Global law firms have traditionally dominated the corporate market in Russia and the CIS. LB assesses the chances of those domestic firms taking on the internationals at their own game.
Dimitry Afanasiev, chairman of the Russian law firm Egorov, Puginsky, Afanasiev & Partners (EPA&P), is fully aware of the challenges that lie ahead. On 19 July, EPA&P announced that it was to take over the Ukrainian firm Magisters, creating a pan-CIS firm with over 300 lawyers and, as reported in the legal press, a combined turnover of €115m. In doing so, the firm has planted a serious flag in a market that has always been dominated by major internationals.
‘It isn’t an easy move,’ says Vassily Rudomino, senior partner at rival Russian firm ALRUD. ‘Both firms might get certain benefits from this merger but it is a big challenge. I really admire the courage they have taken to do it.’
From Afanasiev’s point of view, it was an inevitable juncture in a bid to establish EPA&P as a major legal institution, rather than a domestic firm based around two or three key partners. Afanasiev feels this is the only way domestic firms like EPA&P can gain the long-term trust of their largest clients.
‘It’s the evolutionary stage in the development of our firm,’ he says. ‘It was necessary because we made a commitment a few years ago to institutionalise. As part of the institutionalisation we wanted lateral hires.’
‘International firms aren’t really local players and you sometimes have local players who aren’t experienced enough to be internationally acceptable.’
The Moscow-based chairman realised the firm needed to make lateral hires and add weight in certain specialised areas. It had typically relied on internal growth but this wasn’t enough. A kick-start was necessary, and the opportunity presented itself when Magisters made it known it was interested in pursuing a merger.
‘We started to get to know them better last winter,’ says Afanasiev. ‘The more we got to know them the more we liked them because they shared the same philosophy of working to Western standards in a challenging jurisdiction like the CIS. There are very few firms who do that. The international firms aren’t really local players and you sometimes have local players who aren’t experienced enough to be internationally acceptable.’
EPA&P believes it can fill that gap, but in doing so it faces several major hurdles. First comes the entrenched market position that international firms enjoy, particularly in Russia. Second, and perhaps most important, is the fact that almost every significant M&A or financing deal is structured under English law. As such, EPA&P still has to get referrals or choose partner firms for international deals, and persuade clients that they are better off instructing two independent firms rather than one global network.
‘Our only choice is to tell the client we are putting up a team that combines the top law firm in the CIS with our best friends – the top law firms in the West,’ says Afanasiev. ‘There are upsides and downsides from a client’s perspective to each model. My pitch to clients is that they should go to the best restaurant in each town rather than eat at a global restaurant chain like McDonald’s. The strength in this pitch is that by combining the best national law firms in one team, the client gets excellent strategic advice. The weakness in that pitch is, of course, that some global firms aren’t exactly a McDonald’s.’
Away advantage
In most jurisdictions, domestic independent law firms are sufficiently established. While they might not lead on cross-border transactions, they will always sit at the table and advise on the local aspects. This works well in legal markets where Bar rules restrict foreign firms, or where the internationals simply feel there is no profit to be made from having an office on the ground.
In Russia, however, there are few rules restricting foreign law firms when it comes to providing local advice. And many of these firms see Russia as an incredibly attractive place to do business and therefore have sizeable offices in Moscow.
To put this into perspective, of the 18 law firms in the top four tiers of this year’s Legal 500 UK M&A rankings, only six are without Moscow offices, including Slaughter and May, Ashurst, Macfarlanes, Shearman & Sterling, Travers Smith, and Weil, Gotshal & Manges.
While these firms, as well as others in the US such as Davis Polk & Wardwell, will provide numerous referral opportunities to local Russian firms, there is a much smaller pool to fish from compared with other countries.
Since international firms have been an ever-present force in Russia the independent domestic market wasn’t given much of a chance to flourish’
In contrast, the local firms in Ukraine have a much easier time in the corporate market and face very little competition from global law firms when it comes to providing domestic advice.
‘It is very difficult to compare the Russian and Ukrainian legal markets,’ says Mikhail Ilyashev, name partner at Ukrainian firm Ilyashev & Partners. ‘There are only a few international firms in Ukraine. That is why domestic Ukrainian law firms are significantly involved in major corporate transactions.’
Since international firms have been an ever-present force in Russia – Baker & McKenzie was the first, back in 1989 – the independent domestic market wasn’t given much of a chance to flourish, except in areas such as litigation, regulatory and tax advice. ‘Unlike in many other emerging markets the international offices really developed local law expertise at an early stage in Russia,’ says Skadden, Arps, Slate, Meagher & Flom corporate partner Pranav Trivedi, who divides his time between London and Moscow. ‘They were never dependent on local law firms to execute transactions. We are firmly ensconced in the local corporate world.’
Changing perceptions
It has been a struggle to convince international, and even some domestic, clients that local firms offer a safe alternative to the large global firms. And apart from the practical hurdles, there has been the issue of perception.
‘There is a sense that if you’re representing a Western party and there is a Russian client on the other side, they will also want Western lawyers on its side,’ says Dechert’s Russia head, Laura Brank. ‘Russian clients are hugely concerned about confidentiality and the ethical considerations in doing a deal. Rightly or wrongly, and I think wrongly for the most part, there is a perception that they will be better off with a Western law firm in respect of these issues.’
This is reflected in the fears that some international companies have when looking to invest in Russia and the CIS. For them, negotiating the domestic legal market can often prove daunting. It’s a tightrope walk where any misstep could result in serious problems. On the one side is the client’s desire for international standards and ethics. On the other is the need for a streetwise guide that can lead them through a market that is at best challenging, and at worst a morass of corruption and political interference. The challenge therefore is in finding some sort of Goldilocks zone between the streetwise and the ethical.
‘I think if you are an international investor entering the Russian market you certainly need advisers with local connectivity and local knowledge who understand the Russian culture, and the regulatory background and at the same time are attuned to the governance and compliance culture of Western multinational companies,’ says Margaret Jordan, European general counsel at the global food manufacturer Mars, Incorporated.
In the case of Mars, which has been operating in the market for over 20 years, the legal advice has largely come from Andrey Goltsblat, managing partner at Goltsblat BLP, which won International Office of the Year at the 2010 Legal Business Awards. While Goltsblat has been working under the Berwin Leighton Paisner banner since 2009, his background is very much local, having previously been a name partner at the leading domestic firm Pepeliaev, Goltsblat & Partners (now Pepeliaev Group).
While Mars has been more than satisfied by its choice of local counsel, for many international companies, particularly new entrants, the safer choice is to opt for an international firm.
‘As you can imagine, if you are a big international company it is easier to go to White & Case and Linklaters,’ says Vladislav Zabrodin, managing partner of the Moscow and St Petersburg-based firm Capital Legal Services. ‘If they use local firms it is more complicated because you are taking the responsibility. Then it is absolutely vital to have contact with the decision makers. Russian law firms have more limited resources. If they are able to get that contact they can become quite competitive.’
‘Occasionally I ask myself the question, why do I work so hard? And the answer is because I want the law firm to succeed, but I don’t want to do it till I drop dead.’
For those domestic law firms that have succeeded in getting quality international corporate work, it has typically been because of one or two partners, and the contacts they have established with either foreign law firms, in-house counsel or key legal buyers. The client rarely followed the firm itself. This was the problem that set Afanasiev on the path towards the Magisters merger, and a bid towards greater institutionalisation. He reveals his motives weren’t purely for the sake of his firm, but for his own longevity.
‘The challenge sometimes is to sell younger associates and partners who have a lot of ambition, but have yet to prove themselves to clients,’ says Afanasiev. ‘That is why I’m saying that from a management perspective my main challenge is to train the people we have and bring the lateral hires in who can do the work. At the senior level we are quite financially successful, but given that the prices have come down we have to work more to make less. Occasionally I ask myself the question, why do I work so hard? And the answer is because I want the law firm to succeed, but I don’t want to do it till I drop dead. I want to say to clients: I’m busy but Ivan or Andrei or Natalia are excellent and he/she is going to do it.’
Two years down the line since his practice merged with BLP, Goltsblat is aware of both the benefits of a merger and the difficulties independent Russian firms face. ‘For the Russian law firm it is very hard work,’ he says. ‘Psychologically, the clients do need to be confident that the lawyers have background and experience, which a big branded law firm can provide.’
He adds: ‘The client’s perception has changed since we merged. They now come to us to handle their cross-border M&A transactions in the whole rather than just the Russian side. Now all our M&A deals are direct instructions from the client. It is a completely different market position and that is what we aimed for when we merged. The major challenge is not to lose the Russian side of the brand and at the same time become truly international.’
It is perhaps telling that, despite the fact that Goltsblat’s Moscow office is fully part of BLP, the Goltsblat name has remained. As Goltsblat points out: ‘It’s one firm, but we’re just branded for the Russian market.’ Clearly in some parts of the domestic market the cult of the individual still applies to certain Russian lawyers, whose names carry more weight than the London firm they have tied up with.
Culture hit
From the client’s perspective, one of the biggest issues that Russian law firms have had in the past is their lack of service skills. ‘When you deal with Russian law firms you should watch out for the service and the responsiveness of Russian lawyers,’ says Elena Grigoriyan, Eastern European head of legal and corporate affairs at the global personal and healthcare company, Kimberly-Clark. ‘I think it is a cultural thing, Russians aren’t good in service industries. Everyone wants to be a client and no one wants to serve. That is a general problem and it is the same with law firms. Young people are already spoiled. Everybody wants to make money and no one wants to invest. They think they are perfect and everyone thinks they are the client and not the lawyer. A lot of Russian law firms try to build the service, but the hardest thing here is the mindset and you can’t break that overnight.’
Afanasiev concedes that, despite the high level of remuneration that his firm offers, the fast buck mentality is definitely a problem. This is partially because the modern Russian legal market is barely a quarter of a century old and the system, and the lawyers within it, are making up for lost time.
‘How do you grow a generation of lawyers who understand that the practice of law isn’t just about making money?’ asks Afanasiev. ‘When you look at my generation, you don’t see a lot of lawyers who are focused on doing good deeds for the sake of doing them. Good lawyers are always going to be able to put bread with butter on their family’s table. But they are not likely to become oligarchs. Once you realise this, then there is a choice to make: do you have your bread and butter and do the right thing for the people or do you try to add more fat to your butter and waste your life by dying from a cholesterol-rich heart attack? Ultimately, Russia is playing a catch up game on pro bono. A lot of the lawyers here are really hungry because they have never been rich before. It is all rush, rush, rush whatever the cost. But as time goes by, the Russian lawyers will grow to become more confident in their ability to be financially successful and will begin to focus more on doing the right thing.’
‘Everybody wants to make money and no one wants to invest. They think they are perfect and everyone thinks they are the client and not the lawyer.’
While no one is suggesting that change is happening overnight, most international lawyers and clients believe that improvements are being made. Whether it is by osmosis, or through training at international firms, many see a shift in cultural sensibilities and a willingness to emulate the style of the Western law firms. This is driving forward the improvement among the domestic firms in Russia, and will ultimately help them compete for corporate work on a more even footing with their international rivals.
‘The Russian legal market and its participants have gone in a positive direction over the past year,’ says Alexander Khrenov, name partner at Yukov, Khrenov & Partners. ‘The number of talented and dedicated professionals, their ambitions, and their willingness to adapt to Western business models is on the rise. That certainly attracts new clients and business. In the next decade, Russian law firms will become closer to the clients, more transparent and definitely more desirable.’
Buyer power
On a day-to-day level, local firms are becoming increasingly successful at competing with international rivals – particularly when it comes to instructions from clientele who have been in the market for a while – and recognise the respective strengths of each type of firm. Since the state of the economic market has been driving prices down, Russian firms have also been able to accelerate this process, thanks to a timely combination of lower overheads, lower fees and improved standards.
For corporate work, Russian firms have additionally managed to leverage off the greater market share enjoyed in other areas where they traditionally had a more prominent position, such as real estate, regulatory, tax and litigation advice.
‘For the past ten years I think a lot of companies have preferred Russian firms because they are more flexible with the price list and they have local knowledge,’ says Grigoriyan at Kimberly-Clark. ‘Our approach as a company is to combine international firms with a Russian law firm. When we were building our manufacturing facility we used a Russian firm. To my mind the Russian firm did a better job than the international law firm, which didn’t have that deep knowledge of the real estate environment in Russia.’
The improved quality of the domestic firm is giving greater choice to clients, which in turn don’t necessarily feel the need to use an international firm that has an office in Moscow, despite the lack of English law capabilities among the locals.
‘For the past ten years I think a lot of companies have preferred Russian firms because they are more flexible with the price list and they have local knowledge’.
‘If you look at the example of large-scale, cross-border transactions, they often need to comply with the laws of several different jurisdictions and it is natural that multinational firms possessing the requisite expertise, like us, tend to get instructed on these deals,’ says Kim Latypov, a corporate partner at Linklaters’ Moscow office. ‘However, we’ve come across some of the leading Russian law firms on the market-leading transactions and we think this is a great development and we welcome the fact that our colleagues in Russian firms are gaining more experience on top M&A deals.’
Firms such as Moscow-based ALRUD have enjoyed a bumper year working on major international transactions as Russian co-counsel. One example is the $5.7bn IPO of Russian internet company Mail.ru in November 2010. ALRUD advised underwriters Goldman Sachs and J.P. Morgan on the deal, alongside US corporate firm, Sullivan & Cromwell.
Another highlight for ALRUD was advising, alongside Davis Polk, underwriters Morgan Stanley, Deutsche Bank and Goldman Sachs on the $1.4bn IPO of Russian internet search engine Yandex in June 2011.
But the fact that Davis Polk worked alongside Linklaters, rather than a domestic firm, on PepsiCo’s $3.8bn acquisition of a 66% stake in Russian dairy and juice company Wimm-Bill-Dann at the end of 2010, illustrates that these sorts of arrangements aren’t entirely guaranteed for the domestic firms.
‘Competition is difficult. It is not easy and of course the cost factor is important here. But overall, we do see that more clients are accepting this model,’ says Rudomino at ALRUD. ‘The clients are becoming more sophisticated and they are looking for the best quality service and this often comes from an independent.’
We fought the law
An encouraging development is that sizeable transactions aren’t governed by English law in every instance. Mid-sized deals that aren’t necessarily Anglo-centric are often done under Russian law.
‘We advised a Turkish group of companies that was acquiring two factories, one in Russia and the other in Ukraine,’ says Andrey Zelenin, a partner at the Russian law firm Lidings. ‘The parties initially planned to use English law to structure the deal. Upon review we figured out that it wasn’t appropriate for the specific circumstances. What is more important is that we structured the Ukrainian deal and Russian deal under Russian law. It logistically saved time for the client.’
While it is still rare, some billion-dollar deals have also been structured under Russian law. One of the largest recent privatisations in the market was the $3.1bn secondary public offering of a 10% stake in Russia’s VTB Bank. EPA&P advised the Russian state sellers – the Federal Agency for State Property Management – in a deal that was entirely governed by Russian law. ‘We managed to convince the government and Western banks to use Russian law for the transaction,’ says Afanasiev. ‘The reason this was important is because unless someone starts doing those deals under Russian law it will never develop. Everyone, including English law firms, needs rule of law in Russia. Unless you give a chance to the Russian law it will never become sophisticated.’
It is for this reason that Afanasiev, alongside corporate lawyers at other leading Russian firms, including Pepeliaev Group, ALRUD, Liniya Prava and Andrey Gorodissky & Partners, have been pushing for the development of new corporate laws. They are also lobbying the government in the current drafting stages of the new civil code.
While it is not expected that the dominance of English law will disappear, lawyers on the ground want to at least see changes that might help bring the system up to speed.
‘There has been a trend over the past several years to try and align the legal and regulatory framework for business transactions with Western standards,’ says Alexey Kiyashko, co-head of Skadden’s Moscow office. ‘[President Dmitry] Medvedev has a legal background and put that at the top of his agenda, and I think he has been relatively successful in the past few years in making amendments to the legislation and making it more investor friendly.’
While it is not expected that the dominance of English law will disappear, lawyers on the ground want to at least see changes that might help bring the system up to speed. ‘For lawyers, the application of English law is not a disadvantage,’ says Ilya Bolotnov, a partner
at Pepeliaev Group. ‘We must admit that English law is definitely more suitable for transactional matters. It is a fact. However, the domination of English law is a disadvantage in general. It stops further development of Russian law, and, in particular, the practice of its application.’
It is very much a chicken and egg situation: no one wants to use Russian law because the courts and the system have a bad reputation, but in some instances the courts are in that shape because they don’t have the experience to make themselves more business friendly.
‘It is obvious that the laws introduced in the mid-1990s have to be drastically reviewed,’ says Zelenin. ‘Whatever is done with the Russian civil code, it will never be a peer to English law, which has hundreds of years of history. What we lack in Russia is a good track record of enforcement of certain provisions of law and problems with the efficiency of the court system.’
Latham & Watkins’ Moscow managing partner Chris Allen has seen systemic improvements, but, like most, he feels there is some way to go: ‘It is certainly a very different legal and commercial landscape to 13 or 14 years ago when I first came to Russia. There is still a long way to go though. Foreign investors still have the (not unreasonable) perception of unpredictability and corruption in the Russian courts which spooks them. Added to the fact that much Russian law is vague and inconsistent, it is not surprising that the vast majority of deals are structured offshore via English law.’
Whether the new civil code will have a positive impact remains to be seen, since there is an ongoing debate as to what shape it should take. ‘It depends on whose point of view will prevail,’ says Bolotnov. ‘One of the sets of amendments that has been prepared by the presidential council may probably make our civil law extremely unattractive, and possibly even more difficult to understand for foreign investors.’
As a result, international firms still have the upper hand because of the dominance of English law and can still attract the young talent coming out of Russian universities.
New recruits
The fact that most of the international firms have the capital to recruit the top Russian law students has also meant they can provide the local handholding without the perceived risk of scrimping on the ethics. It is on this recruitment front that domestic law firms face one of their biggest challenges as well as one of their biggest long-term opportunities. The majority concede that the most likely destination for top graduates with decent language skills is to an international firm. While this may pose problems at a junior level, many of these career paths do often end up veering towards the local firms when the lawyers become more senior.
‘If you look at the market compared to ten years ago, the number of visible domestic firms has probably doubled,’ says Zabrodin. ‘You are also seeing lawyers at major firms looking to see if they can go to local law firms, because they can have more managerial authority. In the case of the junior lawyers, usually Russian law firms don’t pay top dollar. If we’re talking about senior people and partners, I would say the money is definitely quite competitive.’
‘I think it is still the case that talented young lawyers would like to start their careers with the international law firms, because it is a step up for them in terms of remuneration and experience,’ says Kiyashko. ‘Once they grow, they often go to Russian firms because they have better prospects to become partners. In the fight for talent among Russian law firms only EPA&P can compete.’
With partner earnings at EPA&P reportedly around the £5m mark, it isn’t hard to see why some international lawyers, as well as those at graduate level, might have their heads turned by the Russian firm.
‘I think our law firm is pretty much on par with respect to junior associates,’ says Afanasiev. ‘When people reach the level of senior associate and up, in our law firm the profit-sharing element kicks in which is unusual for Western law firms. As a result the young lawyers tend to make more money with us.’
Afanasiev adds: ‘There are certainly prejudices in the market where the local best and brightest always try and get experience in an international law firm, and that is understandable. Once they reach the level where they’ve learnt enough and stop benefiting from it, we’d like them to come and join us.’
‘There are certainly prejudices in the market where the local best and brightest always try and get experience in an international law firm.’
The fact that there is such competition for graduates, is reflective of the fact that the Russian legal market is in fairly rude health, at least compared to other jurisdictions. This is in stark contrast to Ukraine where it is very much a buyer’s market when it comes to recruitment. ‘It is a good time for law firms and a bad time for graduates,’ says Ilyashev. ‘There are few places but there are a lot of graduates, that is why we don’t face any significant competition for students. They are hunting for us. There is no difference for domestic or international law firms, we propose the same level of payments.’
EPA&P’s bid to level the playing field when it comes to recruitment hasn’t just been limited to Russian-qualified lawyers. In a move that attracted a good deal of attention within the Russian market, EPA&P announced that it was recruiting English-qualified and American-qualified lawyers as well. Some rivals have seen this as a bid to compete directly with international firms on English law transactions. This is something that Afanasiev denies.
‘The reason we’re bringing English-qualified lawyers in is that we want them to work alongside Russian lawyers and transfer their skills to them,’ Afanasiev says. ‘Now there is a definite globalisation of skills and if you look at their nature they are more American or British type skills. They are the golden standard today in the legal profession. We have in our law firm a couple of American lawyers, and a couple of English-qualified lawyers, to assist in the transfer of skills and create a culture that others can feed off. Their more pragmatic function is to help the Russian lawyers build a Western standard practice.’
Home advantage
The sense is that the broader domestic market is moving forward at a rapid pace. This involves intangible advances such as in the improved culture and mindset of the lawyers and their working environment, as well as more tangible developments in profits and growth. Whether other domestic firms will capitalise on this in the same manner and scale as EPA&P is doubtful. In most cases, the likelihood of more pan-CIS offerings seems slim.
‘I think there is likely to be consolidation in the Russian legal market, rather than expansion into other jurisdictions,’ says Alexander Skoblo, a partner in Salans’ Moscow office. ‘[EPA&P] is a very unique case of a law firm with very high profits per partner. Not a lot of other domestic firms are able to afford the luxury of opening an office in London.’
There are also the political and structural implications that developing a pan-CIS law firm would entail. ‘Integration among local law firms is a very difficult matter with unpredictable results,’ says Oleh Malskyy, a partner at Ukrainian law firm AstapovLawyers International Law Group. ‘CIS law firms do not have a long culture and deep understanding of how to grow into an organisation of more than 20 partners. Internal difficulties may arise that could potentially influence the quality of service, as well as bring many conflicts of interest internally and externally.’
Most domestic firms would prefer the cheaper, less risky route of nurturing best friends relationships and developing their practices in Russia, be it in Moscow or the surrounding regions. Most Russians don’t feel incentivised to grow abroad since there is so much more to achieve at home. This is in contrast to independent firms in neighbouring jurisdictions.
‘Baltic firms are moving to Belarus and Kazakhstan,’ says Zabrodin. ‘The only reason I can find is that there isn’t much work in the Baltics. They are also trying to compensate for the quite low rates in the Baltics and go elsewhere. Russian firms aren’t doing this because the potential of the market in Russia is huge and there is no particular need to go to Belarus and Kazakhstan in order to grow.’
Assuming the Russian firms continue to get buy-in from their clients in this respect, then there is huge potential. The same potential that attracted their international rivals in the first place.
It is ironic then that perhaps the greatest winners in this improvement in domestic standards won’t be the Russian firms themselves, but those corporate firms in the UK and the US who took the decision not to establish offices in Russia. If the clients believe that Russian firms can maintain high standards, and are prepared to use them on the Russian end of major deals, then for the UK and US best friends there really is no need to bother with the expense of opening in Moscow at all. LB