When east meets west

The cold war is being fought anew in eastern Europe where practising rules still ensnare foreign lawyers.

Given such restrictions, why do top city firms have offices there? With countries such as Poland and the Czech Republic knocking on the door of the EU, law firms are well placed to reap future riches, says Philip Hoult

Baroness Scotland's visit to Poland last month underlined the importance of central and eastern Europe to the City's largest firms.It was the minister for international law policy's second trip to the region in as many months, with Slovakia her destination before Christmas.The drive to promote the liberalisation of legal services across Europe comes at a welcome time for firms.Despite the existence of practising restrictions in a number of countries (see page 29), the likes of Linklaters & Alliance, Allen & Overy, Clifford Chance and CMS Cameron McKenna have invested heavily in the region.Many of the firms have had operations in central and eastern Europe for more than a decade, principally advising on privatisations, foreign direct investment and banking.

The prospect of countries joining the European Union has sparked renewed interest.Poland, the Czech Republic, Hungary and Slovakia are among the front-rank applicants that are set to join the EU in 2004.This confidence in the long-term prospects of central and eastern Europe has not been dented by the current period of political uncertainty, with elections scheduled in the autumn in the Czech Republic, Hungary and Slovakia.Although anti-EU sentiment is being expressed in the run-up to the polls - the economic restructuring necessary has required austerity measures and increased unemployment - the outcome of the elections is not expected to alter the countries' commitment to EU accession.As a result, the past two years have seen a number of City firms strengthen their presence in the region, by bolstering existing operations and branching out into new territories.Jason Mogg, a partner at Linklaters' office in the Slovak capital Bratislava, says: 'We are trying to be a premier global law firm and it was felt that we have to be at the top of the charts in Europe.

We could not ignore central and eastern Europe.'Besides increasing the size of its existing Warsaw and Prague operations, Linklaters opened offices in Romania and Slovakia in January 2000 by taking over the practice of US firm Burns Schwartz in the region.Other firms have been similarly active, notably Allen & Overy, Norton Rose, CMS Cameron McKenna and Lovells, which have sought to establish bases in at least two of the three key business centres of Warsaw, Prague and Budapest.With the second highest number of branches of firms in eastern Europe after Russia, Poland has long been an integral part of the top firms' networks with the surprising exception of Freshfields Bruckhaus Deringer.As Nicholas Richardson, who opened Norton Rose's 11-lawyer Warsaw office in 2000 after joining from Baker & McKenzie, points out: 'The fact of life is that with a population of 38 million and with a country that is joining the EU, it is too important a market to ignore.'However, current market conditions are the toughest they have been for a while, with an economic slowdown leading to suggestions that the country now has too many lawyers.The country's left-of-centre government, elected in October last year and led by prime minister Leszek Miller, has put a hold on privatisations, long a source of lucrative advisory work for international firms.This has also been accompanied by a general slowdown in the country's economy, with growth of its gross domestic product (GDP) down to just 1% this year.Mr Richardson says that although privatisation work has historically been an important part of law firms' practices in Poland, most have been careful not to be over-reliant on it, and have targeted a wide range of corporate and banking work.Norton Rose's clients in Poland include Scandinavian banking and insurance group Nordea and car interior manufacturer Lear, and Mr Richardson says there is little sign that investors are looking to pull out.'I genuinely have not detected any major panic among the foreign legal community.

It is more just a stop for breath,' he says.

'We are seeing a slowing of the pace rather than a moving into reverse - after ten years of non-stop growth there was bound to be a pause.'Nick Fletcher, managing partner of Clifford Chance's 40-lawyer Warsaw office, agrees that the outlook is not as bright and there are now more lawyers in the market.'Maybe some of the newer entrants will struggle,' he says, 'but we will look to build on our track record and develop further in tax, litigation and projects.'Mr Fletcher is frustrated that privatisations have been put on hold with the firm having advised German group EON and Ireland's ESB on bids for the stalled energy privatisation.'There is still quite a lot of potential privatisation to go, particularly in energy, mining and defence,' he says.

'The reason given by the government for delaying is that they do not want to sell to fill a hole in the budget - they want to do it for the right reasons and in the right way.'However, Mr Fletcher insists that there is still good-quality work around, with the firm's clients including French supermarkets group Carrefour, the banks financing Poland's airline LOT, and the Polish oil and gas exploration company PGNIG, which has just completed an Zl800 million (136 million) Eurobond issue.Vying with Warsaw as the key business centre in the region, Prague is also bearing witness to intense competition among foreign lawyers.

'There are a lot of lawyers in Prague,' says Stephen Pollard, managing partner of Allen & Overy's 24-lawyer office in the Czech capital.

'If there is a downturn then competition will be fierce.'For now though work levels remain high, with growth in GDP currently running at more than 3% - significantly more than most countries in western Europe and many of the Czech Republic's neighbours.According to Mr Pollard, the bulk of practice is in the corporate and finance arena with foreign direct investment again an important source of business.However, there is only one major privatisation ongoing - that of Czech Telecom.

The only other privatisation of note, of the electricity industry CEZ, has been pulled because the government said it was not going to get the price it wanted.Instead, there is a significant amount of work acting for companies and financial institutions post-privatisation, Mr Pollard says.

'All the banking sector has been privatised and we have acted on all of them,' he adds.

'This creates ongoing work if you win.'Allen & Overy acted for the winning bidder in the biggest transaction in the region last year - for Socit Gnrale on the Komercnibank privatisation.Foreign direct investment is also strong with greenfield investments by the likes of car manufacturers Toyota and Peugeot, bringing in others, such as component manufacturers, in their wake.While the incoming Czech government in September is not expected to change the policy on EU accession, it will have a number of challenges to face up to, particularly in the area of corruption and economic crime.According to Tom Bettelheim, managing partner of Lovells'20-lawyer Prague office, another key challenge is the state of the country's court system.This is an important step to maintain the confidence of foreign investors, he says.

Among Lovells' clients in the country are Tesco, Anglian Water and German bank BGB.As with other countries in the region, Mr Bettelheim says there is still a huge amount of restructuring to be done.'Large parts of Czech industries are not in a fit state to be sold to foreign investors, so they have to be restructured first to attract investment,' he says.Alongside Warsaw and Prague, Budapest is the third component in most international firms' central and eastern European networks.Ulrike Rein, managing partner of Freshfields Bruckhaus Deringer's 32-lawyer-strong office in the Hungarian capital, says the firm started out mostly acting for foreign investors.'We have now developed a core business relating to certain industries, such as breweries, cement, and electricity and gas,' she says.Ms Rein says the office remains busy even though its biggest Hungarian deal - the sale by the Hungarian oil company MOL of its share in its gas business - was recently called off after MOL terminated the tender with a view to selling to the Hungarian development bank MFB.Ms Rein adds that, although all the main parties in the forthcoming elections are in favour of EU accession, there have been a series of incidents recently that have concerned foreign investors.'There could be conflict between the EU accession programme and discrimination in the area of foreign investment,' she says, citing reports that local companies have been favoured for motorway construction projects.'The government wants to attract investment but this can be jeopardised by programmes such as that,' she says.Of the four front-rank EU applicants, Slovakia has the smallest economy and is the most restrictive for foreign firms looking to practise there.Nevertheless, over the past three years, it has provided a bonanza of privatisations, mergers and acquisitions and financings for those City and international firms prepared to open there.Following the election defeat of hardline prime minister Vladimir Meciar in 1998, the new government of Mikulas Dzurinda embarked on a rapid privatisation programme.'Before the 1998 election, Slovakia was the black sheep of Europe,' says Linklaters' Mr Mogg.

'The current government has aggressively tried to do what everybody such as the International Monetary Fund and the EU has been telling them that they should do.'There is now pressure to get the programme completed, as far as possible, before the elections, when former leader Meciar is attempting a comeback.Linklaters now has 22 lawyers in the capital Bratislava, with clients including the likes of US cable TV company UPC and General Motors, as well as aluminium company Slovalco.

Investment bank clients include CSFB, JP Morgan Chase and BNP Paribas.It is a similar tale of growth at the other City firm to have set up in the country, Allen & Overy, which has grown from three lawyers in 1999 to 12.Hugh Owen, a Bratislava-based senior associate at the firm, says that, despite fears expressed in some quarters about what will happen once the privatisation boom comes to an end, his firm is in Slovakia for the long term.'We opened in July 1999 when we identified an unmissable opportunity to hire the current partner [Igor Palka] for the office,' he says.

'The philosophy is if we can identify a very strong local lawyer we will be able to build a practice round that person.'Mr Owen says the firm had already noted a healthy level of activity in the local banking market with syndicated loans and large corporates carrying out financings and refinancings.Allen & Overy hopes that, provided a reasonably investor-friendly government is elected, a market for more sophisticated financings such as securitisations and repackagings will evolve.'The worry is that after the election you might get a very unstable coalition that cannot put through a reform agenda or someone with an axe to grind,' he says.

'But we are bullish.'Although not in the first rank of applicants for EU status, with accession targeted for 2007, Romania has benefited from being the most politically stable country in the Balkans during the past ten years.It is a tough market to crack, with Taylor Joynson Garrett shutting its eight-lawyer office last summer, after the firm's Bucharest-based partner Simon Dawes decided to return home.However, Michael Tetreault Schilling, managing partner of Linklaters' Bucharest office, is optimistic.'Assuming sound management at the macro-economic level and continued political stability in the region,' he says, 'the prospects for moderately accelerated growth remain promising.'Mr Tetreault Schilling says the current Romanian government - elected late in 2000 - has a solid parliamentary majority, allowing it to tackle a broad spectrum of issues that proved too difficult for the preceding coalition governments to address.Most of the larger privatisations have now been completed and all but one of the large state banks are in private hands.

Attention has turned to the planned deregulation and liberalisation over the next two years of the energy sector as well as public utilities such as water and waste management.

The telecoms sector is also scheduled for liberalisation.This commercial activity has meant that, since opening in January 2000, Linklaters has grown from six fee-earners to 22, with a total staff of close to 60.In contrast to the relatively recent arrival of Linklaters, the other UK firm with a permanent base in Romania, Sinclair Roche & Temperley, is celebrating its tenth anniversary.Resident partner David Stabb says the firm's links go back more than 40 years to when the practice was a shipping, trading and transport specialist and used to act for the Romanian state fleets on international disputes.Mr Stabb shares the belief that the country is still a good place to do business.

'The last six months have shown quite a good turnaround,' he says.

'It is a big territory with a lot of potential - we have also only had one client in the last four years pull out.'This last message could in fact be applied across central and eastern Europe as a whole.

Confidence in the long-term future is high, despite the global economic downturn and political instability having introduced a certain degree of nervousness.Even in the less high-profile states, there is good work to be had.

Harrisons, the English law firm run in Yugoslavia by former City solicitor Mark Harrison, was last week appointed by the Serbian government to act on the country's largest ever privatisation, that of Beopetrol, the country's second largest gasoline retail company.

The Macedonian government has appointed Harrisons to act on the privatisation of the state electricity company, and it is also acting on oil privatisation in Montenegro.

While central and eastern Europe may not be the easiest part of the world in which to practise, for those lawyers prepared to take the risk the business opportunities are there.And with EU accession for many of the countries now only two years away, investment now should reap rewards later.

Philip Hoult is a freelance journalist

Barriers come down slowly as countries pin colours to EU mast

Practising in central and eastern EuropeThe plans of most countries in the region to join the EU have been good news for solicitors in terms of bringing down the barriers to practise there.

As part of their accession agreements, countries have to abide by European law, part of which is the lawyers' rights of establishment directive.

This provides lawyers from one member state with the right to practise permanently in another under their home professional titles, and to join the local bar association after three years there.An almost standard procedure has developed in the region.

A country proposes a new lawyers' law which will inhibit the practice of foreign lawyers, or even prohibit it all together.

The law firms protest, their home law societies and bar associations protest, and eventually the European Commission is brought in to remind the government that the law would breach its accession agreement.

Depending on the circumstances, the Organisation for Economic Co-operation and Development (OECD) and the World Trade Organisation apply extra pressure.

Eventually, reluctantly, the government and local bar association back down.

This 'model' was established in 1997 during a long wrangle over practice rights in Poland, and has since been seen elsewhere.

The Czech RepublicThe applicant must pass a brief legal recognition examination to demonstrate a basic understanding of the Czech legal system.

The exam generally takes less than an hour and can be taken in a language chosen by the applicant.

The applicant must be employed in a position related to the legal profession.

HungaryHungary seems to be in compliance with its international obligations.

However, the OECD has criticised various Hungarian laws, including the new law on lawyers, for being unclear and thus potentially being in breach of transparency requirements.Currently, the foreign lawyer must practise law in conjunction with a Hungarian law firm, or together with a Hungarian attorney employed in a foreign law firm operating in Hungary.There are also restrictions on the firm name - that the name(s) of the Hungarian partners must appear in the firm name.

PolandCity firms have not raised many problems relating to their Polish practices in recent years.There is a Bill before the Polish parliament that largely meets the requirements of the various EU directives affecting legal services.

However, the bill contains restrictions that would not be permissible upon full accession to the EU, including a skills test and discrimination over the practice vehicles available to Polish lawyers and solicitors.Foreign firms are required to have Polish partners.

There must be at least one Polish general partner in the limited partnership, who has a management role and unlimited liability, while foreign lawyers may only be limited partners.

SlovakiaThis is the most restrictive of the five main countries.

Currently, foreign lawyers are not allowed to work as 'lawyers' in Slovakia.City firms have set up in non-lawyer vehicles and have agreements with local lawyers who give advice if necessary.However, a breakthrough is close, with a Bill expected to go to the Slovak parliament soon, which will give foreign lawyers a legal status.

It is hoped this will permit them to advise permanently under their home title on home and international law, and to have an office under their own name.

RomaniaProgress was made last year when a law was brought in that gave foreign lawyers the right to practise under their home title.The law retains the obligation to enter into partnership with Romanian lawyers, and it introduced a new restrictive requirement that the number of Romanian lawyers employed in the firm must be at least equal to the number of foreign lawyers.The only form of practice is the 'civil professional association', which requires unwieldy voting and consultation procedures.

However, after talks between the Romanian Bar and the Law Society, English and Welsh firms can advise directly on home and international law, and use their globally recognised firm names.

For more information, contact Christian Wisskirchen at the Law Society on 020 7320 5776.

English law firms in eastern EuropeCzech Republic: Allen & Overy, Clifford Chance, Pnder, CMS Cameron McKenna, Freshfields Bruckhaus Deringer, Linklaters, LovellsHungary: Berecz & Andreko Linklaters, Dr Eva Hegedus in association with Allen & Overy, Koves Clifford Chance Pnder, Oppenheim es Tarsai Freshfields Bruckhaus Deringer, Ormai es Tarsai CMS Cameron McKennaPoland: Allen & Overy, Clifford Chance Pnder, CMS Cameron McKenna, Linklaters, Lovells Boese- beck Droste, Norton Rose Piotr Strawa & PartnersRomania: CMS Cameron McKenna Christina Brinzan Law Office, Miculiti & Associati Linklaters, Sinclair Roche & TemperleySlovakia: Allen & Overy, Freshfields Bruckhaus Deringer, LinklatersSource: www.martindale-hubbell.com