Russian bear roars again

Doing business in Russia is no longer like playing roulette as it was in 1998.

Today, a buoyant economy has created a competitive legal market where international firms are thriving with work from conglomerates, domestic mergers, and in finance and capital markets, reports Philip Hoult

Russia's economy has made a remarkable recovery from the dark days of its financial crisis in 1998.

With gross domestic product growing by more than 4% last year and share prices on the Moscow stock exchange increasing by a factor of five since 1999, it has managed to avoid the global slowdown.

'Russia is in a much better state of health than it was before the crisis,' says David Griston, managing partner of CMS Cameron McKenna's 14-lawyer Moscow office.

'Although horrendous at the time, the crisis helped to refocus investors' minds.

A lot of people got their fingers burned but the ones who continued were those with a more realistic idea of the timeline for returns.'

Russia's economic revival has been welcome news for lawyers operating in what is considered to be one of the most competitive legal markets anywhere in the world.

A host of international firms - drawn from the UK, US, Germany and elsewhere - are vying with one another and with the small but growing number of respected local practices for the available big-ticket work.

Hammonds is the latest UK firm to throw its hat in the ring with the announcement of a joint venture with 12-lawyer Moscow and St Petersburg firm Zhigachev & Christophoroff (see [2003] Gazette, 3 April, 8).

Hammonds' move comes after its separate appointment by the European Commission and Russian government to advise on the country's planned accession to the World Trade Organisation.

Despite the highly competitive environment - and the resulting pressure on fees - the leading UK firms remain committed to maintaining a presence in Russia.

'Generally we are very busy,' says Dominic Sanders, a partner in Linklaters' Moscow office, which employs 39 fee-earners.

'It is a very strong market across the board.'

Mr Sanders cites the decision two months ago by the firm's client BP to invest 4.2 billion in a 50-50 joint venture with Russia's third-largest oil and gas company TNK as a potentially key moment in the country's economic development.

'The deal is a bit of an icebreaker in terms of scale.

It has really captured people's imagination,' he says.

Historically, while the main justification for having an operation in Russia was to service corporate clients such as BP and the major global banks, international firms have recently been looking to target major Russian businesses.

A wave of consolidation since the financial crisis of the late 1990s saw the emergence of a number of substantial conglomerates.

According to The Economist, 20 such groups are estimated to account for up to 70% of Russian gross domestic product alone.

And while these businesses will often have sizeable in-house legal teams and strong connections to local firms, they are turning more and more to the international firms for advice.

'The range and number of Russian clients we have has increased significantly over the last couple of years,' says Michael Cuthbert, a partner in the Moscow office of Clifford Chance.

'We want to increase our profile with Russian companies further still by playing to our traditional strengths in finance, corporate and litigation.

In this respect, we have been helped by the large influx of German investment into Russia.'

A significant amount of the conglomerates' expansion has been abroad, with oil and gas companies in particular buying up refineries and other interests overseas, and they will often turn to international firms to advise on these forays.

But UK and other foreign firms have not just been limited to cross-border deals - they are also increasingly being called in to advise on domestic mergers and acquisitions as transactions become larger and more complicated.

'The primary motivation for bringing in the international firms on these deals is that the big players in the Russian market want to see transactions done to higher standards,' says Mr Sanders.

'They do not want something done on the back of an envelope - they want proper documentation and to have people thinking through the structure of the deal.

Before the crisis, that would have been laughable.'

It is not just on the corporate side that UK and international firms have seen activity levels improve sharply either - their finance and capital markets practices are also enjoying heady days compared to the late 1990s.

Foreign borrowing quadrupled in 2002 to $12.4 billion (7.8 billion), while this year oil giant Gazprom raised $1.75 billion in the biggest emerging market bond issue ever.

On the equity side, Mr Cuthbert says there is considerable interest among Russian companies in obtaining a stock market listing either in London or New York.

'There are two things holding this back at the moment,' he says.

'First, there is the state of the international capital markets.

Second, many Russian companies are restating their accounts to international standards and are not yet at the stage where they have the three-year track record they need to obtain a listing.'

Other practice areas showing healthy levels of activity include oil, energy, project finance, structured trade finance, real estate and tax.

Of course, the fortunes of the international firms in Russia remain to a significant extent dependent on the continuing economic success story.

The question is: will it last?

While there will always be doubts because of the economy's over-reliance on natural resources, and oil and gas in particular, it is felt that Russia's improved performance is more sustainable this time than was the case in previous boom periods.

Credit is given to the fiscal and legislative reforms introduced by President Vladimir Putin's government, which have simplified the tax system and made significant changes to property laws.

There has also been considerable progress in terms of the protection of minority shareholders' interests and enhanced corporate governance.

'People are starting to appreciate that if they want to tap into the international markets, they need to be transparent and demonstrate good standards,' explains Peter Timchur, managing partner of Allen & Overy's Moscow office.

Nevertheless, there is recognition that despite all the undoubted progress that has been made, a lot more needs to be done.

Russia's banking sector in particular is considered ripe for overhaul because it provides little in the way of lending capacity.

'The banking sector is in a desperate state,' says Mr Timchur.

'There are around 1,400 banks, most of which are captive and so tied to one corporate.

The sector does not provide a meaningful platform to help grow small and medium-sized enterprises.'

Court reform is also high on the wish list of international lawyers.

Poor pay for the judiciary has left the system open to corruption, while the fact that many judges were appointed during the Soviet era has created huge inconsistencies in approach.

Too often investors are left feeling that they are unable to get appropriate remedies when things go wrong.

However, for many Moscow-based lawyers these problems are part of what makes Russia such a stimulating place in which to practise.

'It is a totally dynamic environment,' says Mr Sanders.

'You can see a tangible impact on the companies you advise.

But it is not everybody's cup of tea.'

Philip Hoult is a freelance journalist

Practice rights in Russia

In July last year, Russia's Parliament - the Duma - passed the Federal Law on Advocacy and the Bar, which gave foreign lawyers the right to advise in Russia on the laws in which they obtained their professional qualifications, writes Philip Hoult.

Previously, while firms were free to operate, they did so in a regulatory black hole.

The move confirmed the perception among international lawyers that the practice rights regime in Russia was a liberal one and that they were given pretty much a free rein to go about their business.

But, as Law Society international policy executive Mickal Laurans explains, the new legislation was unclear as to whether it prohibits foreign lawyers from practising public international law and third country law.

'It also does not explicitly state which practice vehicles are available to foreign lawyers,' he says.

Additional uncertainty has been created by Russia's ongoing negotiations to join the World Trade Organisation.

While a revised offer made by Russia permitted the free provision of cross-border legal services, there were problems again over the types of practice vehicles to be made available to foreign lawyers.

The offer appeared effectively to limit operations to sole practitioner status, something that is clearly unsuitable for international firms.

Another stumbling block in the offer was a limit on transferring employees to a period of a year.

Although this can be extended, the criteria for doing so are unknown.

There was also uncertainty over the ability to advise on third country law.

'It is desirable for a foreign firm to be able to advise on any country's law in which it has qualified personnel,' says Mr Laurans.

A recent visit to Russia by the Lord Mayor of London, Gavyn Arthur, and the Lady Mayoress Carole Blackshaw - a solicitor and consultant at City firm Denton Wilde Sapte - to press the role of English lawyers in Russia's development will, it is hoped, see progress made in resolving these issues.