Tatarstan, one of the 85 provinces, republics and other regions that make up the Russian Federation. About 3.8 million people live in Tatarstan and more than 1.2 million in Kazan itself, and 75 per cent of the population live in urban ­centres. Kazan is Russia’s sixth-largest city.

Tatarstan has two official languages – Tatar and Russian – and two official religions, Russian Orthodox Christianity and Islam.

The republic is largely industrialised and built on petrochemical production. Major employers include truck-maker Kamaz and state oil company Tatneft. More recently Tatarstan has sought to develop itself as a centre for innovation, establishing two ­special economic zones designed to host start-ups, ­especially in technology.

Tatarstan aims to build an economy based on innovation and hi-tech, with the growth of professional services a corollary to that

Its ‘Strategy 2030’ is centred around building an economy based on knowledge, innovation and hi-tech sectors, with the growth of professional services a corollary to that aim.

Investment agency Invest Tatarstan says the state is the top-ranked region for investment in Russia, attracting $2m (£1.5m) in foreign investment daily. Private equity is its largest source of capital investment, representing 66.4 per cent of funds.

Much of the republic’s development came after it hosted the World Universiade, a summer multi-sport event for students, in 2013. That sparked significant infrastructure development, which has continued as the city prepares to host the quarter-finals of the FIFA World Cup in 2018.