Legal Russia: bear market
- Author: Vladislav Zabrodin
- Date: 08.02.2016
Since 2014, the energy-dependent Russian economy has been hit by western sanctions and low oil prices, tipping it into recession. Russia’s GDP was expected to shrink by 3.8% in 2015 and a further 0.7% in 2016, according to the World Bank.
The legal sector has also suffered, according to Brian Zimbler, managing partner of the Moscow office of US firm Morgan Lewis: ‘We see a general fall in all forms of legal business.’
Sanctions have become a big part of the practice for all international corporate lawyers in Russia,’ Zimbler says. Although his practice focuses on M&A and private equity, in the past year Zimbler has spent about half his time on sanctions or sanction-related matters, making sure that foreign clients do not violate them and Russian clients ‘adjust their business so that they don’t have problems with their foreign partners’. Others confirm that picture.
Oxana Balayan, Hogan Lovells managing partner in Moscow, highlights the positive, if wholly unintended, knock-on effects of western sanctions. There are now sanctions aspects in compliance checks and due diligence exercises, and in the structuring and execution of corporate deals. ‘While conducting due diligence or working on structuring a deal, we must now seek input from our dispute resolution colleagues who have expertise in sanctions to make sure the target company is compliant, or a particular corporate structure of the deal will not raise any sanctions and liabilities issues,’ Balayan says.
Another side-effect has been the shift of activity, including M&A and disputes, towards Asia. Balayan argues that investors from sanctions-free Asian jurisdictions have ‘proved to be keen to step in and reshape the traditional dominance of western sources for funding’, and that ‘both Hong Kong and Singapore have attracted many [Russian] investors looking for an alternative place of arbitration’.
The increase in Asia-focused business is also benefiting other firms. ‘More and more Russian clients are interested not just in London, but also in Singapore as a place for arbitration,’ Zimbler says. Morgan Lewis last year entered the city-state by combining its operations with Singapore’s Stamford Law Corporation.
Certainly, the global footprint of international firms means they are well placed to capture increasing workflows to and from Russia from their far-eastern outposts. ‘We expect to see more projects involving companies from Asia-Pacific, as Russia looks for ways to replace [services] and products that are under western sanctions,’ Voitishkin notes.
Florian Schneider, Russia managing partner at Dentons, says: ‘Like every other international law firm, we have seen a reduction in corporate, M&A and finance, and foreign direct investment from the west is very low.’ But, he adds: ‘Increasingly we see interest from China.’
Schneider stresses that this is not just because of the recent combination of Dentons and Dacheng, China’s biggest law firm. China is not bound by western sanctions and Russia was already reorienting its economy toward China when sanctions came in. Every other day, Schneider says, he receives requests for legal support from Chinese companies, ranging from establishing offices, branches, subsidiaries and joint ventures with Russian partners, to setting up international funds to support Chinese and Russian businesses.
It also helps to have a diversified practice. Dentons has a full-service offering in Russia, Schneider says, pointing to increased activity in 2015 in arbitration and litigation, employment and tax, competition, and bankruptcy. That made up for the drop in corporate and M&A business, which accounts for almost 40% of fee-earning income in Russia.
In 2015 Dentons hired 13 fee-earners, including three partners, in Moscow: Maria Oleinik and Evgenia Laurson from White & Case, and Richard Cowie from Hogan Lovells, beefing up the firm’s corporate and M&A, banking and finance, and energy practices. Another new arrival was counsel Galina Dontsova who joined Dentons’ Russia tax and customs practice, which now has 11 lawyers. Staff also increased in the St Petersburg office with three fee-earners, including one partner.
Speaking to the Gazette in December, Schneider said Dentons was on course to meet its budget, albeit a conservative one, for 2015 and that he expected stronger financial results in 2016 owing to the recent lateral partner hires.
Dentons has a ‘polycentric’ model with no single headquarters. In the federation, the firm operates as a ‘independent subsidiary’ incorporated in Russia (unlike other foreign firms, which tend to operate through branches or representative offices of foreign-registered entities). That means it can take on referrals for work which other EU and US firms have had to refuse due to the sanctions, Schneider says.
A diversified offering of legal services has also helped Baker & McKenzie, one of the largest international firms in Russia, with 162 fee-earners, including 30 partners, between Moscow and St Petersburg. The firm’s headcount remained stable over the past year, according to Voitishkin: ‘Our practice in Russia is quite diversified, and sanctions have not had a serious effect on our business so far.’
In Russia, the Chicago-headquartered firm has been ‘reasonably busy’ advising on regulatory and litigation matters in the areas of compliance, tax, employment and intellectual property, Voitishkin says. Highlights in 2015 included acting as tax counsel to US pharmaceutical and healthcare company Abbott Laboratories on its $306m acquisition of Russia’s pharmaceutical producer Veropharm and its various subsidiaries in Russia, Kazakhstan and Ukraine.
As Russian banks and energy companies struggle to cope with the crippling effects of sanctions and low oil prices, 2016 is expected to bring ‘more distressed owners’ on to the market, Zabrodin notes, resulting in an increase in M&As and transactions for the sale of assets. ‘Hopefully this will also help the legal market,’ he adds.
Corporate and M&A remain among the ‘busiest areas’ for CLS. ‘There are actually significant issues tied to new investments and the need to support and restructure existing ones,’ Zabrodin says. Amendments to the corporate legislation of the Russian Federation, which came into force in July and affect the registration and operation of companies limited by shares, should spur further corporate activity.