Russia’s propensity for volatility is infamous. Since its revolution 100 years ago, it has lived through events that the Soviet Union’s founders would never have imagined. Today, amid heightened geopolitical tensions, it continues to face huge uncertainty. But its law firms are adamant that it will continue to provide solid revenues.
‘Reports of Russia’s decline are much exaggerated and most of the issues with the West are not business-driven,’ argues Dimitry Afanasiev, chair and co-founder of Egorov Puginsky Afanasiev & Partners (EPAP). ‘When oil prices head north of $60 and the cycle in hard assets turns, we will remain strategically-placed to capitalise on the opportunities.’
Such optimism is not isolated. In September, Eversheds Sutherland launched a presence in Moscow and St Petersburg, taking over the offices of Nordic firm Hannes Snellman. Executive partner Ian Gray says: ‘Our strategy is to be established as a leading global law firm and even with the political uncertainty, Russia remains a major economy in the world. What we are doing is following our clients and a lot of them are still doing business in Russia.’ The firm is sole global legal adviser to Turkish Airlines and exclusive EMEA legal adviser to Eaton, the power management company, and both clients are ‘active’ in Russia according to Gray.
Eversheds sees Russia as key to its international offering, despite three economic and financial crises in the last 20 years. Russia has been blacklisted by international leaders for its annexation of the Crimea region and condemned for its military intervention in Syria. Sanctions imposed by the EU and the US have pushed it to the global economic margins, but while this has posed significant challenges to the nation since 2014, it has posted resilient recent financial performance. Russia’s economy ministry predicted 2.1% GDP growth in 2017 and inflation dropped to 3.3% in August 2017, a landmark low given the nation’s chronic fiscal problems in the early 1990s when inflation reached 2,333% in December 1992. The value of the rouble has steadied following a period of volatility linked to the sanctions, and unemployment dropped to 5.1% in June 2017, having stood at over 14% in the late 1990s. The Central Bank of the Russian Federation has been praised for its handling of the latest financial crisis, by keeping interest rates relatively high and curbing inflation.
Confidence is creeping back, even if Donald Trump’s election as US president has not heralded the thaw between Russia and the West that many had hoped for.
Bread and salt
Investors hoping for better relations with the West and a dismantling of sanctions have recognised that tensions are unlikely to disappear in the foreseeable future.
Alexander Zharskiy, a partner at ALRUD, believes that business is no longer willing to wait for the political climate to change: ‘Most clients consider that there are going to be no changes over the next two or three years with sanctions. Some investors, foreign companies and Russian companies are using the opportunity to become stronger and get more market share.’
The firm is currently advising an agricultural business on its sale to a foreign strategic buyer that Zharskiy says has been circulating the market for some time: ‘It came to understand that it is losing out on potential opportunities and it is time to do a deal.’
Laura Brank, head of Dechert’s Russia practice, also believes the tide has turned and the volume of cross-border transactions is poised to increase: ‘Private equity funds are looking at the market again as they see an undervaluation of Russian companies.’ Brank says that while cross-border transaction activity is poised to pick up, it is not as if firms have had nothing to do. Among other engagements, the firm is advising the ad hoc bondholder group in the financial restructuring of FESCO, the Russian transportation group.
Russian banks that have stood up to the financial crisis have accumulated high levels of cash as Russian companies have repatriated capital in fear of the effect of western sanctions. For example, Sberbank and VTB now have significant cash piles from corporate deposits that have been used to finance the wider economy. Despite the harsh effects of the oil and gas price slump, corporate bankruptcies have been fewer than expected as finance remains readily available.
‘Even with the political uncertainty, Russia remains a major economy. We are following our clients and a lot of them are still doing business in Russia.’
Ian Gray, Eversheds Sutherland
Murat Akuyev, a Moscow partner at Cleary Gottlieb Steen & Hamilton, says that many Russian corporates are also coming back to the capital markets, particularly as investors are lured in by the high yields offered by non-sanctioned debt. Akuyev also believes that Russian issuers are looking to the equity markets and that this is promising business for international firms: ‘Russian businesses are trying to do international offerings with a Moscow-only listing. Most of the companies we are talking to are seeking a 144A/Reg S deal. It is good-quality work from an international perspective.’
Cleary Gottlieb’s Moscow office advised the Ministry of Finance of the Russian Federation on a series of bond issues in 2016 and 2017, including its return to the capital markets in 2016 through a $1.75bn eurobond offering. In 2017, it advised RUSAL, the aluminium giant, on its debut $600m eurobond offering, followed by a $500m eurobond issue.
The Asia pivot
Moscow’s tilt towards Asia following western sanctions continues to attract the attention of firms. Transactions involving Asia have not completely filled the deal gap but it represents a valuable business flow for the legal sector.
In September, it emerged that CEFC China Energy was seeking a $9bn acquisition of a 14% stake in Rosneft, the state-controlled oil company, from Glencore and the Qatar Investment Authority; legal advisers for the deal have not been announced. In a further sign of China-Russia co-operation, CEFC turned to VTB, Russia’s second-largest lender, for a $5.1bn short-term loan to finance the acquisition.
Frequent meetings between Russian president Vladimir Putin and Chinese premier Xi Jinping are bringing the two nations ever closer. In July, Xi completed a two-day visit to Russia, by announcing that a $10bn Russia-China RMB Cooperation Fund was to be invested in infrastructure projects related to China’s ‘One Belt, One Road’ programme. Xi said that relations with Russia had never been closer.
In 2016, turnover with China accounted for 14% of total Russian trade, according to the Federal Customs Service of Russia. A report by EY also highlighted that imports from China accounted for 21% of total Russian imports, up from 17% in 2012.
Oxana Balayan, Hogan Lovells’ Moscow managing partner, says that advisers need to work harder to integrate their Russia offices into the wider network, including with Asia. Yet Andrey Zelenin, the managing partner of Russian firm Lidings, observes that it is easy to become too bullish about investment coming from Asia: ‘You are never going to see the billions that were invested from the West now coming from the East, because it doesn’t work like that. There are still risks for Chinese banks and institutions because of western sanctions and pressure from business investors. They are not rushing into Russia, because they have a bigger market to access themselves.’
Spreading the net
With fewer cross-border deals, firms have had to reassess their strategies and become more versatile. Balayan talks of associates being ‘universal soldiers’, able to switch from M&A and private equity deals to sanctions and investigations-related work as part of an effort to deliver more rounded ‘cross-practice advice’.
Afanasiev says that his firm is targeting ‘crisis-driven M&A’, while complex disputes and special situations matters ‘are on the rise’ in its litigation practice. He indicates that while there has been ‘no real shift of emphasis’, there has been an ‘organic shift of some personnel’ to hotter sectors. ‘As a full-service law firm, we always had a diversified business that could hedge the good times for M&A against the new normal and a heightened focus on restructuring and disputes,’ he notes.
The tougher economic and political conditions have certainly not fostered an expanding legal market. Other than Eversheds, there have been precious few new entrants. Many international firms have scaled back their presence to account for the reduction in deals.
Herbert Smith Freehills’ (HSF’s) Moscow office, traditionally one of the most profitable in its global network, has reduced numbers through ‘natural attrition’ with some fee-earners redeployed to other offices, according to Evgeny Zelensky, a Moscow partner. ‘We have to adapt. Change can be scary, but you have to react to changing conditions,’ says Russia managing partner Alexei Roudiak.
This change is not entirely about retrenchment and conservatism. In June 2017, HSF hired Moscow finance partner Dmitry Gubarev from Orrick, Herrington & Sutcliffe. This strategy is aligned with the prominence of Russian banks that survived the latest financial crisis and have capital reserves that are in need of deployment. In 2016, Gubarev represented Russian banks Sberbank and VTB on their financing of Russian energy business EuroSibEnergo Group’s acquisition of a 40% stake in Irkutskenergo, the company that operates several hydroelectric power plants, thermal plants and electric networks.
‘Reports of Russia’s decline are much exaggerated. Most of the issues with the West are not business-driven.’
Dimitry Afanasiev, Egorov Puginsky Afanasiev & Partners
In another sign that the oil and gas and commodities industries are recovering, Latham & Watkins hired corporate partner Alexander Gomonov from Baker McKenzie; Gomonov specialises in oil and gas and mining. Latham also recently announced the promotion of Moscow capital markets specialist Olga Ponomarenko to partner.
Lateral hires and partner promotions have typically focused on Russian nationals with international firms reducing the number of expat lawyers. Firms have been helped by the further development of the private practice profession that was only restarted in 1991, when the Soviet Union was dissolved and democracy returned to Russia.
The biggest folly that firms now recognise is the over reliance on foreign clients and inbound investors. Major international players, such as Linklaters, now have a greater emphasis on Russian clients, while maintaining close links to its traditional client base. Linklaters Moscow senior partner Dmitry Dobatkin says: ‘Since 2008, there has been a shift in client base from international clients towards major domestic corporates and banks. As the market matures, domestic players have become more sophisticated users of international legal services and are more prevalent in international M&A and finance transactions.’
ALRUD’s Sergey Petrachkov also observes: ‘Global law firms are looking to develop partners that can originate deals. If you rely only on foreign clients and inbound deals and you don’t have a Russian client base, then you are going to suffer quite a lot.’
Russia began significant reforms to its Civil Code in 2014 with the intention of creating a more transparent and attractive corporate law for businesses and investors. It heralded the prospect of a dwindling influence of English law in cross-border contracts. The overhaul of the civil code has seen it adopting a number of English law mechanisms such as options, warranties and indemnities.
The legislative programme is designed to encourage foreign investment and particularly to heighten the attractiveness of entering Russian joint ventures. The code provides additional rights to creditors and shareholders.
Stefan Weber, the head of German firm Noerr’s Moscow branch, says: ‘Russia has improved the statutory law and the higher courts have become much more pragmatic in the interpretation of the law. There is an ongoing overhaul of the civil code and changes in corporate law that have enabled call options in M&A transactions under Russian law and these would have been very doubtful in the past.’ Call options typically allow purchasers to acquire further shares in a target at a designated price within a defined time frame.
Already, state-controlled companies are being pushed to adopt Russian law contracts, though as the new civil code has yet to be fully tested in the courts, there continue to be reservations about its suitability in cross-border transactions.
Balayan says that the legal sector is watching the growing influence of Russian law, but it still has limited application in cross-border deals: ‘We have run certain statistical analyses to see whether Russian law is now playing an increasing role for M&A transactions. It is not even 50%, it is substantially lower than that.’
HSF’s Zelensky says: ‘We do practise Russian law more than previously, but with the more complex M&A deals we still see the tangible dominance of English law.’
Dentons’ Russia managing partner Florian Schneider says that English law terms are too ingrained into the economic and financial system to be pushed aside overnight. ‘Even the Russian banks try to use the Loan Market Association (LMA) standard as much as possible,’ he says, referring to the London-based LMA syndicated loan guidelines. ‘I wouldn’t say the importance of English law is low. English law is still very important in the market.’
Although international firms have been challenged by the tough economic climate in Russia, there are no suggestions that the requirement for international lawyers is evaporating. ‘There is still significant demand for services by international firms,’ Akuyev says. ‘We are able to translate the concepts from English and New York law agreements into Russian law documentation and clients see that as the deal management package.’
As part of its greater focus on the domestic market, Linklaters sought to expand its dispute resolution offering by hiring partner Vladimir Melnikov from HSF. Dobatkin says Melnikov’s arrival is part of the firm’s increased global emphasis on disputes, including international arbitration, but it was important to take the Moscow dispute resolution practice to another level.
At Hogan Lovells’ Moscow office, dispute resolution is now the second-largest practice. The firm has been at the forefront of multibillion-dollar fraud and asset-tracing cases involving the banking sector. It represented the Russian Deposit Insurance Agency and Mezhprombank in the headline case against Mezhprombank co-founder Sergei Pugachev, previously known as ‘Putin’s banker’. Pugachev faced allegations that he had transferred hundreds of millions of dollars from Mezhprombank into a Swiss private bank account and that he was ‘vicariously liable’ for the bank’s liquidation. In October, the High Court in London ruled that Pugachev had hidden his assets in ‘sham’ trusts in New Zealand. Having fallen out of favour with Putin, the Russian oligarch moved to London in 2011 with his partner Alexandra Tolstoy, a descendant of Leo Tolstoy.
Aside from the headline Pugachev case, Hogan Lovells had previously acted for the Russian financial group Otkritie in a $150m fraud case against former employees and their associates.
‘You are never going to see the billions that were invested from the West now coming from the East. They are not rushing in, because they have a bigger market to access themselves.’
Andrey Zelenin, Lidings
Latham’s recent hire of Gomonov shows the importance of domestic credibility as firms seek to develop connections to Russian clients such as influential local banks, although the domestic legal profession remains far from stable. Partner and team departures from Russian firms are notorious, particularly when the performance of certain departments does not match others. Goltsblat BLP, the Russian practice of Berwin Leighton Paisner (BLP), recently suffered the departure of senior disputes partner Rustam Kurmaev and a team of seven to launch Rustam Kurmaev & Partners. Despite the group’s exit, BLP’s Russian practice continues to reap the rewards of domestic clients’ activities. In October, it advised Sberbank Investments as the restructuring agent on the debt portfolio restructuring for the Genser group, the Russian car dealership.
Doubling down
Dispute resolution is not the only area to receive particular interest from firms. Dentons has built a significant presence in Russia and the CIS, with offices in Russia, Ukraine, Kazakhstan, Uzbekistan, Georgia and Azerbaijan. It has been unusually bullish during a period of real uncertainty in the region. In May this year, it hired Louis Skyner, Clifford Chance’s head of oil and gas for Russia and CIS. In June, the Moscow office recruited Konstantin Tretyakov as of counsel and head of white-collar crime from EPAP and is looking to expand this team further this year. In October, the Moscow real estate practice was augmented by the arrival of three associates. ‘We have used the crisis to improve our market share,’ says Schneider, who suggests that the firm offers a broader suite of expertise and specialisation than many of its international competitors in the jurisdiction. ‘Over the first nine months of the year our dispute resolution, banking, employment, IP, real estate and tax practices are ahead of budget.’ Schneider is adamant that investment and nimbleness is essential for long-term stability: ‘You learn from every crisis. I have learnt that you cannot rely on certain things and you have to be ready for everything.’
On top of tightening relationships with China and Asia, Russia has provided incentives for multinationals to localise their manufacturing plants and production facilities inside the jurisdiction, helping to boost domestic economic activity and inbound investment.
Noerr’s Weber says: ‘The state has pushed forward with laws on public procurement and certain subsidies, meaning that goods produced in Russia get certain advantages and this forces companies to localise production.’ He says the firm is working on new localisation projects for large and mid-sized foreign companies in Russia, including a major car manufacturer.
Akuyev believes that it is dangerous to become overly fixated on the recent trough in economic performance: ‘What is interesting about Russia and volatility is that it can go from good to bad very quickly and go from bad to good just as quickly. We experienced the Russian financial crisis in 1998 and at the time that seemed like Armageddon, but it didn’t take long for us to be very busy. We remain committed to Russia and a year ago we promoted one colleague to the partnership and another to counsel. We make these decisions on a 20-year horizon.’ LB
China investment bolsters CIS and Eurasia region
China’s One Belt, One Road (OBOR) programme, a modern day reboot of the Silk Road trading routes, touches on large swathes of the globe. The CIS and Eurasia region is one of the chief beneficiaries of China’s intent to cement its position as an economic superpower.
Although states such as Kazakhstan have suffered due to the recent slump in commodity prices, it is now being branded as the ‘buckle’ in China’s OBOR initiative. China is establishing major railroads through Xinjiang, its western province, and is developing dry ports along the borders of Kazakhstan, Kyrgyzstan, and Tajikistan. Doran Doeh, the senior partner in Dentons’ Moscow arm, says that workflow between Russia and Kazakhstan
also remains high, the same being true for its recently expanded branch in Uzbekistan through a merger with local firm Avent Advokat. ‘Uzbekistan has had a change of regime and has liberalised its foreign exchange system. Things are opening up. It is a relatively large country with over 30 million people and a large agricultural and natural resources sector,’ Doeh notes.
Dentons is also ambitious about the broader CIS region, having launched a new office in Tbilisi, Georgia, in May this year; an 11-lawyer team joined from DLA Piper, which closed its branch there.
London loses its allure for Russia disputes
There was a time when London’s Commercial Court was virtually overrun by disputes involving Russia and CIS parties. One of the most headline-friendly cases was the $6.5bn battle between oligarchs Roman Abramovich and Boris Berezovsky in 2012. Skadden, Arps, Slate, Meagher & Flom represented Abramovich with Addleshaw Goddard acting for the defeated Berezovsky.
Yet when western sanctions hit Russia in 2014, London lost its attraction as a major centre for disputes featuring Russian partners. According to several senior dispute resolution lawyers, Russian state-controlled enterprises are now favouring arbitration clauses in their contracts that identify Singapore as the preferred venue. With sanctions being imposed by the US and EU, Singapore and other arbitration centres such as Hong Kong are now seen as more neutral by Russian parties.
As ever, the issue with arbitration is whether judgments and awards in neutral venues can be enforced against the counterparty in domestic courts. According to Laura Brank, head of Dechert’s Russia practice, foreign investors should not be overly anxious about enforcing arbitration awards. ‘Unless it is a very political situation, then Russian courts tend to be fair and enforce those foreign judgments, though that’s not to say that the enforcement process is an easy one.’
Murat Akuyev, a Moscow partner at Cleary Gottlieb Steen & Hamilton, is also confident in the Russian judiciary. ‘The Russian court system has opened up. There is significant transparency now,’ he says. In 2016, the firm successfully represented the Russian Federation in the District Court of The Hague, annulling three arbitral awards totalling some $50bn obtained by the former majority shareholders of Yukos Oil.
Russia has also sought to reform its own arbitration legislation, creating greater certainty in disputes connected to direct investments into Russian companies. The reforms have also increased the powers of the Russian courts to support arbitration and have to an extent reduced the state courts’ ability to intervene.