Not reached the bottom yet – sanctions on Russia begin to bite for law firms

Jaishree Kalia reports on the anticipated fall-off in deal work in the wake of Ukraine crisis

Russia’s volatile political environment has begun to impact the business of international and domestic law firms in Moscow as M&A activity falls, new capital markets work dries up and expanding sanctions cause increasing concern.

Western targeted sanctions imposed largely on individuals in Russia over its handling of the crisis in Ukraine have already had a crippling effect on corporate activity. However, it is the looming threat of yet tougher, broader-based sanctions as the situation escalates, with measures potentially targeting the Russian financial and energy sectors specifically, which could cause advisers even deeper problems.

As one Moscow-based partner at an international firm puts it: ‘The deals that were ongoing at the time of the Ukrainian crisis have continued, but it has become a little more complicated as the sanctions expand to include more individuals in the business realm as opposed to the political realm.

‘One major player in the business world was put on the [sanction] list a few weeks ago and there is an expectation that if there is another round of sanctions, they will name individuals in the business world, and that will have an impact. The biggest concern at the moment is uncertainty. It is difficult to start up a large expensive corporate transaction not knowing whether a party will be prohibited from entering into anything.’

Skadden, Arps, Slate, Meagher & Flom’s London managing partner and former Moscow head Pranav Trivedi told Legal Business: ‘The M&A transactions that were ongoing at the start of the year have largely continued – we have not seen anybody pull out of those, but I think the expectation is that, at least in terms of capital markets work, the market for Russian issuances for debt and equity is likely to be closed in the near term until there is some clarity on the political situation.’

One of the largest deals in Russia this year was the $1bn dual listing of Russian hypermarket giant Lenta on the London and Moscow stock exchanges, creating the world’s largest publicly listed BVI company, in which Skadden Arps represented the joint bookrunners, including Credit Suisse, Deutsche Bank and JPMorgan, led by Trivedi and Dmitri Kovalenko. Cleary Gottlieb Steen & Hamilton represented Lenta, with a team including partners Scott Senecal, Yulia Solomakhina and London-based partner Raj Panasar. The deal also saw offshore firms Ogier and Conyers Dill & Pearman advise Lenta and the underwriters respectively, while Squire Sanders advised one of the shareholders.

With capital markets activity expected to drop off for some time, the volume and value of M&A deals have also fallen significantly. Recent mergermarket figures show the number of M&A deals in Russia in the first quarter of 2014 was 49, down from 88 in the fourth quarter of 2013, representing a drop of 44%. The total value of transactions also dropped by 83% from £20.2bn in Q4 of 2013 to £3.4bn in Q1 of 2014.

Linklaters senior partner in Moscow Dmitry Dobatkin says: ‘We continue to advise on cross-border capital markets transactions as well as domestic securities and structured finance transactions, although the deal flow has of course been affected by the recent events and most of the deals that closed in the last six weeks were placed privately rather than publicly. There has been no change in client profile – most of the work we do is still for the major international and Russian investment banks. As regards to future outlook, we cannot really crystal-ball gaze at this stage, we need to see how the political situation is resolved and what impact this will have on the market.’

But while the uncertainty of the expanding sanctions raises clear transactional concerns, it could benefit Russian disputes practices. Arbitrator Dominic Pellew, who joined Dentons from Baker Botts in April, said: ‘These kinds of things [the political situation in Russia] generally create work for disputes lawyers, but certainly they can be bad news for other practice areas in Russia. We have had some involvement in relation to the World Trade Organization (WTO) issues, as Russia’s membership raises questions as to whether trade and economic sanctions will be compatible with WTO obligations. This may be an area where disputes are generated.

‘I have also seen some possible disputes in relation to loans not being paid, and financial obligations not being met as they fall due for reasons connected directly or indirectly with what is going on. The Ukrainian and Russian economies are in difficulties already, and this will exacerbate things and give rise to defaults.’