Euro elite: focus Russia and CIS – Cold fronts

While international firms have enjoyed tussling with leading independents in Moscow for years, a hardening market has seen the local players show their resilience.

Russia’s legal market continues to struggle after international sanctions were imposed in 2014 during the Ukraine crisis, affecting corporate, commercial and capital markets. These penalties added to the problems the region was already grappling with following the global financial crisis and low oil prices that were hitting the nation’s industry.

As Legal Business reported towards the end of 2015, although Russia’s sovereign debt is relatively low, Standard & Poor’s and Moody’s still downgraded the country’s sovereign credit rating to junk status, and Russia’s corporate debt pile was at an all-time high of around $700bn, leading analysts at Sberbank to argue Russian companies would need to refinance over $100bn of this debt during 2016.

Speaking to Legal Business last autumn, Sergey Pepeliaev, managing partner of the Pepeliaev Group, said: ‘The Russian legal market is probably the most open and competitive in the world and the competition is about to get a lot more intense.’ The relationship between top-tier Russian law firms and their international counterparts can best be described as one of hostile admiration.

The Euro Elite: Russia and CIS	Country	Total lawyers	Total partners	No. of offices
Egorov Puginsky Afanasiev & Partners	Russia	256	32	6
Pepeliaev Group	Russia	160	21	9
Sayenko Kharenko	Ukraine	77	9	2
Asters	Ukraine	75	15	1

However, local independents are adept at talking their way out of trouble and argue that increased political and economic tensions have meant an increased demand for instructions. Egorov Puginsky Afanasiev & Partners chair and co-founding partner Dimitry Afanasiev agrees there is a new environment within the Russian market, but with 256 lawyers and partners, he points out his firm has ended up benefiting from the situation due to its focus on Russian law. In addition to major Russian clients such as Rusal, Yandex and Sakhalin Energy, the firm also advises major international players such as Citibank, Allianz and Pfizer. In the last few years, the firm has successfully represented Allianz in defending myriad insurance claims in Russia worth billions of dollars.

‘We’re quite uniquely placed to win high-end work and navigate the current climate because the clients are no longer looking for someone who can just quote the law; they’re looking for someone who understands the big picture, the political environment, the international trends and how to navigate between the conflicting sides, so to speak, and build a business,’ says Afanasiev.

‘We naturally have a competitive advantage over the foreign firms because demand is very much for local law work right now, as opposed to the good times when there was more of a demand for international firms on IPOs [initial public offerings] or raising bank financing in the West.’

Meanwhile, the Pepeliaev Group recently signalled its commitment to boost work with Asian clients by opening an office in Sakhalin, an island in the north Pacific close to Japan, in September 2015, adding to its offices in Vladivostok and Yuzhno-Sakhalinsk, both of which lie near the far eastern border of Russia.

The Russian legal market has also seen a steady flow of work emanating from the Commonwealth of Independent States (CIS), with M&A work and dispute resolution instructions keeping the legal market afloat. In Ukraine, Sayenko Kharenko and Asters are recognised as among the leading domestic firms, with Sayenko in particular reporting a significant 28% increase in revenues during 2015. The firm specialises in advising banks, counting Commerzbank, Deutsche Bank and the European Bank for Reconstruction and Development among its clients, and last year acted as Ukrainian legal counsel to Citi, JPMorgan Chase & Co and Morgan Stanley as the lead managers of two eurobonds issued by the state of Ukraine, worth $1bn each, and advised on the Ukraine aspects of the $7.1bn global transfer of Novartis’ vaccines business to GSK.

Meanwhile, large international players, such as Clifford Chance, Schoenherr and Gide Loyrette Nouel have closed their doors in Kiev.

Conversely, expansive Central and Eastern Europe firm Kinstellar opened in Ukraine this April. ‘It is a large country, not a huge legal market, and fits our model exactly,’ says managing partner Jason Mogg. ‘The upside is there’s not much competition.’

Aequo managing partner Denis Lysenko admits international clients had a difficult time last year. ‘I would say many of them were looking to restructure or exit the market, again based on the economic situation and some difficulties politically.’

However, he also believes there are positive signs for the country with investors taking an interest. Vodafone announced in October 2015 it would roll out a number of new services with local telecoms company Mobile TeleSystems PJSC. ‘It was a sign of confidence that Vodafone decided it could actually use the brand in this market for both marketing purposes and, potentially, subsequently investing into the company,’ Lysenko says. ‘We’re seeing existing investors from both the private equity space, like some of the US private equity houses, and local investors, confident that the market will pick up this year, so they’re investing quite significantly in the Ukrainian agricultural sector and selected commercial real estate, while also looking for opportunities in retail and consumer goods.’

With major clients like the ministry of finance of Ukraine, UniCredit Group and PrivatBank, Avellum managing partner Mykola Stetsenko says there is very limited competition within the domestic market. ‘Restructuring work is probably as sophisticated as you can get in the broader area of finance,’ he says. ‘Given it is such sophisticated work, not many firms were actually likely to get it. The market is competitive only to a certain extent. Large lenders and large borrowers like the ministry of finance had a fairly limited choice of firms whom they can trust in leading and providing restructuring legal advice.’

Although law firms have struggled through the political and financial turmoil, the sense is there is still a strong demand for the services of elite firms. Afanasiev believes the key to his firm’s success is an understanding of demands within the region.

‘A lot of the foreign law firms for the past ten to 15 years have been saying Russian law is irrelevant because all the transactions are done under English law, so why bother? But things are changing now. We stay out of politics. We’re focused on helping our clients deal with all sorts of situations. We are evenly balanced. We have a substantial local client base – a lot of industrial companies that we’re advising on both domestic matters and international matters by teaming up with our best-friend law firms from around the world.’ LB

madeleine.farman@legalease.co.uk