Remember the days when Russia was the El Dorado of the Western legal elite? Potent New York outfits like Cleary Gottlieb Steen & Hamilton and Skadden, Arps, Slate, Meagher & Flom forged hugely lucrative businesses catering to Russian clients, while oligarchs and their top-dollar disputes were regulars in London’s commercial courts.
Just half a decade on and those days seem a distant memory. Chat informally with local partners and, once you get past the party line about it not being so bad, it is clear they are spending increasing chunks of their working lives merely trying to stay in the game.
First came the sanctions after the invasion of Crimea in 2014, with the US and EU publishing lists of Kremlin-linked oligarchs whose foreign assets were frozen, and forbidding their citizens from dealing with them. So-called secondary sanctions also meant people of any nationality supporting someone on the list could be sanctioned themselves, prompting law firms to start choosing their clients (somewhat) more carefully.
With the oil price and the rouble plummeting, a financial crisis soon followed, and Russia’s always-volatile flows of transactional activity and capital markets work slumped right on cue. Hopes that the 2016 election of Donald Trump as US president could herald a new era were soon dashed amid controversy.
There were broader factors also at play. Reform of Russia’s civil code in the three years to 2015 made Russian law more appealing to a number of companies traditionally choosing English law for transactions, triggering a rush to retrain local counsel and send expats home.
‘As a lawyer in the local market you have to constantly reinvent yourself,’ notes Latham & Watkins’ Moscow managing partner Mikhail Turetsky. ‘I have seen a lot of cycles in the Russian market, but it was never as quickly changing as now,’ agrees Dechert Russian head Laura Brank. ‘We are on a rollercoaster.’
The impact on Western law firms’ local business has been dramatic. While the closures of small local branches at Orrick, Herrington & Sutcliffe this year and Simmons & Simmons in 2009 were the only notable cases of big foreign brands entirely pulling out, most international players have slashed headcounts.
Already lean in terms of lawyers on the ground, Skadden and Cleary went from 30 to 15 and from 26 to 18 lawyers respectively. ‘We don’t make a distinction between London and Moscow at all: we don’t have Russian clients we only service in Russia or only in London,’ says Skadden London head Pranav Trivedi, who significantly is one of the firm’s three partners ‘fully committed to Russia’.
Even White & Case’s well-regarded local practice scaled down from 75 to 55. Moscow executive partner Igor Ostapets stresses that unlike many competitors it ‘continues to believe in the full-service approach’, which helped it compensate for the decrease in transactional work with ‘a substantial increase in regulatory and cross-border investigations’.
And if London’s Magic Circle can point to more stable teams in the last four years, it is mainly because there was much cutting amid the global financial crisis a decade ago. Clifford Chance saw the most drastic reshaping, slashing headcount from a pre-Lehman peak of over 180 lawyers to just 60 today.
With GDP returning to moderate growth in 2017 for the first time in three years, talks of a busier market in the new year are now in the air. Yet the market convulsions are far from over. On 4 March the poisoning of former spy Sergei Skripal and his daughter on English soil sent relations with the UK to a new low. On 6 April, the US published the most damaging sanction list to date, including multibillionaire Oleg Deripaska, a regular to a number of international firms.
It did not take long before Britain’s Foreign Affairs Select Committee called for an investigation into ‘the gaps in the sanctions regime’ that had allowed Deripaska to raise $1.5bn through the London initial public offering of his energy company En+ Group in November last year.
Although White & Case had advised En+ on the float, MPs singled out Linklaters for assisting the underwriting banks. When the Magic Circle firm declined to give evidence, MPs turned up the rhetoric, saying it was for ‘others to judge’ whether Silk Street was ‘so entwined in the corruption of the Kremlin and its supporters that they are no longer able to meet the standards expected of a UK-regulated law firm’.
Linklaters’ official line was to ‘reject any suggestion based solely on the fact that we – like dozens of other international firms – operate in a particular market that our services may somehow involve the firm in corruption’. The firm’s 65-strong Moscow outpost is now keeping its head down and unusually declined to engage with this column.
The consensus among the Russian legal elite is that criticism of the firm was a tactical message to the legal industry that more care is needed in accepting Russia-related mandates (rivals claim Linklaters has been more selective in accepting Russian engagements since the political drubbing).
Meanwhile, Chelsea Football Club owner Roman Abramovich found himself without a UK visa in May amid a tougher renewal process introduced by the UK government. Abramovich had been a cash cow for Skadden over the years in both transactions and litigation, most prominently in the $6.5bn London court battle with oligarch Boris Berezovsky in 2012.
While the last four years have been tough for the elites of London and Manhattan, a number of players in the local mid-market have ridden out the turmoil, in part because they focused more on domestic matters. Verein firms Baker McKenzie and Dentons both have well over 100 lawyers on the ground, the latter pointing to more than one lateral in the last few months.
Meanwhile, Bryan Cave Leighton Paisner’s 100-strong local arm topped the Mergermarket league table for Russian deal volume in H1 2018 thanks to its focus on domestic transactions at a time when Russian groups increasingly target local companies in the post-sanction era.
Herbert Smith Freehills (which topped the table for value) and Hogan Lovells have also kept their numbers steady throughout the crisis at 80 and 55 respectively, although the latter shut its Russian capital markets practice in 2014.
The message is clear: life in Russia for foreign firms is getting tougher. Surviving will require agility and assiduous lobbying in Moscow, not to mention strong nerves and stomachs.
Still, by consensus it is the best Russian independents reaping the benefits of political fallout. Egorov Puginsky Afanasiev & Partners (EPAP) has cemented its position as the top-billing house in Russia, fielding 300 lawyers generating well over €100m in 2017. Chair Dimitry Afanasiev is bullish: ‘The effect of sanctions on the Russian business is close to zero. We are picking up work from international firms. Russia is a big country; most of the stuff is internal anyway.’
Not that the firm’s business is confined to Russia. Historically a regular referral partner of Slaughter and May, EPAP has interestingly tilted in recent years towards teaming up with Macfarlanes when following its clients into London courts, after noting that the Magic Circle firm was not sending through much work.
ALRUD has also cemented its reputation as a formidable operator. ‘The geopolitical situation is such that a lot of local and international clients prefer to use Russian firms,’ says senior partner Vassily Rudomino. ‘They are perceived to have a better understanding of local politics and legislative landscape.’ And Pepeliaev Group has been expanding beyond its traditional tax heartlands, despite seeing two senior departures to Dentons in July.
True, Russian independents still have to tread with care in picking clients for the risk of secondary sanctions and significant growth remains arduous even for EPAP, although in the context of an economic downturn a 1% hike in revenue last year is not to be dismissed by peers.
However, the worst is likely yet to come for international advisers. Two very ominous proposals have emerged this year that raise a potentially existential threat to their local businesses.
Shortly after the US published its latest list of sanctions, Russian lawmakers started debating so-called counter-sanctions. Proposals included making it a criminal offence to comply with Western sanctions and forbidding Russian companies from obtaining legal advice from foreign firms.
It required strong lobbying to get the reference to legal services out of the final, milder version of the proposals signed by President Vladimir Putin into law at the beginning of June.
The second front comes amid the Russian government’s current drive to dramatically tighten up regulation of the legal profession: locals speak of millions of ‘so-called lawyers’ giving advice without any professional qualification and lawyer-client privilege.
Yet proposals put forward by the Ministry of Justice in the autumn of last year went well beyond introducing a requirement for all lawyers to be members of the Russian Bar by 2023, prohibiting any form of foreign control over law firms operating in Russia. Despite stopping short of banning international firms, the consequence for the business models of most firms would be ominous, turning their profit-sharing local branches into completely separate partnerships with limited ability to co-operate with parent practices.
Accusations started flying that national firms were backing the proposals to stem international competition (local independents strongly reject such accusations). A local partner of a US firm shouts his rage that ‘some of those people are our mates from law school’.
‘We were very lucky that international firms united and fought against these regulations, which would mean a serious restriction for Russian businesses expanding abroad,’ says Hogan Lovells local head Oxana Balayan. A final draft will be published by the end of the year, although there is general optimism that the lobbying will be once again successful; Russia has a tradition of floating draconian legislation that is ultimately watered down.
But regardless of the outcome, the message is clear: life in Russia for foreign firms is getting tougher. Surviving will require agility and assiduous lobbying in Moscow, not to mention strong nerves and stomachs.
While it is easy to see heavily-localised practices of foreign giants enduring on a diet of increasingly-domestic Russian law work – perhaps in ring-fenced, verein structures – on current trends, the era in which Moscow has been a substantive market for global leaders is drawing to a close. Committed Russian veterans will fight to retain their businesses, but the attraction for the next generation of mobile talent and law firm leadership in New York and London is fading fast. The growing fear is that, five years from now, foreign law firms will look back on 2018 – in highly relative terms – as the good old days.