The market economy in the Russian Federation has developed exponentially since the Soviet Union (USSR), its legal predecessor, dissolved in 1991. Oil and gas contribute up to 25% of GDP and a massive 80% of exports according to UKTI, but Russia is diversifying its economy. With low unemployment, a population of 140m and GDP per capita higher than $20,000 (well above other BRIC countries), Russia is becoming one of the world’s largest consumer markets.
Federal and regional governments are investing in ports, roads, airports and public transport systems, through the public-private partnership (PPP) model. Domestic banks such as Sberbank, VTB Bank and VTB Capital, and Gazprombank, have been expanding rapidly both within and outside Russia. There are renewed efforts to create an international financial centre in Moscow, after earlier efforts fell flat. And although growth is slowing, compared to the eurozone Russia performed relatively well in 2012, expanding by 3.4%. GDP is predicted to grow by around 3% in 2013.
The legal services market is thriving too. All the major international law firms have offices in Moscow and a few have footholds in St Petersburg. Clients are both international and increasingly Russian corporations. With a large number of business transactions, including joint ventures, M&A and international financing, governed by English law, legal firms with a UK base are reaping significant rewards. ‘There is no single City law firm that is not doing Russia-related work,’ says White & Case’s Artem Doudko.
Julia Bateman, head of the Law Society’s International department, says the significance of Russia is immense for her team: ‘In the wider European context and indeed in terms of the BRIC countries [Brazil, Russia, India and China], Russia is hugely important for our members and their clients.’
Among the BRIC countries, Russia is a relatively open market. Foreign lawyers do not require a licence to practise international or home law, and there are no restrictions on Russian lawyers practising Russian law in a foreign law firm. However, only members of the Russian Federal Chamber of Advocates have the right to appear in court on criminal matters, and an advokat must complete legal education and training in Russia. Of course, the market is not without its challenges for foreign firms. Transparency International ranks Russia 133rd out of 176 countries in its Corruption Perception Index; in the World Bank’s Ease of Doing Business 2013 survey, Russia is 112th (below China) out of 185 economies.
Edwin Tham, managing partner of Allen & Overy’s Moscow office (the magic circle firm has been in Russia since 1993), argues that bureaucracy and governance are the main issues faced by firms such as his. ‘The government wants to create a positive environment for investment and business, but the country still has a very heavy legacy from the Soviet past; one aspect of that is a very stifling and not particularly investor-friendly bureaucracy. That makes the entry cost into a market like Russia relatively high, even compared to China,’ he says.
As for governance, law enforcement and the application of the law by the judiciary suffer from vulnerability to bribery and political influence, some observers allege. ‘That is the reason why much legal activity is effectively "offshored" through the use of contracts governed by English law, and disputes are referred to arbitration in London and elsewhere,’ Tham says. This has benefited lawyers and courts in London in a high-profile way. The most notable recent case was the $5.1bn lawsuit brought by the late Boris Berezovsky in London against fellow oligarch and former business partner Roman Abramovich.
‘One of the biggest areas of growth in recent years has been the demand for English law capability for Russian-Russian deals,’ says Dentons’ Moscow managing partner, Doran Doeh. He explains that English law is widely used by businesses that operate in Russia but are registered in offshore jurisdictions like Cyprus – that is, at least until the island’s financial crisis hit large depositors, many of whom were wealthy Russians. ‘No doubt that’s going to move somewhere else now,’ he adds. However, there is a move to shift disputes back to Russia. One UK-based lawyer observes: ‘From a government and judicial point of view, there is an anxiety that certain Russians take their disputes elsewhere and I think they want to repatriate a lot of them.’
Last June, the Supreme Commercial Court of the Russian Federation invalidated a ‘unilateral option clause’ in a lawsuit launched by Russian Telephone Company (RTC) against Sony Ericsson. This clause entitles one of the two parties in the agreement (in this case Sony Ericsson) to refer the dispute to arbitration, and is often used by foreign investors in Russia to avoid litigation in Russian courts. But the court ruled in favour of RTC’s right to sue in Russia. A year ago, speaking at the St Petersburg International Legal Forum on ‘unfair competition among legal systems’, Anton Ivanov, the Supreme Court of Arbitration’s chairman, argued that Russian courts should be given power to set aside international arbitration awards that unfairly prejudice the interests of Russian parties.
And, in another case still – a lawsuit brought by Russian businessman Nikolai Maximov against Russian steel company NLMK – in January 2012 the Supreme Commercial Court ruled that corporate disputes, such as those arising from shareholders’ agreements or from contracts for the sale and purchase of shares in Russian companies, cannot be referred to arbitration. Tham explains that the NLMK ruling is likely to affect agreements with arbitration clauses between direct shareholders of Russian companies, but not those reached between investors in offshore holding companies. But he adds: ‘There is no guarantee that the Russian courts will not extend their powers even further and say that everything to do with business in Russia has to come back to them. There is also an understanding that this could have a very chilling effect on investment because Russian courts and the Russian legal system do suffer from a very negative perception that is going to take time to overcome.’
Vladislav Zabrodin, managing partner of Russian commercial law firm Capital Legal Services, argues that Russia’s legal system is ‘over-dominated by English law and English courts’. But he says: ‘We need to improve our judicial system and legislation to persuade businesses to keep their disputes in Russia.’ Russian courts need to be ‘more reliable and efficient’, but if judges sometimes arrive at ‘very strange decisions’, this is often because they are ‘unconnected with’ or do not understand business, he argues. It is a ‘catch 22’ situation: the quality of the Russian judiciary is unlikely to improve if so many cases continue to be tried abroad.
Spurred by the growth of large Russian corporations, the Civil Code of the Russian Federation, which regulates contract and company law, is being overhauled in a bid to make Russian law more business-friendly. Harold Paisner, senior partner at Berwin Leighton Paisner, explains that several legal concepts which are used in international finance and M&A transactions are not recognised in Russian law. These include indemnities (a contractual promise to compensate for loss arising from an identified occurrence or event), ‘call’ and ‘put’ options, and ‘drag and tag’ clauses in agreements between shareholders.
‘There is a desire on the part of the Russians to make their legal system more relevant to modern transactional work and modern trade,’ says Paisner. ‘It’s only 20 years or so since the Soviet Union came to an end and the legal system in this country [England and Wales] has been developing for hundreds of years.’ The first part of the Civil Code was enacted in 1994. The revision, involving some 2,000 pages of amendments to an already mammoth 800-page document, is proving tortuous. Denis Kachkin, managing partner of St Petersburg-based Kachkin & Partners, says: ‘There is conflict between the old school of civil lawyers who drafted the code that we have now, and the new school of business lawyers who demand new regulations to be more flexible and a bit like English law.’ Changes to corporate law in the code are not expected to be introduced before the autumn, he says.
Underlining the Law Society’s commitment to building relationships with the Russian legal profession and government, president Lucy Scott-Moncrieff will join other prominent guest speakers from around the world at the St Petersburg International Legal Forum later this week.
The annual event, launched in 2011, is organised by the Russian Ministry of Justice and the Supreme Commercial Court of the Russian Federation. Elena Borisenko, Russia’s deputy justice minister, said: ‘The forum is the largest platform for the highest-level open dialogue between politicians, lawyers, businessmen and scholars.’
Last year more than 2,000 delegates from 51 countries attended the forum, among them former justice secretary Kenneth Clarke.
‘Every year during the forum, a number of treaties and agreements aimed at the development of legal co-operation between Russia and other countries are signed,’ says Borisenko. ‘We regard the annual St Petersburg International Legal Forum as one of the most effective tools for building co-operation, and as the most important event for the ministry.’
Satellite versions of this legal forum are being held across Europe this year, including in the Hague, Rome and London.
English law firms
Despite repatriation pressures, English commercial and corporate lawyers are in great demand for the moment. Success depends on having a presence in the country. One reason is that Russian clients, as opposed to foreign investors, are becoming a more significant part of their business. Another reason is that Russian law issues often crop up in disputes or transactions governed by English law and, therefore, this facilitates access to local expertise. The product of a three-way combination in March of the UK’s Salans and SNR Denton, which already had Moscow offices, and Canadian firm Fraser Milner Casgrain (FMC), Dentons boasts one of the largest offices among international firms in the Russian capital.
With 115 lawyers, including 23 partners in Moscow, Dentons will also operate in St Petersburg through Salans’ existing 26-strong lawyer team in the city. The combined Russia operation will offer expertise in banking, energy, tax, IP, real estate and litigation. Moscow office partner Florian Schneider says around 75% of the firm’s fee income comes from international clients, but with a strong footprint in the US, Europe, Africa and the Middle East, he is confident Dentons will attract more Russian clients who are investing heavily abroad.
Dentons’ clients include Russia’s largest bank, state-owned Sberbank, whose subsidiary Troika Dialog Investments the firm has advised on the sale of shares in Russian car-maker AvtoVAZ to Alliance Rostec Auto BV, a joint venture between the Renault-Nissan alliance and Russian Technologies State Corporation. In the energy sector, clients include state-owned enterprises Rusnano and Gazprom International, and privately owned Lukoil.
Capitalising on its North American base, Dentons sees future growth from advising US consumer goods companies on joint ventures in Russia. ‘There is a very robust demand from the Russian middle class for consumer products,’ says BLP’s Paisner. BLP, which took over local law firm Pepeliaev Goltsblat & Partners in 2009 to form Goltsblat BLP (GBLP), now employs 95 lawyers, including 16 partners, in Moscow. GBLP offers tax advice on foreign direct investment projects in Russia in the consumer goods sector, with Barilla, Mars, J&J and Nike among its clients.
The firm’s business is also driven by corporate and M&A, real estate and construction, and IP. Paisner says inward investment in Russia is a big component of the firm’s business, but GBLP also acts for Russian state corporations, including development bank Vnesheconombank, nuclear corporation Rosatom and hydroelectric power producer RusHydro, which GBLP has advised on a strategic alliance and joint venture with France’s Alstom for the construction of production facilities in Bashkortostan. ‘The law we practise is a mixture of Russian law and English law,’ says Paisner. ‘Where the two systems meet is in fact where we get a great deal of work.’
David Goldberg, partner in the Moscow office of White & Case, says that clients of international firms in Russia have ‘changed dramatically’ in recent times. When White & Case set up in Moscow in 1991 they were mainly foreign multinationals. ‘The biggest clients now are the Russian companies, some of which have become multinationals themselves,’ he says, pointing to state-owned Gazprom, the world’s biggest gas producer; VTB Capital, the investment banking arm of Russia’s second largest bank; and Sistema, a privately owned Russian holding spanning mobile, telecoms and oil assets.
White & Case focuses on large complex corporate transactions, and has boosted its litigation team in Moscow in response to the growth of Russian clients. Adds Doudko: ‘Foreign firms are getting involved in doing litigation work in the Russian courts because the amount and value of these matters is getting much higher.’ Goldberg notes that the commercial – or arbitrazh – courts have become more transparent. All judgments and orders of the four-tier commercial courts are now available online and enforcement has improved. ‘It is not 100% bulletproof but neither is it bulletproof in most European countries,’ he says. Doeh concurs, adding: ‘As a rule of thumb, generally, the closer you get to Moscow and the higher up in the system, the better it gets.’
Allen & Overy’s Moscow office has 35 lawyers, including seven partners, which supplements the magic circle firm’s large team of lawyers based in London working on deals in Russia and other CIS states. It focuses on transaction work in banking and finance, M&A and capital markets. However, litigation has been on the increase and Tham expects it to pick up further. ‘This reflects the fact that the Russian market is becoming more sophisticated. Russians are increasingly willing to resort to the law to settle their disputes rather than, as in the 1990s, rely on political connections or force,’ he says.
Half of A&O’s fee income is now from Russian clients. Recent highlights include advising Rosneft Oil Company on its $14.2bn financing to fund its acquisition of Alfa-Access-Renova’s stake in TNK-BP; and in 2012 advising Russia’s second lender VTB Bank on the issuance of a $1bn ‘perpetual eurobond’ and a $1.25bn tap issue.
The London Link
On 9 July the Law Society’s International Division will hold its annual conference: ‘The London Link: innovation, opportunities and challenges in emerging markets.’ This event highlights the business opportunities that exist in providing legal services in commercial transactions and projects in, and between, emerging markets.
- Topics to be addressed include:
- The project: financing projects in emerging markets
- The contract: why English law for international contracts?
- Assessing risk and the regulatory framework
- Dispute resolution and enforcement: opportunities in the newest dispute resolution centres
- The keynote speaker is Dr Augusto Lopez-Claros, director of global indicators and analysis, The World Bank and IFC, US.For more information see the Law Society International pages.
While attractive, the Russian market is becoming more competitive – in both Moscow and St Petersburg. With the move of the Supreme Commercial Court and the Supreme Court of Russia from the new to the old imperial capital by 2018, St Petersburg is set to become an even more important legal hub.
Kachkin, whose independent law firm is based in Russia’s second largest city, says: ‘We are definitely seeing more competition from international players.’ He points to second-tier firms such as DLA Piper, Baker & McKenzie and Dentons, and notes that foreign law firms are cutting prices in response to client pressure and expanding into areas of law that were previously the domain of domestic firms, for example, regulatory work for PPP projects; drafting contracts under Russian law; and litigation in Russian courts.
Most of Kachkin’s clients are domestic, while international clients have come mainly through referrals from foreign firms such as UK’s Taylor Wessing and Stephenson Harwood. Kachkin & Partners is considering a formal association with a UK-based law firm entailing, for example, a formal referral agreement. Infrastructure and PPP practice as well as litigation work have been driving revenues recently. With eurozone growth prospects remaining dim, Russia, despite some of its drawbacks, appears to be a fairly good bet for law firms feeling the squeeze on their home turf.
‘I have been on the Russian scene since the early 1990s, and in those days it was really pretty chaotic. Now Russia has a pretty workable legal system,’ says Doeh. And even if competition for legal services is tougher than it used to be, ‘it’s still a lucrative place for international law firms to invest’.
Marialuisa Taddia is a freelance journalist