While their transactional colleagues in Moscow are suffering, the current sanctions on Russia have been a boon to trade and sanctions lawyers, who are fielding countless enquiries from Russian and international clients. The fact that the sanctions are so multi-layered, leaving plenty of scope for interpretation, has increased the demand, particularly when it comes to deciding what constitutes a controlling stake in a company, something that was relevant to the designated Russian individuals who were named in the first few rounds of sanctions and who owned stakes in many different companies. This uncertainty has, in many respects, been more damaging to Russian business than the sanctions themselves, something that the US authorities were fully aware of when they rolled them out.
‘I spoke with US officials on behalf of certain clients and said to them that greater precision in the sanctions-related announcements could make it easier for the US companies to comply,’ says Jeremy Zucker, co-chair of Dechert’s international trade and government regulation practice. ‘On multiple occasions, the US officials responded that the imprecision was deliberate because the uncertainty it develops among American industry leads to greater pull-back from Russia than is actually required by the sanctions themselves. As with a blanket ban, greater precision would remove much of that element of choice.’
‘When sanctions hit there is always an element of triage as to what is okay and what isn’t,’ says Ross Denton, a London-based partner in Baker & McKenzie’s European Community, competition and trade department. ‘The triage stuff has died down. Now we’re very much into people coming to us with quite complex questions. More than 50% of my work is now Russia related.’
Another area that has been keeping law firms busy is simple due diligence into who the beneficial owners of certain companies actually are.
‘The Russians have historically been quite good at putting in place complex corporate structures that obscure who owns what,’ says Denton. ‘Lots of big Russian companies seem to be owned by nominee law firms in Nicosia. Our Moscow office has been pretty successful in producing the other half of that jigsaw.’
Cyprus – another challenging year
It’s been a tough few years for Cyprus’ business community. With 2013 seeing the bank bail-in that saw domestic and Russian depositors lose 47.5% of any savings that exceeded €100,000, Cypriots could be forgiven for hoping that 2014 would be more of a fallow year. Unfortunately for a country with such close business ties to Russia, and the hundreds of Russian companies that structure their business on the island, 2014 has not been a great improvement.
Cyprus’ recent Russia-related problems have taken many forms: the devaluation of the rouble has meant that tourists who typically flocked to the island have largely stayed away. Cypriot agricultural exports to Russia have also stopped as a result of the tit-for-tat embargo that Putin put on food imported to Russia from the EU. Then there are the EU sanctions, which have undoubtedly raised another challenge for Cypriot lawyers, although most feel it is the economic fallout from the sanctions that have had an effect rather than the specific sanctions themselves.
‘Joint venture work is still coming in, but generally the slowdown reflects the deterioration of the economy as a whole,’ says Stelios Americanos, managing partner at Stelios Americanos & Co. ‘One would expect it to be worse but still we are quite satisfied with the volume of work. The main reasons why groups have been using Cyprus as a jurisdiction are still there.’
To compound matters, Russia is in the process of drafting a ‘de-offshore-isation’ law that could have a profound effect on where Russian citizens structure their businesses in the future. The intention in Russia is to ensure that there will no longer be any tax advantages for Russian residents using offshore companies. Those Russians that don’t notify the authorities of their interests in such companies could receive heavy fines.
While Cypriot lawyers do not deny that there are concerns about what effect those laws will have on their underlying business, most believe that Russians will continue to register their companies in Cyprus.
‘For most Russian entrepreneurs, [structuring your business offshore] is not really a question of taxation, it’s mostly a question of how you can preserve and protect your assets and continue to do your business,’ says Elias Neocleous, head of corporate at the Cypriot law firm Andreas Neocleous & Co.
‘I do not believe [de-offshore-isation] will change the market,’ says Andreas Haviaras, managing partner of Haviaras & Philippou. ‘Non-Russian companies will still feel more comfortable to deal with Cyprus-based structures and therefore Russians will still need to use this channel even if it will be less beneficial to them than before.’
Courting trouble
As to whether the Ukraine crisis and the resultant sanctions will lead to full-blown disputes, most agree that it isn’t a case of if but when. Nothing concrete has hit the courts yet, although companies are already starting to put together challenges to the sanctions, particularly in the EU.
‘These are politically motivated lists,’ says regulatory and tax specialist Aki Corsoni-Husain of offshore firm Harneys’ Cyprus office. ‘It’s not like these people have necessarily done anything wrong and there is an opportunity under the EU regime to come off the sanctions list if you can prove that you shouldn’t be on it.’
A precedent has already been set by Iran’s central bank that successfully had an EU asset freeze lifted following challenges in the EU courts, and the hope is that certain Russian businesses will be able to do the same.
‘We are working with a number of clients who are looking at the possibility of challenging the EU sanctions in particular. They are actively exploring opportunities,’ says Oleg Konnov, a Moscow-based tax and trade partner at Herbert Smith Freehills.
Sanctioned markets |
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| Bank | Issuer’s counsel on recent bond issues | Arranger’s counsel onrecent bond issues |
| Gazprombank | White & Case; Arthur Cox (Ireland) | Linklaters |
| Bank of Moscow | Morgan, Lewis & Bockius; Arthur Cox (Ireland) | White & Case |
| Russian Agricultural Bank | Clifford Chance | Allen & Overy |
| Sberbank | Clifford Chance | Linklaters |
| VTB Bank | Allen & Overy; Morgan, Lewis & Bockius | Linklaters |
| Vnesheconombank (VEB) | Morgan, Lewis & Bockius | Linklaters |
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Source: cbonds.com
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On top of breach of contract claims arising from companies affected by the sanctions, another likely source of disputes will be related to Russia’s annexation of Crimea, particularly in regard to businesses that had assets in the region. In these cases, the disputes will probably fall under investment treaty rules, although even here it is unclear how one could shape a claim because Crimea is still disputed territory.
‘I’ve heard some law firms that do investment treaty arbitration are thinking of firing claims against the Russian Federation for property that was seized in Crimea,’ says Timur Aitkulov, an arbitration and litigation partner in Clifford Chance’s Moscow office. ‘The claimants struggle with the very difficult question of why it should be the Russian Federation who should be the respondent because they, the claimants, don’t recognise that Crimea is part of Russia. The question is whether they should file a claim against Ukraine for failing to protect their property. It’s a situation that doesn’t have any precedent.’
One thing that is for sure is that it is unlikely to be a law firm with a Moscow office that files that claim against Russia, especially now that the political tension is so high. It is no coincidence that in the last major case against the Russian state, the successful $50bn investment treaty arbitration claim that Yukos majority shareholders launched against the Russian Federation, the claimants were represented by Shearman & Sterling, which has no offices in Russia.
Annual deal trends in Russia
Source: Mergermarket
‘Law firms have to be very careful who they can represent in those sorts of things,’ says one Moscow-based managing partner. ‘If there are cases that are going to be adverse to Russia I’d be quite surprised if you saw major international law firms with Moscow offices acting against them. You’d have to be quite brave.’
The Yukos award on behalf of the shareholders, which was rendered on 18 July 2014, has ratcheted up the politicisation of Russia-related disputes even further.
Co-publishing features
Are sanctions affecting workloads in legal services? What are the expectations for 2015?
– Andrei Gusez, Borenius
Interim injunctions for the freezing of assets and disclosure of documents and information
– Christos Galanos, Michael Kyprianou & Co LLC
Sanctions: an unprecedented moment for doing business in Russia
– Evgeny Zhilin, YUST
‘A very interesting development is the attitude of Russian clients to litigation and arbitration in Europe and the UK,’ says the managing partner of a Russian firm. ‘Because of the geopolitical crisis and the general feeling in Russia of support for Putin, coupled with the unprecedented amount of compensation that was awarded to Yukos shareholders, there is a feeling that because of the general attitude towards Russia, decisions could be slightly biased. Clients now often don’t want their disputes referred to arbitration or litigation in London or Europe.’
The challenge of finding legal representation works both ways and certain Russian individuals and institutions on the sanctions list have been dropped by their law firms during a dispute. ‘We had one long-running mandate that was virtually at a conclusion, then right towards the end this client came to be affected by sanctions and we had to cease acting,’ says a partner at one US firm.
This is a fact that many lawyers find deeply troubling, particularly since those on the sanctions list haven’t necessarily done anything wrong, but the sanctions, particularly from the US, are limiting their access to legal representation.
‘There are areas, such as international arbitration, and particularly highly specialised areas such as investor-treaty arbitration,’ says Alex Gerbi at Quinn Emanuel Urquhart & Sullivan, ‘where if international firms are precluded from working for certain Russian clients, and those are the only firms that have serious capability in the area, this could prejudice the position of those clients quite significantly if they are faced with material disputes in those areas.’ LB