Who’s Who Legal brings together Logan Wright of Clifford Chance, Ilya Nikforov of Egorov Puginsky Afanasiev & Partners and Evgeny Zhilin of YUST to discuss a range of key issues affecting the Russian legal marketplace, including the economic slowdown, sanctions, legislative initiatives, as well as what's in store for the future.
Who’s Who Legal: Russia is a key but sometimes difficult legal market. What have been the main challenges for your firm during the past few years and how are you meeting them?
Logan Wright: The main challenges have been increasing regulation; slowing economic growth; and sanctions.
Regarding regulation generally, this has largely been part of the continuing maturing of the market, and includes legislation regulating areas such as state procurement, anti-money laundering, insider trading and anti-corruption – all of which require considerable analysis, as well as training and policies put in place to ensure compliance (about a year ago we hired a dedicated risk and compliance officer in Moscow to focus on this area). More recently, the geopolitical situation around Ukraine and the related trends towards localisation and insulation have lead to further legislation, such as the pending data protection law – which could have a potentially significant impact of how we manage our business in Russia.
On the other two items, the slowing economy was starting to restrict business volumes even before the sanctions were introduced; this has now been significantly exacerbated by the introduction of the sanctions, together with the sharp drop in oil prices and the rapid devaluation of the rouble. However, our Moscow team is lean, strong and flexible, and we are keeping ourselves busy by redeploying resources to those areas of business that remain active, or have become increasingly active.
lIya Nikforov: Difficulties in the Russian market have always gone hand-in-hand with the level of competition for clients – work for talented legal practitioners was limited. In the past few years (particularly following an economic crisis that put stress on medium-sized practices), we have acquired several high-quality teams with various areas of expertise. These teams are now fully integrated and happy at EPAM.
EPAM will expand into regional markets by means of “best friends” arrangements with local practices in South Russia, the Urals, the Far East, and so on. The concept is to create a “club”, by invitation only – in other words, a community similar to the CIS leading counsel network (cislcn.com). Quality, efficiency and integrity will be decisive factors in selecting of members of this alliance.
Evgeny Zhilin: The Russian legal market sees regular waves of maturity. Every time the market seems to have matured, a new set of circumstances appears on the horizon and it becomes inevitable that the market will be reshaped again.
Law law firms have faced several challenges in the past few years, including but not limited to: diversification of the legislation and the need to develop various regulatory practice groups; dominance of English law in transactions and the need to promote Russian civil legislation; the introduction of new legal procurement rules and the necessity to hire additional staff; the strengthening of spin-offs and price competition; a general reduction of legal fees and the resulting necessity to do more work for less money; an enhanced demand for legal services among business law firms in non-traditional areas, such as criminal law and family law; and an increasing number of state and state-owned customers.
We saw most of these changes in advance and were prepared to them. What we were not prepared for, and probably no one was, were the various sanctions imposed on Russia this year by most of the European countries and the US.
Who’s Who Legal: Are the recent EU and US sanctions against Russia resulting in national firms becoming more prominent in the market? If so, what impact has this new dynamic had on your firm and do you think this change is here to stay?
Logan Wright: I don't think the national firms have become more prominent as such. Rather the sanctions, together with the West's reaction to the geopolitical situation around Ukraine and the corresponding Russian reaction, have clearly reduced the amount of cross-border, English-law business into and out of Russia, which is what international firms tend to focus on. With a larger share of the Russian market now comprised of local transactions under Russian law, there is scope for national firms to occupy a greater share of this market than was previously the case. However, there continues to be a reasonable volume of work that plays to the strengths of the international firms – albeit increasingly involving investment from or into non-Western markets. At the same time, Western investment will return in force at some point. It is just difficult to say quite when that will be.
Ilya Nikforov National firms have established themselves as stable consultants and employers. The first warning to the community came in 2008, when foreign firms laid off a significant number of their staff to cut costs. Domestic firms, and our practice specifically, managed to remain stable and avoid significant losses. Moreover, EPAM attracted new and talented lawyers on the market. That was an eye-opener for the legal profession and contributed to the loyalty of our staff. Partners have seen the firm as a safe haven – an anchor in turbulent waters.
The current political and economic situation, with sanctions, is beneficial for the domestic legal industry. The market was monopolised by foreign (primarily Anglo-Saxon) firms that still dominate here. In some ways, even domestic clients often preferred London or New York lawyers, in the same way we talk about aspirational products – like Swiss cheese, French wine and Moroccan oranges!
National champions, such as our firm, have come a long way to reach top ratings across most practices. The moment of truth came this year, when foreign firms largely abandoned national industry leaders due to sanctions (whether direct or “creeping”), dumping their clients barefoot in the Russian cold. It is inconceivable to drop a client in the middle of a hearing, or when the transaction is about to close. This puts our firm at an advantage in the long run – we are there on standby, and we can be relied on in any circumstances.
Evgeny Zhilin My feeling is that the share of Russian law firms on the market has increased, overall, by virtue of a stronger demand for litigation and regulatory legal services where international firms have traditionally been weaker. The share of international firms has dropped due to the drastic reduction of financing and capital markets work, as well as a considerable reduction in M&A-related matters. These changes will probably stay for a while, allowing Russian firms to continue playing a more important role in generating new business.
Who’s Who Legal: Are there any other trends you have noticed in the local legal market – particularly in regards to the key international and national players, the main practice areas providing work for firms, competition in the market and pressure on fees? How much have these developments been driven by the current crisis, or were they occurring already?
Logan Wright: The most obvious impact of the sanctions has been on international capital markets work, and more recently, on international bank lending as well as foreign investment generally. Work continues across all practice areas, but for the transactional practices the focus is somewhat different (eg, Chinese rather than Western investment). Fee pressure has increased significantly for some work, and the current market situation is causing some international firms to downsize (though not Clifford Chance), while others have actively seconded lawyers out to other offices. The national firms, on the other hand, seem to be hiring.
Ilya Nikforov: Alternative fee structures, as I see it, are a two-way street. On the one hand, they provide certainty for a client with respect to budgeting; but on the other hand, there is an uplift for the lawyer doing due diligence/transactional or contentious work who has contributed to the success.
I love contingency fees – these projects turn out to be universally enormous. They match or exceed the economics of projects we handle on an hourly basis. The clients are also happy with the arrangements, as for such projects the timeliness and successful result is worth the premium.
Lawyers are becoming more entrepreneurial, and I trust this new trend is here to stay for the long term.
Evgeny Zhilin: There has been strong competition for new mandates, especially those pitched for. Many international firms are currently prepared to work for “0+”, which is not very promising. Legal fees have come under even more pressure, due to the recent and very significant weakening of the Russian Rouble as compared to the US dollar or the Euro.
Who’s Who Legal: Russian and international practitioners alike have commented on a shift in focus to the East. How is this affecting your firm? What impact will it have on the importance of Moscow in the global legal market?
Logan Wright: This is less a shift to the East, and more of an accelerated (thanks to the geopolitical situation) rebalancing or diversification of the Russian economy. This plays to our strengths, as we have strong practices across the Middle East and Asia. In the long-term, this is unlikely to have an impact on the importance of Moscow in the global legal market, as it was an inevitable and expected development (and an already existing trend, pre-sanctions).
Ilya Nikforov: I anticipate that Russia, and specifically St Petersburg, will be a hub for arbitrations among parties from new independent states as their economies and legal systems mature. Russia is within everyone’s reach logistically, and it also it offers a visa-free regime for citizens of former Soviet states, as well as the language and the legal system that became a model upon which the national legislation of surrounding countries was built. Advancement of integration in the form of Eurasian Economic Union will further the deal.
Why St Petersburg? First, it is going to become a judicial capital of Russia as all the country’s highest courts are relocated here. Second, it hosts the Inter-Parliamentary Assembly and other institutions of the CIS countries. Third, and importantly, costs are lower here than in Moscow and traffic is much better. Also it is a city known for good-quality living, as well as unmatched sights and tourist attractions. It is always nice to have a seat in a colourful location. Russian language is the de facto language of commerce in the post-Soviet region, which also adds to the attractiveness of Russia as a seat for international arbitrations involving parties from New Independent States and even Asia.
Evgeny Zhilin: We have discovered more business opportunities in working with Chinese, Japanese and Korean clients. The East has not and will not replace the West, but certainly has a potential to grow and become comparable in revenues in a few years. Moscow will continue to play the role of a bridge between the West and the East.
Who’s Who Legal: There have been substantial changes to the country’s civil code as well as other legislative initiatives, such as the proposed “de-offshoreisation”. What impact will these have on Russia as a place to do business, and on the legal market?
Logan Wright: Many of the changes are very positive – particularly those proposed or implemented pre-sanctions – and, absent the wider geopolitical situation, would no doubt have led to an enhanced foreign perception of the Russian market as a place to do business. More recent changes – eg, limiting foreign ownership of Russian printed media, or the proposed changes to the data protection law – may or indeed do make it harder for international businesses (including, in some cases, law firms) to operate in this market.
Ilya Nikforov: The have been notable developments in the arbitration area. As a response to the potential need for modern arbitration tribunals and, in fact, to cultivate demand, we see new modern arbitral facilities being established and infrastructure growing. A remarkable development is the inauguration of Russian Arbitration Association – a modern, international-style appointing authority which has adopted UNCITRAL’s 2010 rules of arbitration as its procedure.
Evgeny Zhilin: These changes will hopefully result in Russian law strengthening its positions with regards to English law and the laws of some other popular jurisdictions. There should be many corporate reorganisations coming soon and an increased demand for tax, corporate and wealth planning advice.
Who’s Who Legal: What do foresee for your firm and the Russian legal market for the next few years?
Logan Wright: The next few years will likely be tough for the market – and for many businesses operating in the market. At the same time, this provides real opportunities for strong businesses such as Clifford Chance to attract the best people, to build and cement client relationships, and to grow market share – and to position themselves well for when the economy recovers.
Ilya Nikforov: With respect to development I do think that law firms have continued to grow bespoke expertise, ie, specialising in niche industries and areas of practice. For this to be attainable, the firm must have a sizeable operation to ensure sufficient work for the niche practices. That comes as a result of internal cross-referrals from the core practices.
The same goes for arbitration professionals. These days, most are generalists handling all types of cases. I foresee some will stay this way, because of their natural ability and capacity to absorb and analyse details coming from all walks of life. I foresee that I will stay a generalist myself. The majority, however, will specialise in specific a sector or industry – insurance, intellectual properties, commodity, construction, financial markets – as arbitration becomes more common. Arbitrators and counsel alike will be successful if they pursue a specific niche, become an expert in the trade (and position themselves as such), and gain reputation within the industry.
Evgeny Zhilin: At turbulent times, there are always a great number of options and the real challenge is to identify those which are not mainstream. Probably one should try to move in the opposite direction and see what happens when the general landscape changes. The market should not be seriously damaged by the emerging recession. There is still plenty of work and whoever keeps the dynamics will survive and prosper. We do hope that the advocate monopoly will be introduced for court representation rather soon, allowing simplified transition procedures.
Our firm will continue to add competences and strengthen its people. The expansion of geographical reach is also one of the priorities.