Maligned as Europe’s most corrupt country, conflict-scarred Ukraine is tough terrain for advisers. But far-reaching reforms give grounds for optimism, reports Marialuisa Taddia.
Ukraine ranks high among unstable jurisdictions. Over the past two years the second-largest country in Europe has seen a head of state (president Viktor Yanukovych) flee the country; a territorial seizure by its powerful neighbour; and the start of a military conflict between Ukrainian troops and Russian-backed separatists in the east of the country that has so far caused nearly 10,000 casualties.
The Russian Federation’s annexation of Crimea in March 2014 led to a raft of sanctions and trade controls on Moscow by the EU, the US and other western economies. For the ex-Soviet republic, the Crimean crisis has meant severing much of its economic ties with Russia, a major trading partner and investor, deepening economic woes. Ukraine’s real GDP declined by almost 10% in 2015.
It is no surprise, then, that some international law firms have either downsized or pulled out of Ukraine, among them Germany’s Beiten Burkhardt, Chadbourne & Parke of the US and Clifford Chance, which closed its Kiev office last December. The Ukraine-based team formed Redcliffe Partners which has a ‘best friends’ referral arrangement with the magic circle firm.
But other foreign firms stayed. For Baker & McKenzie, Dentons, DLA Piper and others, it is business as usual – or almost.
DLA Piper, in Kiev since 2005, has a team of more than 30 lawyers, including six partners. It has increased headcount since the onset of the crisis in 2014, in part through associate hires.
‘Ukraine is a challenging but rewarding market,’ says Margarita Karpenko, managing partner at the Kiev office. ‘Our business has not been affected [by the Crimea crisis] except for the fact that as an international law firm we have to strictly comply with the sanctions regime. Although the economy is going through difficult times, we have seen some positive improvements.’
GDP grew 0.7% between January and July and the country agreed a four-year $17.5bn bailout package with the IMF in March 2015 that requires the government to deliver economic reforms, which include tackling corruption. ‘The annexation of Crimea affected our work, as it has affected the business and projects of many of our clients,’ says Serhiy Chorny, co-managing partner of the Kiev office of Baker & McKenzie, in Ukraine since 1992.
‘We have provided advice on how to rearrange the business of international and local clients given the sanctions affecting operations in Crimea,’ says Chorny, who heads the banking and finance group in Kiev. The US firm, which has 60 lawyers in the Ukraine capital, including 10 partners, has advised clients on the ‘law-compliant approach’ to providing banking and other financial services in, or involving, persons in the Crimean peninsula.
Dentons, also in Kiev since 1992, has continued to expand in Ukraine over the past two years. It has hired Chadbourne & Parke’s US-qualified lawyer Adam Mycyk, who joined Dentons as a partner in its Kiev corporate practice, six associates and a number of paralegals.
International firms continue to do business in Ukraine even without a physical presence. Linklaters has focused on Ukraine for over two decades, advising the government, financial institutions, Ukrainian and multinational companies across various sectors. The firm’s Ukraine desk has over 20 lawyers, explains Mirthe van Kesteren, who with Daniel Tyrer co-heads the practice from London. ‘Ukraine is undoubtedly an attractive emerging market, with strategic positioning and strong connections with the Middle East and Europe,’ she says.
So what has been keeping firms busy?
‘The volume of work for external counsel has decreased,’ says Oleg Batyuk, managing partner of Dentons in Ukraine. ‘For example, international capital markets, mergers and acquisitions, real estate and private investment funds are almost in a frozen state.’ But he adds: ‘There is substantial demand for corporate and debt restructuring, debt recovery and arbitration, criminal defence and white-collar crime.’
Last year the government restructured $15bn of its public external debt with creditors as part of the IMF aid programme. Dentons Kiev acted as Ukrainian legal counsel to the ‘Ad Hoc Creditors’ Committee’, comprising Franklin Advisers, BTG Pactual Europe, TCW Investment Management Company and T. Rowe Price Associates, in its negotiations with Ukraine as part of the restructuring of 14 sovereign and sovereign-guaranteed eurobonds worth $18bn. Following months of negotiations, on 29 October 2015 Ukraine announced that (with the exception of Russian bonds worth $3bn) the exchange offers were successful.
In February Russia filed a claim at London’s High Court against Ukraine over the unpaid €3bn eurobond (the repayment deadline was 20 December). In June, Ukraine’s finance minister was reported as saying that hearings at the High Court could take up to two years.
‘We have observed a downward trend in transactional work with a shift to dispute resolution and restructurings,’ says Linklaters’ van Kesteren, adding that refinancing work and insolvency proceedings are ‘extremely busy areas of practice now’. Key economic sectors remain commodities, agriculture, industrials and financial services, she notes.
Most recently, the magic circle firm advised the government, Ukraine companies and international banks on their debt restructuring; and on the ‘liability management exercises’ on behalf of power generator and coal producer DTEK (a unit of SCM Group controlled by Rinat Akhmetov, Ukraine’s richest person); iron ore producer Ferrexpo; MHP (the country’s largest poultry producer); and PrivatBank (Ukraine’s largest commercial bank by asset).
These transactions were completed via English-law schemes of arrangement, a statutory procedure under the Companies Act 2006 that allows a company to enter into a compromise or arrangement with its creditors. They are frequently used by foreign companies in complex financial restructurings.
Baker & McKenzie has also been assisting clients affected by the conflict in the Donbass, Ukraine’s industrial heartland, and the deterioration of the economic situation. Debt restructuring and liability management have been among the busiest areas of practice at the Kiev office of the Chicago-headquartered firm. It has acted for SCM’s steel unit Metinvest (like DTEK, it has assets in the conflict zone), including in the restructuring of its eurobond and bank debt (in excess of $2.3bn). Baker has also issued expert opinions to DTEK Finance plc (a unit of the DTEK group) and PrivatBank with respect to the recognition in Ukraine of the schemes of arrangement sanctioned by orders of the English High Court.
Rising demand for advice in criminal defence and white-collar crime is the result of the ‘global push’ against foreign bribery, and the launch of new anti-corruption authorities in Ukraine, Batyuk observes. These are the National Agency for Prevention of Corruption, which monitors income declarations of government officials through an e-disclosure system; the National Anti-Corruption Bureau of Ukraine, which investigates high-level corruption; and the Specialised Anti-Corruption Prosecutor’s Office. ‘We believe this will soon result in a real enforcement of Ukrainian anti-corruption laws,’ he says.
The OECD has described the creation of the anti-graft authorities by acts of parliament as ‘the major breakthrough in the anti-corruption institutional reform in Ukraine’.
The country significantly amended its anti-corruption laws in October 2014 in response to the ‘Revolution of Dignity’, or Euromaidan revolution, the anti-government demonstrations in 2013/14 that overthrew the ‘kleptocratic’ government of president Yanukovych.
One firm to benefit is EPAP Ukraine, created by the merger in July 2011 of CIS firm Egorov Puginsky Afanasiev & Partners with Ukraine’s Magisters. Managing partner Serhii Sviriba says demand for expertise in the areas of criminal law, ‘business protection’ and compliance has increased as a result of ‘Ukraine’s willingness to fight corruption’, and ‘some rather bold actions by the law enforcement agencies’.
M&A activity, a useful measure of economic strength, has not disappeared, says van Kesteren: ‘There continues to be work in circumstances where foreign investors leave the market or choose to reduce their presence in Ukraine, a theme that has dominated most inbound investments.’ Linklaters is advising Italy’s UniCredit on its disposal of Ukrsotsbank to ABH Holdings.
DLA Piper appears to be bucking the trend, with Karpenko reporting healthy growth in M&A and corporate work over the past 12-18 months. She cites two examples in pharmaceuticals. Ukraine was once the scientific and manufacturing centre for all of the Soviet Union’s pharmaceutical needs and today the market is seen as having strong growth potential. The Anglo-American firm recently acted as local counsel to shareholders of Ukraine’s Pharma Start in its sale to Swiss drug maker Acino Pharma (Baker & McKenzie acted for Acino). In June it advised the Georgian Industrial Group on the acquisition (via its Luraq Investments Ltd) of a minority stake in Ukraine’s insulin producer Indar from a Polish biotechnological company.
Karpenko relates rising interest from Asian investors, particularly China, adding: ‘We welcome the news that some large international retail players have renewed their expansion plans in Ukraine.’ DLA Piper has advised Ukraine’s perfumery and cosmetics retailer Bomond Group on obtaining a ‘preliminary’ long-term lease within Kiev’s Central Universal Department Store; and a local landlord on the extension of a long-term lease to Christian Dior group for premises of 500 square metres in a central Kiev historic building. The deal allowed Dior to reopen a boutique in the city after a closure of more than six months.
Firms have also won big mandates in competition and antitrust law, stemming from multi-jurisdictional mergers. EPAP Ukraine advised Finland’s Kemira Oyj and Nokia Corporation on obtaining merger clearance from the Antimonopoly Committee of Ukraine for their acquisitions of multinationals AkzoNobel and Alcatel-Lucent respectively.
Agriculture, which represents around 10% of GDP, continues to provide significant work for firms. Ukraine is the world’s seventh-largest grain exporter and a major producer of sunflower seeds and oil, and sugar beat.
The sector provides Sayenko Kharenko (SK), a 70-lawyer Ukrainian firm with offices in London and Kiev, with ‘vast opportunities’ to advise clients in a variety of areas, including land purchases, international arbitrations, debt and equity financing, regulatory and compliance, says London-based senior counsel Eugenia Rebotunova. SK recently represented French agricultural giant Soufflet Group when it signed an MoU with the Ukraine’s state-owned maritime merchandise port of Illichivsk, to invest $70m in port infrastructure and the construction of a grain trans-shipment terminal.
Meanwhile, Dentons has acted for Noble Resources Ukraine, a subsidiary of Chinese state-backed grain trader COFCO, on the construction of another trans-shipment complex for grains and oilseeds at the Mykolaiv seaport.
Ukraine’s accession to the World Trade Organization in 2008 and the EU-Ukraine Association Agreement signed in June 2014, have boosted other practice areas, including international trade. For example, there has been increased demand for legal advice on export regulations, agency, distribution and franchise agreements, Rebotunova says.
The trade part of the EU deal, the Deep and Comprehensive Free Trade Agreement, became operational in January, allowing Ukrainian businesses access to 500 million customers and the progressive alignment of Ukraine’s regulations with EU legislation. The Euromaidan protests, which erupted on 1 December 2013, were triggered by president Yanukovych’s failure to sign the EU trade deal at a summit the week before.
Law firms are also capitalising on IMF-led reforms spanning the fiscal and financial sectors, pension and healthcare systems, and public service infrastructure. ‘Reforms on multiple fronts are crucial to achieve sustainable recovery and growth in 2016 and beyond,’ the World Bank said in April.
‘Ukraine is in a transformative period,’ says Batyuk, who adds that Dentons is ‘actively involved in legislative drafting and advising on sectoral reforms’. For example, the firm is advising the Ministry of Agrarian Policy and Food on implementing EU legislation on agriculture in the country; and the State Commission for Securities and Stock Market on preparing and reviewing draft securities legislation, and joining the International Organization of Securities Commissions.
SK advised the European Bank for Reconstruction and Development (EBRD), of which Ukraine is a member, on improving regulations governing energy performance for public buildings and the implementation of the energy service company concept in Ukraine; while Baker & McKenzie also acted for the EBRD on the corporate governance reform of Naftogaz, the state-owned oil and gas company.
With turmoil at home, Ukrainian businesses are targeting foreign markets. Batyuk says: ‘We receive requests relating to the overall assessment of the investment situation, for instance in China, Canada, Germany, Poland and countries in the MENA region.’
Dentons, which last year merged with Atlanta-based McKenna Long & Aldridge, known for government contracts and public policy work, has opened a dedicated ‘Ukraine desk’ at its New York office to help Ukrainian business expand into the US (and vice versa), where the firm has 21 offices. The practice is headed by two Kiev partners – Myron Rabij, who has relocated to New York, and Markian Silecky, who works in both the Kiev and NY offices, and is backed in Kiev by Mycyk and Batyuk.
Despite the trade war with Russia, sparked by the EU-Ukraine treaty which was strongly opposed by Moscow, Ukrainian businesses have not severed all ties with their powerful neighbour. The EU accounts for about 30% of Ukraine’s trade, while CIS countries account for about 40%, according to the Foreign & Commonwealth Office. ‘Irrespective of the political setting and sanctions, Russia remains an old and historic market,’ says Capital Legal Services managing partner Vladimir Zabrodin. He adds that Ukrainian companies with ‘appropriate financial capacity’ are still investing in the federation in such sectors as food, goods manufacturing and distribution. The Russian firm recently advised a major Ukrainian alcohol manufacturer on the acquisition of a Russian counterpart.
So what about the future? Chorny expects debt restructuring and liability management to continue to ‘take up most of our time in the next 24 months at least’, but he also anticipates growth for the firm in such areas as infrastructure finance and privatisation. A number of large Ukraine enterprises are expected to be privatised this year and next.
Hopes were high that $778m would be raised from the state sell-off programme in 2015, but the government managed just $7m, according to data from the State Property Fund. In January, economy minister Aivaras Abromavicius sought to give the plan new impetus when he announced that 25 state companies had been shortlisted for privatisation in the energy sector, chemical industry and port infrastructure.
All eyes are now on the sale of state fertilizer group Odessa Portside Plant. Karpenko says that a successful sale is ‘a test of the government’s commitment to an ambitious privatisation plan’.
Sviriba expects growing demand for IP rights protection, particularly in healthcare and pharmaceuticals. EPAP Ukraine recently acted for one of the world’s largest pharmaceutical companies in a dispute with the State Intellectual Property Service of Ukraine.
‘Talking long-term, transactional and M&A work should gradually return to the market accompanying growth of foreign investment and infrastructure development,’ Rebotunova says.
‘As tensions between Ukraine and Russia ease, we expect to see a number of infrastructure projects emerging, and various industries requiring developments and investments through traditional bank and alternative finance vehicle lending or eurobond issues,’ van Kesteren says.
That scenario may appear unduly optimistic. In September, president Petro Poroshenko warned that a full-scale invasion from Russia could not be ruled out. In 2015 a ceasefire was internationally brokered but has been under renewed pressure recently following an intensification of fighting in the Donbass region.
Chorny notes that firms in Ukraine are operating in a country with a ‘wartime situation’. But in other respects the challenges are similar to elsewhere: ‘Retaining the best talent, keeping lawyers busy and motivated, and maintaining reasonable financial results.’
But balancing those books is not easy, lawyers suggest. ‘The market is becoming increasingly competitive and price-sensitive,’ van Kesteren notes.
‘The local law firms compete on all levels,’ Karpenko says. ‘We see [them] dumping the prices of the services they offer to clients.’
Ukraine’s legal market – less open to foreign outfits than Russia – remains dominated by local firms. But the legal market and the profession are nevertheless going through ‘rapid changes’, Sviriba says. This is due to foreign capital flight, the insourcing of legal services and clients cutting spend. Firms are ‘refocusing’ and launching new practice areas, while new players are coming in, he says.
For example, the big four accounting firms, traditionally strong in tax consultancy and transfer pricing services, are expanding into new areas such as employment law, while local firms are bolstering their tax practices. SK recently hired a team of five tax practitioners from PwC to give the firm ‘a competitive edge’ in the market through the provision of the same services as the accountants, Rebotunova says.
For lawyers and clients, constant and serious issues are governability, corruption and the sway of Ukraine’s oligarchs. A pro-EU governing coalition formed in October 2014 collapsed in February. Samopomich (Self Reliance), its most pro-reform faction, pulled out after two key reformers and anti-corruption champions resigned – Aivaras Abromavicius, the economy minister and Vitaly Kasko, deputy head of the prosecutor’s office. A new prime minister, Volodymyr Groysman, has been in office since April, reportedly securing the parliamentary vote approving his appointment with support from oligarch-linked opposition parties.
The Foreign & Commonwealth Office stated in September: ‘The reduced and unstable majority [in Ukraine’s parliament] has hampered the government’s ability to pass new legislation.’
Still, Rebotunova says: ‘As Ukraine is striving to harmonise its legislation and law-enforcement practice in accordance with the EU requirements, neutralising the internal negative factors such as a corruption is a priority.’ She highlights the ongoing overhaul of the judiciary as ‘crucial to launch the broader spectrum of reforms in the country.’
In June the Verkhovna Rada (parliament) adopted constitutional amendments and a new law aimed at combating corruption within the judiciary, and making the system more efficient, independent and transparent. The changes will include a unified court system under the Supreme Court of Ukraine; the lifting of judges’ immunity from prosecution; and close monitoring of ethical and professional conduct.
‘Our country faces a lot of challenges,’ Batyuk concludes. ‘But at the same time there are a lot of new opportunities. We see the future in an optimistic light.’
Marialuisa Taddia is a freelance journalist