Russian business and politics can rarely be described as boring. Each year throws up its share of dramas, and 2011 is no exception to the rule.
From prime minister Vladimir Putin’s recent, and not entirely unexpected, self-anointment as Russia’s next president, through to Rosneft’s doomed oil exploration joint venture with UK oil major BP and its subsequent rebound into ExxonMobil’s welcoming arms. These events, and more, have shown that Russia hasn’t lost its flare for political and economic intrigue and infighting. Nevertheless, compared to the problems faced by some of its neighbours in the CIS and Western Europe, Russia has come through the year with a veneer of respectability and stability. Any knocks it has taken have come from external sources.
Russian-based corporate lawyers certainly entered 2011 with high hopes, buoyed by PepsiCo’s $3.8bn acquisition of a 66% share in the Russian food and beverage company Wimm-Bill-Dann in December last year.
Russian business and politics can rarely be described as boring. Each year throws up its share of dramas, and 2011 is no exception to the rule.
Despite a strong opening to 2011, where according to mergermarket $39.2bn worth of M&A deals were done during the period between January and June, (as opposed to the $24.7bn in deals done for the whole of 2009) the months to follow have produced a stunted flow of deals. But this has since diminished as the eurozone crisis refuses to resolve itself.
‘Russia is directly affected by the crises elsewhere in Europe,’ says Pranav Trivedi, a Moscow and London-based corporate partner at Skadden, Arps, Slate, Meagher & Flom. ‘People are waiting to see what will happen in Western Europe before coming back into the market here, and many investment banks are saying that for the near term investors are going to wait on the sideline in terms of Russian corporate work, both in M&A and capital markets. It’s not as bad as 2009, but it won’t be as bullish as 2010.’
Skadden played a central part in some of the biggest headline matters in Russia over the past year, not least the tug of war surrounding Rosneft’s oil exploration in the Arctic shelf. Earlier this year, the firm secured an injunction victory for its client Alfa-Access-Renova (AAR) in its bid to block its TNK-BP joint venture partner BP from entering into the proposed $16bn strategic alliance with Rosneft. Following the collapse of the BP deal, Skadden later went on to represent BP rival ExxonMobil in its subsequent $3.2bn agreement with Rosneft. While Skadden declined to comment on these specific matters, it is safe to assume the firm won’t be on BP’s Christmas card list this year.
Reasons for cheer
Even in the case of BP, which for the past few years has been portrayed as the international poster boy for all that can go wrong when investing in Russia, the picture isn’t exactly bleak. Its TNK-BP joint venture with AAR has been acrimonious but it remains hugely profitable. TNK-BP’s net income last year was $5.82bn and $4.97bn in 2009.
‘Despite the difficulties they’ve had, the reality is BP has already recovered its investment many times over,’ says a partner at a major international law firm. ‘It has only managed to do that by having a long game in Russia. If you start to talk to most M&A lawyers, the average life of a joint venture is two years. BP’s started in 2003, so it has already survived much longer than most and it has made BP a huge amount of money.’
Nevertheless, BP’s travails, including the recent court-approved raid on its Moscow offices by Russian special forces, has played into the hands of the naysayers who claim Russia is a terrible place to do business.
Lawyers on the ground however, who are unusually honest about the obstacles they face, do feel that the tide is turning and that investors should look beyond the headlines.
I’m getting the feeling that Western companies are more interested in coming into Russia than they have been for the past couple of years.
Akin Gump Strauss Hauer & Feld’s Moscow head Richard Wilkie, whose firm was Russian counsel to ExxonMobil on the Rosneft deal, is upbeat.
‘I’m getting the feeling that Western companies are more interested in coming into Russia than they have been for the past couple of years,’ says Wilkie. ‘In my mind [the ExxonMobil deal] is a very positive sign, especially coming off the BP situation. People will look at that as a huge deal that was expanded to include projects outside of Russia. If you look at the Russian aspects of the joint venture, it is huge. It shows that one of the largest international companies in the world is happy to take an investment in Russia.’
Clients have also seen a noticeable improvement in the business environment. Most lawyers concede that there is a long way to go, but relative to what came before, Russia has made huge advances, and the hope is that this will continue.
‘There has been a sea change. Fifteen years ago the legal system was such that it was difficult for a foreign lawyer to grasp the shape and underlying policy of Russian regulations,’ says Margaret Jordan, European general counsel for global food manufacturer Mars, Incorporated. ‘Now, more and more, when you read new Russian regulations the concepts they embody are more easily recognisable and understood from an EU or US perspective – for example the antitrust legislation and the recent Bribery Law.’
The court system is reforming and becoming more transparent, yet still faces problems. Corruption and political interference certainly remain an issue, but for the most part it is a question of perspective, both in terms of what came before and what Russia’s competing jurisdictions are like.
‘Most of our Western clients tell us they have had good experiences in Russia as compared to other BRIC countries,’ says Dimitry Afanasiev, chairman of Russian legal giant Egorov, Puginsky, Afanasiev & Partners. ‘Even though we in Russia like to compare ourselves with Europe and follow European standards, in reality we are competing for foreign investment not with the European countries but with the BRIC ones.’
Client power
The fact that corporate deal activity is no longer focused just on the oil and gas and natural resources sectors is also encouraging. Linklaters and Latham & Watkins found themselves opposite one another on two of the largest Russian deals outside of energy and mining this year. The takeover of Wimm-Bill-Dann by PepsiCo, where Linklaters represented PepsiCo and Lathams acted for the target company is one, while the other is the largest deal in Russia’s telecoms sector.
Mobile TeleSystems’ (MTS) $2.71bn takeover of Comstar United TeleSystems (Comstar) which finally completed in June 2010, saw Linklaters represent the target and Lathams the bidder.
Similarly, in the equity capital markets there has also been activity way beyond the usual listings of mining companies. 2010 saw the $5.7bn IPO of Russian internet company Mail.ru, which owns a 2.4% interest in social networking website, Facebook. In May this year, the Russian internet search engine Yandex achieved a $1.3bn listing on America’s Nasdaq.
‘Ten years ago what you would see were the classic emerging market sectors,’ says Linklaters corporate partner Hugo Stolkin. ‘People were coming into Russia for the oil and gas deals. What is exciting to see is the development of business across all the sectors. We’re seeing supermarket deals, real estate deals, food and beverages transactions. They are the proper mainstays of the local economy.’
The MTS/Comstar deal added an extra twist because it involved two Russian companies that were listed abroad.
What is exciting to see is the development of business across all the sectors. We’re seeing supermarket deals, real estate deals, food and beverages transactions. They are the proper mainstays of the local economy.
‘The concept of public M&A is a very recent phenomenon in Russia and is due largely to the way Russian companies have evolved over the past ten years or so. The MTS/Comstar telecoms tender offer and merger that we structured last year was a leading example and a very challenging mix of Russian, US and English corporate and securities law,’ says Lathams’ Moscow managing partner Chris Allen.
The increasingly complex nature of the deals has also been reflected in the increasing sophistication of the Russian clients who are driving a growing amount of the business for international law firms.
‘Over the course of the last two decades Russian business has become fairly internationalised and an increasing number of Russian business people have been exposed to international standards of deal-making,’ says Kim Latypov, a Russian-qualified corporate partner at Linklaters. ‘These days we are seeing more deals, which are basically Russian domestic deals, being done to full international standards, than a decade ago. Ten years ago, more deals were done on the back of an envelope. Generally, the more there is reliance on law and formal legal institutions in doing business in Russia, the greater is the need to document domestic transactions properly and deal with contingencies and risks in transactional documentation. It is in this area that I see significant potential for growth in the demand for legal services. This is bound to benefit everyone operating in the Russian legal market.’
The back of the envelope type deals agreed between oligarchs in smoky hotel rooms are, most lawyers agree, the reason why some of the most high-profile Russian corporate litigations are taking place at all. The current UK High Court dispute between Roman Abramovich and Boris Berezovsky being one of the most recent headline examples. As companies publicly list and become increasingly institutionalised, the theory is that this sort of behaviour will be less frequent.
Where the Russian clients have proved more difficult, however, is in their constant drive to bring down the billing rates. Since deal activity crashed in 2008 and 2009, all firms were forced to reduce their billing rates and include capped fees and other fixed-fee arrangements. Despite the uptick in work that most corporate practices experienced in 2010, the pressure on fees remains, particularly in capital markets work. This has been exacerbated by increased competition from independent Russian law firms that have lower overheads and are now seen as an increasingly acceptable alternative for domestic corporate advice.
‘The whole industry is struggling with this sea change in approach from Russian clients,’ says a partner at a major international law firm. ‘People were hoping back in 2009 that this would be a short-term issue and we could get back to normality, but I don’t think it will be that way. It will take a long time to unwind the effects of the crisis and how the Russian clients view what we bring to the deal. In the US there was some pricing pressure, but clients are more sophisticated and understand what lawyers bring to transactions and how our business models work. They appreciate that while lawyers took the pain for a couple of years, things change. Here it is very different.’
‘Things are starting to get busier this year so some firms have said enough is enough,’ adds Laura Brank, Dechert’s Russia head. ‘Some of the Russian companies that have been pushing on this haven’t really caught onto the fact that the market has moved on a bit since 2009/10.’
No news is good news
Whether the market can maintain the momentum is now entirely dependent on external factors. ‘The question is whether it will be going down because of the international situation,’ says Vassily Rudomino, senior partner at leading Russian independent, ALRUD. ‘Oil is still quite expensive, the economy is still growing by about 4%. All the economic statistics in Russia are quite good, but still now we feel the market is changing.’
One aspect that won’t be changing, however, is the political status quo in Russia. The likely return of Putin to the Russian presidency in 2012 may not necessarily be welcomed by all the electors, or by proponents of free and open democracy. But from a pragmatic business perspective it is at least one less thing to worry about.
‘I think that business likes predictability,’ says Afanasiev. ‘Business people always tell me that no news is good news. If you look at it from that perspective the fact that Putin is coming back is a good thing. Everyone in Russia realised that Mr Putin continued to be very influential during the last four years, and to that effect his return to the presidency continues the status quo. As to my personal preferences, I certainly think that Putin can be credited with bringing stability to Russia which is an enormous achievement often underestimated in the West.’
For corporate lawyers in Russia, a grey and stable business environment certainly makes for a nice change, the rest is in the hands of less stable eurozone regimes. LB