Emerging markets are by nature volatile, frequently impacted by events such as political instability, civil unrest, corruption and other economic forces. The extremes of growth and decline could hardly be more apparent than in the Middle East, where the collapse in oil prices has prompted a great deal of soul searching.
Saudi Arabia, for example, is going through the most radical social and economic reform programme in its history, and Iran is still subject to ongoing trade sanctions and uncertainty connected to US foreign policy. Added to this, these two nations share deep enmity, which demands high levels of diplomacy on the part of firms that target both jurisdictions.
Despite several years of tumbling oil prices, ongoing conflict in Syria and Yemen, and the world turning its attention to other geographic territories, such as Africa, it is clear that the Middle East has not had its day.
Rahail Ali, Hogan Lovells’ Dubai managing partner and global head of Islamic finance, says the tough climate is forcing governments to make radical choices: ‘There is a view that infrastructure development and investment appetite fluctuates with the price of oil. There is some truth in that, but the dampened oil price and outlook has been critical in pushing governments to address infrastructure development as a way of moving away from oil dependence.’
However, no-one is talking up the market too much. Large cross-border M&A deals involving Middle East parties have been thin on the ground. In 2016, National Bank of Abu Dhabi (NBAD) acquired First Gulf Bank (FGB) for $14.8bn with Freshfields Bruckhaus Deringer advising FGB and Allen & Overy (A&O) acting for NBAD, but few other deals have gained international attention.
‘This is still an emerging market. There is still an enormous amount to be done in terms of infrastructure and economic growth.’
Jonathan Silver, Clyde & Co
Husam Hourani, managing partner of Al Tamimi & Company – the Middle East’s largest law firm with 17 offices in nine countries and Legal Business‘ International Firm of the Year in 2016 – concedes that last year was especially tough for the firm and the first quarter of 2017 has not proven substantially better, although he suggests the firm’s ubiquity across the region and its full-service approach has been pivotal to sustaining satisfactory revenues. While major transactions have been scarce, the firm saw growth in regulatory and arbitration work, and increased its activity in key sectors such as education, healthcare, hospitality and TMT. Hourani adds that the firm has recently launched a tax department to account for the new corporate tax and VAT regime in the UAE. In addition, its Kuwait arm has been ‘extremely busy’ with infrastructure projects that were recently approved by the government.
Kuwait is one market that tends to move slowly, but has attracted some interest from foreign advisers. Sam Habbas, a senior partner at ASAR – Al Ruwayeh & Partners in Kuwait, says that local corporates are currently looking to tap the capital markets after the recent $8bn sovereign bond issue by Kuwait itself. Clifford Chance (CC) and ASAR advised the State of Kuwait, with A&O and local practice International Counsel Bureau advising the banks.
Building the future
It takes time for economic remodelling to filter through in the form of engagements to the region’s top law firms. Yet while a range of firms have been forced to retrench, including by closing offices – most notably in Abu Dhabi and Qatar – there is genuine optimism, not least because Middle East governments have no choice but to sail against the headwinds.
Budget surpluses enabled many states to take on bold infrastructure programmes when oil prices were high, but these only went so far. Now, they are arguably even more imperative. ‘This is still an emerging market, notwithstanding the huge amount of development in the last 20 years,’ comments Jonathan Silver, Clyde & Co’s head of Middle East and North Africa (MENA). ‘There is still an enormous amount to be done in terms of infrastructure and economic growth.’
But the Gulf region’s commitment to infrastructure development could take a heavy toll on government finances. Standard & Poor’s estimated last year that capital projects would create a $270bn gap between the amount of money required to fund capital programmes until 2019 and the amount that will be allocated through contract awards.
Kuwait’s usually slow-moving market is attracting more attention
Dwindling government finances are leading to privatisation programmes and the promotion of public-private partnerships (PPP) as states reshape the Middle East economy. Arqaam Capital, the emerging markets investment bank, said last year that the state funds over 80% of infrastructure projects in Saudi Arabia, but that the government was committed to pushing PPP to limit capital expenditure, and to increase efficiencies in project execution and management. Saudi Arabia has embarked on a concerted airport PPP scheme, which has included the $1.4bn Prince Mohammad Bin Abdulaziz Airport in Medina. The Law Firm of Hassan Mahassni advised the sponsors.
Saudi Arabia is not alone in its aim to privatise and promote PPP arrangements. Dubai, Kuwait and Qatar have all passed new PPP laws in the last few years. Yet nearly a quarter of PPP projects in the MENA region have been abandoned since 1996, according to MEED, the business intelligence service, suggesting poor deal structuring as the primary reason for failed projects. Habbas, though, is confident that lessons have been learned and PPP initiatives are now much more likely to be successful.
The Dubai Electricity and Water Authority announced in 2016 that it would tender renewable energy projects valued at over $7.35bn, with the bulk of these being structured through PPPs. Andrew Greaves, Addleshaw Goddard’s head of the Gulf Cooperation Council (GCC) region, says: ‘Given where the oil price is, governments have no option but to seriously consider a PPP model of sorts. It can serve the demand of the public for investment in infrastructure, schooling and healthcare and we are going to see more PPPs coming into the region. Regional governments are looking at it in a way that they weren’t a couple of years back.’
‘The governments have learned a lot over the last six to eight years. We’re likely to see some successful pilot PPPs in the next year or two.’
Michael Watson, White & Case
White & Case Abu Dhabi partner Michael Watson remarks: ‘There is now a renewed appetite for doing PPPs. It is a question of being more efficient and incentivising people to benefit from international best practice. We are seeing it happen with people looking at PPP or semi-privatisation structures, like in the utilities sector. The governments have also learned a lot over the last six to eight years. We’re likely to see some successful pilot PPPs and semi-privatisations in the next year or two.’
Neil Cuthbert, a Dubai-based banking and finance partner at Dentons, believes that Middle East governments are intent on changing their procurement methods with much more of an emphasis on long-term partnership and sources of finance: ‘A big Chinese contractor told me last week that Saudi Arabia always tendered everything historically, but is now moving towards the direct negotiation route. They want to find a partner like a Chinese contractor that they are happy with and then negotiate the best possible deal. They recognise that the Chinese can bring the money and that they are often willing to finance up to 85% of the construction cost.’
Dubai-centric
China’s focus on augmenting trade links (see box, ‘Help from the East’, below) has helped to reinforce Dubai’s status as a key global and regional hub. It is a welcome phenomenon for law firms that suffered from the effects of the financial crisis, which hit Dubai especially hard in 2009, and then the oil price plunge, which has severely affected government spending power across the Gulf.
Campbell Steedman, who joined Winston & Strawn’s nascent Dubai branch in 2016 as managing partner for the Middle East, says that the emirate must be considered – despite its recent troubles – as one of the world’s principal financial centres: ‘The GCC region is still very much a business hub and Dubai in particular is a gateway for investment from Asia to Africa and Asia to Europe. Further, Dubai continues to be an enclave of political security and relative economic stability in the region.’
There is a widely-held view that the Arab Spring of 2010 and 2011 reinforced Dubai’s position in the region, particularly with the civil unrest in Bahrain, another historically significant financial centre.
Silver says that Dubai’s proximity and commercial connection to Africa should not be underestimated as it begins to rival London and Paris as a primary business hub for the continent: ‘If you look at the way Dubai has developed, it has a business model that stands away from oil and gas, and acts as a regional service hub. Emirates now carries more passengers in Africa than any other airline. It shows how important Dubai has become for the African and other regional markets.’
‘A big Chinese contractor told me Saudi Arabia always tendered everything historically, but is now moving towards the direct negotiation route.’
Neil Cuthbert, Dentons
Multinationals such as Mastercard, Visa, AstraZeneca, DHL, FedEx and Microsoft now run their Africa businesses from Dubai. The Dubai International Financial Centre (DIFC) has also cemented the emirate’s prominent position on the regional and global stage, and became home to 447 registered financial institutions in 2016.
Although other Gulf states such as Abu Dhabi and Qatar have developed their own financial centres, they have not achieved the prominence of the DIFC.
Chris Macbeth, counsel in Cleary Gottlieb Steen & Hamilton’s Abu Dhabi arm, says that the Abu Dhabi Global Market (ADGM), the emirate’s international financial centre, has performed well since its launch in 2015. Even so, it is more than a decade of development behind the DIFC.
The ADGM’s launch and progress has not stopped international law firms from retreating from Abu Dhabi. Having flooded the market in the hope of winning engagements from major sovereign wealth funds, such as the Abu Dhabi Investment Authority and Mubadala Development Company, firms then pulled out when they realised that Abu Dhabi’s small number of oil-rich institutions tended to work with an equally small group of long-term legal advisers.
Many firms naturally felt that the high commercial property costs and the lack of residential capacity was not conducive to maintaining a presence in Abu Dhabi. Latham & Watkins, Herbert Smith Freehills (HSF), Simmons & Simmons and Hogan Lovells are among those that have retreated from the emirate and consolidated their UAE presence in Dubai in the last two years.
Equally, Qatar’s promise as a fruitful place to provide legal services has not lived up to billing. The country is infamous for its stifling bureaucracy and few international firms have felt compelled to be present or remain there. Latham closed its Doha branch in 2015, while CC and HSF pulled-out in February this year.
This has all reaffirmed Dubai’s status as the principal legal centre in the Gulf, although Debashis Dey, a partner in White & Case’s Dubai arm, believes that firms retreating from other markets has caused it to become over-lawyered. ‘Firms are now hunting in packs, chasing the same client,’ he says. Weil, Gotshal & Manges is the latest casualty, deciding to close its Dubai outpost this summer.
‘Dubai is a gateway for investment from Asia to Africa and Europe. It continues to be an enclave of political security and economic stability.’
Campbell Steedman, Winston & Strawn
Dey says that White & Case sees the region differently to others, with offices in Dubai and Abu Dhabi and presences in Saudi Arabia and Egypt through formal associations with local firms: ‘Our strategy is to have global resources on the ground, typically those who understand the market but have the global expertise. The key is to find the right kind of resources and build your offering around clients that you feel will be with you during the up and down cycles.’
Shane Morton, head of recruitment firm Taylor Root’s Middle East operation, says that business is steady for him, but law firms have realised that the ‘streets aren’t paved with gold’. In recent years, his focus has gradually shifted to in-house roles as private practice demand has declined.
Difficult economic conditions and an oversupply of lawyers is not a recipe for overwhelming optimism, but there remains little evidence of dejection, especially in Dubai where London’s big four Global 100 firms all maintain sizeable operations. Hogan Lovells’ Ali says the negative headlines around falling oil and property prices skew the true picture: ‘You can take the negative view that the region has more than its fair share of geopolitical issues, with conflicts in Yemen and Syria and the antagonism between Saudi Arabia and Iran. But, alternatively, you can take a positive view, with all this Chinese investment into the region and the Middle East being seen as a springboard for Africa work. We are not frustrated or fazed by the negative sentiments; you have to be positive and take the long-term view.’ LB
Help from the East: China’s new Silk Road
In 1984, trade between the two nations stood at only £63m, but by the end of 2016 this had risen to $60bn. More than 300,000 Chinese business people now live and work in the UAE.
Last year, a freight train travelled for 14 days from Yiwu in China’s eastern Zhejiang province on a 10,399km journey to Tehran. Scheduled to run once a month and more frequently as demand develops, the journey time is radically shorter than the sea route across the Indian Ocean. The train service is a key part of China’s One Belt, One Road (OBOR) programme to renew the traditional Silk Road trading route that runs from the Far East through Central Asia to the Middle East and Europe. This rekindling of an important historical phenomenon puts the Gulf region at the heart of modern day global trade.
Jonathan Silver, Clyde & Co’s head of Middle East and North Africa, says OBOR is a prime illustration of how the Middle East is at the centre of the global economy: ‘The biggest development over the last decade is the real impact of globalisation. What we see now are trade flows that come across the world, from west to east and east to west, and with that the strategic importance of the Middle East has grown. The Chinese are now very much present and are an increasing presence in the region. A lot of that has to do with the strategic developments within China and its view of the world, and in order to achieve that it needed to develop its OBOR policy through the Middle East.’
From 2004 to 2014, trade between China and the Middle East increased six-fold, with Saudi Arabia, the UAE and Iran being the primary beneficiaries of bilateral trade flows, according to the International Monetary Fund. Notably, China’s trade with Iran has flourished during a period when the Gulf nation has been subject to sanctions imposed by the US and EU. Rahail Ali, Hogan Lovells’ Dubai managing partner, says that China’s political neutrality has served it and the Gulf region well: ‘Chinese investment into the region is promising to be absolutely huge. The fantastic thing is that Chinese investment is done with the mantra of non-political interference. The Chinese have a very healthy neutral outlook. China is singularly driven by the need to move its economic juggernaut. With its enhanced emphasis on infrastructure, there are fantastic synergies between the Middle East and China.’
In Dubai, which has remained the undisputed financial centre for the Gulf region, there is a high regard for China’s influence on the economy. China is UAE’s biggest trading partner. In 1984, trade between the two nations stood at only £63m, but by the end of 2016 this had risen to $60bn. More than 300,000 Chinese business people now live and work in the UAE. In 2005 only 18 Chinese enterprises were operating in the UAE. Now there are more than 4,200.
In 2016, the Dubai Electricity and Water Authority confirmed China’s Harbin Electric Company and Riyadh-headquartered ACWA Power as the consortium leading the construction of the 2,400MW Hassyan clean coal power station. Chadbourne & Parke advised the sponsors of the $2.9bn project with Shearman & Sterling advising the lenders.
Meanwhile, eager to be part of the new trading route, Kuwait is building ‘Silk City’ in the previously uninhabited Subbiya region in the northern tip of the country. Some $100bn is being pumped into the project, which involves construction of a 5,000MW power plant. The ambitious new 36km Sheikh Jaber Al-Ahmad Al-Sabah causeway is intended to cut driving time between Kuwait City and Subbiya from 70 minutes to less than 20 minutes. Sam Habbas, a partner at local firm ASAR – Al Ruwayeh & Partners says that Kuwait intends to be ‘at the heart’ of the new Silk Road network.
Diversification: Saudi’s vision beyond oil
Few jurisdictions have excited and frustrated international law firms in equal measure like Saudi Arabia. Retaining tremendous oil and gas wealth, despite the collapse in oil prices, Saudi is in the midst of radical economic reform through its Vision 2030 programme.
As part of this programme it hopes to diversify its economy away from oil through a number of economic and social initiatives, along with budget and regulatory reforms. More than 70% of national revenues came from the oil industry in 2015 and the state still employs around two thirds of the Saudi workforce. In 2008, the kingdom had a surplus of over $150bn and now faces a financial deficit of some $75bn. Even with recovering oil prices, Saudi will have to work hard to close the gap.
Deputy crown prince Mohammed bin Salman Al Saud, widely hailed as the principal architect of the economic reforms, hopes that Saudi will generate $100bn in non-oil revenue by 2020 and develop six million jobs in non-oil sectors by 2030. The kingdom is, like the other Gulf Cooperation Council nations, introducing VAT to create another source of government revenue.
The Saudi authorities are looking to initiate significant growth in key industries, such as tourism, healthcare, manufacturing and mining. As economic reforms go, it is hugely ambitious.
One potentially significant source of revenue will be the partial privatisation of the oil giant Saudi Arabian Oil Co (Saudi Aramco) in 2018, which has been valued by officials at $2trn, although its true worth has been the subject of much debate. Reports indicate that White & Case, which has advised the Saudi oil and gas company for over 50 years, will advise on the landmark IPO. The firm would not comment on this.
Other big engagements are becoming increasingly plentiful. Legal Business reported in January that King & Spalding won the lead role advising state-owned Tatweer Buildings Company on a $12bn public-private partnership project to privatise the management and construction of school buildings.
Yet despite the scale of these reforms, international law firms have restricted access to potentially large legal engagements due to their own limited presences in the jurisdiction. Clifford Chance (CC) and Clyde & Co are so far the only international law firms to create joint Saudi and foreign-owned law partnerships, enabling them to operate in the jurisdiction under their international brands. Other large international firms, such as Allen & Overy, Baker McKenzie, Freshfields Bruckhaus Deringer and Latham & Watkins are present in Saudi through an association with a local firm. In February this year, Dentons, which operates through a local association, expanded its presence with a second outpost in Jeddah. In April, it then emerged that King & Wood Mallesons would pull out of Riyadh.
CC’s Middle East managing partner Robin Abraham says his firm’s commitment to Saudi Arabia is likely to be rewarded: ‘For Riyadh, key for us and the establishment of our association there was the ability to provide high-quality Saudi law advice for our international clients, and access those government entities that are driving change in Saudi and increasingly providing opportunities for us to do work for them internationally. Our structure there is working very well for us. It’s a market full of opportunity.’
Even with the restrictions that foreign law firms face, Hogan Lovells’ Dubai office head Rahail Ali says that connections and local knowledge in Saudi are imperative: ‘In Saudi Arabia there can be a mismatch between what the letter of the law says and its application in practice. You need to have strong relationships with government-related entities to know what is happening and to be as proactive as possible. There are huge opportunities there simply because the sums involved are huge.’