Are sanctions affecting workloads in legal services? What are the expectations for 2015?

Andrei Gusev of Borenius looks at the effects of the latest EU/US measures.

There was a lot of speculation, stress and tension among foreign investors in Russia when the EU, the US and several other countries imposed their two latest rounds of sanctions against Russia, leading to Russia responding with its own counter-sanctions, including the so-called ‘food embargo’. A few weeks after the introduction of these measures, certain trends have already surfaced. What are these trends?

All market players have realised that sanctions are something serious in terms of compliance (or rather the consequences for incompliance). Law firms analysed the respective texts, drew conclusions, prepared and distributed legal alerts and newsletters, ran seminars and published articles. The conclusive sentiment in most of the material is that incompliance with both EU and US sanctions may trigger criminal liability. Some of the sanctioned companies have received letters from their legal counsel regretfully informing them that no further services may be rendered. All such cases that are known to this author involve law firms with US and UK ties (so-called Anglo-American law firms). Some of the Russian law firms that were initially expecting more work due to their Anglo-American peers dropping clients and matters are now having second thoughts – they have initially forgotten that some of them have offices in London and New York.

A large share of new investment projects involving foreign investors have been put on ice. As a result, law firms have lost some new mandates. At the same time, most of the projects featuring participation by foreign investors that were launched before July 2014 have continued. The described dip in new initiatives appears to be compensated by projects and activities initiated by Russian companies (so-called Russian-Russian matters). Fees paid to law firms for services rendered in relation to such projects and activities appear to be falling in anticipation of smaller 2015 legal services budgets, which will shrink, inter alia, because of the EU and US ban on long-term borrowing for a number of Russian blue-chips.

A separate development that is expected to partly protect law firms’ incomes is the appearance of sanctions-related compliance work. Since approximately mid-September 2014, foreign clients have begun asking to run a ‘sanctions due diligence’ before new contracts are signed and projects are launched, to ensure a new supply or initiative is not banned or is not on the borderline. It is now commonplace for law firms to receive draft agreements to be checked for sanctions compliance in addition to the usual checks that lawyers are normally asked to do. Some law firms offer legal opinion as a product issued as a result of such checks, although Russian law, as well as the laws of most countries in the world, does not recognise legal opinions as being different from letters of advice. The bottom line is to protect clients from the risk of fines for incompliance with the sanctions – if a law firm has checked everything and given the green light, then, logically, there should be no doubts that a company has acted diligently. However, the services in question are not yet yielding serious revenues.

Another noteworthy development is that discussions have been taking place about the status of assets and businesses in Crimea and what to do with them in order for them to be well protected and/or to be used in business activities without violating the respective sanctions. The conclusion is typically that they can be used without triggering sanctions only by Russian companies that have no ties with Europe and/or the US. For some parties this may necessitate the sale of such assets and businesses to Russian buyers, and here two challenges arise. Firstly, both Russian and Ukrainian law may need to be addressed and followed, since Crimea-related M&A deals seem to be more complex than usual, while different parties may have different views on applicable law. Secondly, as a result of the sanctions, many law firms cannot work for Russian buyers and can only represent the side of the seller.

Finally, 2015 business planning by law firms working in Russia seems to be cautious. Based on discussions with Russian colleagues, there are no high growth expectations either in terms of revenues or staff. Likewise, few lawyers expect pay rises in 2015, though this does not exclude bonuses paid for good work during 2014. All in all, the legal community is looking to the future with careful optimism – fairly soon, many say, everything will calm down and the sanctions will be recalled, or we will learn how to build our future business despite them.