The global economy is slowing and so too is the Middle East. In April, the International Monetary Fund (IMF)almost halved this year’s growth forecast for the MENA region to 1.3%, from its previous estimate of 2.5% in October 2018. Dragging everything down is the oil sector – particularly in Saudi Arabia – US sanctions in Iran, and geopolitical tensions in other economies such as Iraq, Syria and Yemen.
But such downgrades are no surprise for lawyers in the region. ‘There is no doubt the region is going through a downturn,’ says Richard Gimblett, resident managing partner of the Dubai arm of Holman Fenwick Willan (HFW), which has more than 50 lawyers across its offices in Riyadh, Dubai, Kuwait City and Abu Dhabi. ‘The volatile price of oil obviously hasn’t helped. These are still largely petro-economies, although they are trying to diversify.’
Economic pressures may weigh on state coffers, but governments remain strongly committed to privatisation and economic reform programmes. There is a lot of demand on government resources – VAT was introduced in the UAE and Saudi Arabia in January 2018. Through its Vision 2030 initiative, Saudi Arabia hopes to attract more than $425bn in private sector investment over the next ten years to overhaul the economy and reduce reliance on oil.
After opening in Dubai in 2007, Hogan Lovells added a second Middle East office in Riyadh last June through an association with Saudi Arabia’s ZS&R Law Firm. ‘There are a number of initiatives and projects announced as a result of Vision 2030 and we are incredibly excited about those prospects,’ says Dubai managing partner Rahail Ali. Among a string of mega-projects announced by Crown Prince Mohammed bin Salman and backed by the Public Investment Fund – Saudi Arabia’s sovereign wealth fund – include the $500bn new futuristic city of Neom; the Qiddiya entertainment district outside Riyadh; and the Red Sea project to create an ultra-luxury resort. ‘That is a clear indication of how significant Saudi is and the deal opportunities there are for lawyers,’ Ali says.
‘The pace of regulatory change is the highest it has ever been.’
Jonathan Silver, Clyde & Co
Lawyers also stand to gain from a raft of renewable energy projects and Saudi Arabia in particular is focused on being much more environmentally friendly. Hogan Lovells advised the lenders on the project financing of the 300MW Sakaka solar plant, the first utility-scale renewable energy project under King Salman’s national renewable energy programme – in a transaction that closed in November. Ali observes that Islamic finance and project finance have remained robust in the downturn because a number of Gulf Cooperation Council (GCC) countries are very much focused on developing their infrastructure.
Although Saudi accounts for more than half of the GDP in the GCC, Dubai is still the regional hub for many international law firms, in part due to its more liberal regime. The oil slump since 2014 has, however, had a particularly negative impact on the UAE economy. Says Ali: ‘Unless firms have significant Saudi operations and work with credible Saudi lawyers, they are going to struggle. In the UAE there are too many lawyers chasing not enough work.’
Husam Hourani, managing partner of Al Tamimi & Co, which has 375 lawyers in 17 offices across the region, says there is so much work in Saudi that many of its lawyers from other offices are helping to cope with demand. That spans a wide variety of sectors and practice areas such as aviation, infrastructure, regulation and sports (the firm recently represented Al-Hilal FC in signing a number of coaches and players). Since the beginning of 2018, the Emirates law firm has added 12 lawyers across its offices in Riyadh, Jeddah and Al Khobar, making it the largest law firm in the Kingdom, and indeed in the Middle East.
Areas of interest
Egypt, expected by the IMF to grow by 5.5% this year, has also got firms’ attention. Al Tamimi opened an office in Cairo three years ago with one Egyptian partner – and now has seven, plus 15 associates. Hourani contrasts the North African country with Saudi: ‘It is a different type of client and work. The private sector is extremely active in Egypt. M&A, capital markets, banking and finance are the three dominant areas of work for us.’
‘If you want to act for any government or government-owned entity in Abu Dhabi, they really like to see that you have got a local office, you just can’t do that from Dubai.’ Richard Gimblett, Holman Fenwick Willan
White & Case recently advised A15, an Egyptian tech investment fund, on the sale of its 76% stake in UAE’s TPAY Mobile to Africa’s Helios Investment Partners, advised by Norton Rose Fulbright. ‘It was the region’s first dragon. That is where the return from one investment is greater than the whole amount of the fund raised in the first place,’ says Dubai-based team leader Marcus Booth, who moved from London last year to lead White & Case’s private equity practice in MENA. ‘The wider region is very much open for business. Activity levels are very strong and what you see more and more from a private equity and financial sponsors’ side is a realisation of opportunity here.’ Another M&A deal, led by Booth earlier this year, saw Goldman Sachs invest in Modanisa, a Turkey-based fashion retailer for women in Muslim countries, advised by Baker McKenzie.
Clyde & Co has around 50 partners across its five offices in the Middle East, making it one of the region’s largest international firms. Jonathan Silver, who has led the firm’s MENA operations since 1989, says a balanced portfolio of work enables the firm to take advantage of increases and adjust to decreases in the market as and when they arise. ‘Healthcare and education are very active at the moment, and we have developed a pre-eminent position in both of those sectors right across our network, including in Oman, the UAE and Qatar.’
Clyde recently advised GEMS Education, a Dubai-headquartered private education provider, on establishing and restructuring schools in the UAE; and Aldara Medical Corporation on the development and operation of a state-of-the art outpatient facility in Riyadh that is scheduled to open this year.
Alongside state-led investment and diversification, pro-market reforms are good news for lawyers.
A raft of new regulation introduced in the past 12-15 months include: a new UAE foreign investment law that will allow 100% foreign ownership of onshore companies across certain sectors, and a long-term visa system for investors, entrepreneurs and professionals; a new companies law in Kuwait that will make it easier to set up a business there; the introduction of PPP legislation as well as new competition and bankruptcy laws in Saudi Arabia; and the launch of a permanent residency programme for expatriates in Qatar. Silver, who has practised in the Middle East for the past 39 years, says: ‘The pace of regulatory change is the highest it has ever been.’
Spread betting
In line with changes to the region’s economy, international law firms have diversified their offerings. White & Case historically focused on project development and finance but has become a full-service law firm in the last five years according to Doug Peel, who leads its Middle East practice. The firm’s regional practice has doubled in size over the same period and now has five offices and around 110 lawyers. Says Peel: ‘If you are in a position to have counter-cyclical practices in the region you are weighted against the impact of volatility in the oil price.’
Construction disputes are currently ‘a thriving business’ for the firm’s dedicated Dubai-based practice. Peel observes that these types of disputes can last for some time and carry over into periods when oil prices bounce back. Most of White & Case’s construction disputes are in arbitration – ad hoc or institutional – increasingly in regional centres such as the Dubai International Arbitration Centre or the ADGM Arbitration Centre in Abu Dhabi.
At HFW, contentious work accounts for around two-thirds of the firm’s global revenue, and this is reflected in the Middle East too. ‘We do a huge amount of local litigation and are the third most-active law firm in DIFC courts,’ Gimblett says. ‘At a commercial level, there is a lot of confidence in them.’ Based in the Dubai International Financial Centre, these are English language, common law courts that are staffed with retired English and Singaporean judges. Last year, the DIFC courts saw a 29% increase in the number of cases to 670, while the total value of cases of the main court of first instance (including arbitration-related) broke £2bn.
HFW employs 31 Arab-speaking lawyers who assist in aviation, shipping, insurance and other disputes before the local courts. ‘It is a feature of the region that local courts are very jurisdiction-hungry, so if you are doing business in the region there is always the risk that you could end up in front of a local court anyway,’ Gimblett notes. ‘You may have a jurisdiction clause in your contract but they won’t necessarily pay much regard to that.’
The firm’s Abu Dhabi’s office opened in October with the hire of a team from Reed Smith, including its regional managing partner. In contrast, several international law firms, including Latham & Watkins, Norton Rose Fulbright and Herbert Smith Freehills, have closed their offices in the UAE capital in recent years. HFW has since added Bird & Bird’s global infrastructure head Richard Lucas, a defence and infrastructure projects lawyer, who is now managing partner of the Abu Dhabi office. ‘If you want to act for any government or government-owned entity in Abu Dhabi, they really like to see that you have got a local office, you just can’t do that from Dubai,’ says Gimblett.
Dentons has been in the region for longer than most, opening in Cairo in 1964 and in Dubai and Abu Dhabi in 1969. Now with over 125 fee-earners in nine offices across the UAE, Saudi Arabia, Oman, Jordan, Qatar, Egypt and Lebanon, its main areas of activity are linked to banking, energy, construction and dispute resolution. ‘We are here for the long term and have thrived through periods of growth and slowdowns,’ says regional managing partner Paul Jarvis. The world’s largest law firm is currently advising on a number of the largest construction arbitrations in the UAE, Saudi Arabia, Oman and Qatar, according to Jarvis. It has also grown business in banking and finance; it has advised on a number of ‘first of a kind’ transactions, such as the first sukuk issue by a real estate investment trust in the MENA region (Emirates REIT), and the first international capital markets issue by an Omani company (Mazoon Electricity Company). Dentons advised Emirates REIT and Mazoon and the bonds were worth $400m and $500m respectively.
Despite the positive noises from firms active in the Middle East, political risk is still seen by observers as dominating this turbulent region. However, Gimblett notes that viewing the region homogenously can lead to false assumptions: ‘There have been pockets of massive difficulty, Iraq, Syria and an ongoing conflict in Yemen, but if you look at where we practise, the UAE is still a very stable jurisdiction politically, and I would say the same still applies for Saudi, notwithstanding certain recent issues. It is more the economic issues that drive our concerns.’
Those concerns are real. However, with the IMF expecting the regional economy to recover to about 3.2%, in 2020 the outlook is looking sunnier, particularly for firms that can adjust to the ups and downs in the Middle East. LB
As one door closes… charting the Saudi Aramco IPO
According to some lawyers active in the Middle East, Saudi Aramco’s much-awaited initial public offering may never happen. The Saudi state, which owns the oil producer, was looking to raise $100bn by selling a 5% stake through what was to be the world’s biggest-ever float. The valuation of Aramco is reportedly one of the reasons the IPO was indefinitely postponed last summer.
Jonathan Silver, who heads Clyde & Co regional operations, is sanguine about the impact: ‘Saudi Aramco is the largest oil company in the world, and continues to operate in the same way it has in the past. From a regional perspective, I don’t think that the decision to defer the listing of a small portion of its shares has had any perceptible impact.’
Rahail Ali, Hogan Lovells’ Dubai managing partner, argues that the intention to launch an IPO was ‘to demonstrate that Saudi is open for business.’ However, he adds: ‘People should not be too hung up on the fact that the IPO did not happen, because the bigger picture is the Vision 2030 initiative from the Saudi Crown Prince, and that will materialise.’
‘We did expect that if the IPO took place last year or this year, it would trigger a lot more activity in the equity markets, but we are seeing the equity markets in the Kingdom developing very well anyway, so we are active in other Saudi Arabia IPOs at the moment,’ says Doug Peel, head of the Middle East practice at White & Case, which is understood to have been advising Aramco on the shelved listing. ‘Even if a marquee transaction does not happen on schedule or at all, often there are other marquee transactions that do happen instead. With the deferral of the IPO, Saudi Aramco’s acquisition of Sabic came into the foreground.’
In March 2019, the oil and gas giant agreed to buy a 70% stake, for $69.1bn, in petrochemicals company Saudi Basic Industries Corp (Sabic) from the Public Investment Fund, Saudi Arabia’s sovereign wealth fund. To help it fund its acquisition, in April Aramco raised $12bn through its first international bond sale, a move that required the company to disclose its accounts. This revealed Aramco to be the world’s most profitable company ($111.1bn in net profit last year). White & Case advised Aramco on both deals. Saudi firm Abuhimed Alsheikh Alhagbani Law Firm in co-operation with Clifford Chance advised PIF; while Saudi firm Khoshaim & Associates, Allen & Overy’s co-operation firm in Saudi Arabia, acted for Sabic.
Peel points to the recent inclusion of Saudi Arabia in emerging market indexes such as FTSE Russell and MSCI. ‘There is going to be an influx of capital, and that is going to drive a lot of business.