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. Last Updated: 07/27/2016

For Lawyers, Legal Reforms Are Good Business

MTHines says more interest in Russian oil since Sept. 11 has given his firm a boost.
If you believe the official figures, foreign direct investment has been falling. But talk to partners at foreign law firms and you may get the opposite impression. Many have been enjoying strong and growing demand for legal services associated with FDI projects.

"We have seen within the last year a significant increase in direct foreign investment," said Constantine Lusignan-Rizhinashvili, partner at Andersen.

"I really don't know how the government comes up with these figures, what they consider to be foreign direct investment," said Hermann Schmitt, partner at Clifford Chance Punder CIS Ltd.

Lusignan-Rizhinashvili and Schmitt are just two among a number of representatives of foreign tax and law firms saying they are seeing more FDI work.

FDI projects, along with security issuances abroad and international lending, have become the main sources of revenue for such firms here. Russian firms, they say, lack the experience, recognized name and international offices needed for these projects.

And although partners at the large firms say demand for other legal services in Russia is steadily climbing, the 10 big foreign law firms and the more than 20 smaller foreign firms in Moscow are still feeling some effects from the August 1998 crisis.

"I'm not sure I'd say the market is fully booming yet, but economically, things are looking better and better, and that means more projects and more work," said Jon Hines, partner at LeBoeuf, Lamb, Green and MacRae.

The recovery is boosted by the return, albeit small, of Russian companies to international capital markets to borrow for the first time since the August 1998 crisis.

Big law firms in Russia made a crisp business representing major international lenders during the "crazy" mid-1990s before that dried up when lenders fled after the crisis.

"Lending has certainly come under steam since summer of last year and looks set to continue, but the paradise that existed for lawyers between 1994 and 1998 has not come back yet," said Clifford Chance Punder's Schmitt.

If they are not flooded with business as they were just four years ago, most firms say lawyers are still busy. With many firms having cut staff following the crisis, there are fewer lawyers around to handle the international projects that do exist. Schmitt said lawyers at his company have reached pre-crisis billing hours.

For MT

Schmitt says his company is working more with foreign direct investment projects.

"Some smaller law firms can be busy with three to four deals the whole year, and that is only a tiny percentage of the work out there," said Hugh Verrier, a partner at White & Case.

"The number of lawyers for a market of this international importance is still quite small."

The large foreign law firms are also busy with work resulting from the expansion of Russian companies, mainly oil and gas, into the CIS and Eastern Europe over the last few years.

This has made the international law firms less dependent on revenues from foreign companies, a trend that companies say will continue for the foreseeable future.

"The biggest change in the last two years for international law firms has been the growth of their Russian clientele," said White & Case's Verrier. "This reflects the strength of Russian companies today. They are receiving credit, buying companies abroad and issuing shares."

Constatine Lusignan-Rizhinashvili, partner at Andersen's legal division, said the company is seeing more work on projects that involve no foreign interests.

Verrier said about 60 percent of revenues now come from Russian clients, up from 20 percent two years ago. The figure is about 30 percent at LeBoeuf, Lamb, Green and MacRae.

Foreign companies in Russia aren't sitting still either, partners at big international law firms say. The drop in work from new foreign players has been softened by work assisting current foreign clients expand their operations within Russia. Work from established clients makes up about 90 percent of revenues for some big firms.

The oil and gas industry is generating a larger share of work than in past years for big foreign law firms, as it taps international sources of finance and signs big deals with foreign partners. Charles Keefe, partner at Coudert Brothers in Moscow, said work for the oil and gas sector accounts for almost 50 percent of the company's revenues today, up from about 30 percent two years ago. That dominance is set to continue.

"[Oil and gas] projects that existed before but were kept on the back burner seem to be moving forward now, and new projects are being announced all the time," said LeBoeuf's Hines. He attributed that to the West's greater interest in Russian oil since Sept. 11.

Law firms say there is now more corporate work arising from opportunities created by a host of new Russian legislation, such as in tax, real estate and labor -- and it is in this work that the smaller companies say they are best able to compete.

"We are able to find solutions for international clients in Russian law realities, and foreign firms which did not have a sound grounding in broad Russian law practice areas may have a difficult time finding work when deals involve more local law," said Maryann Gashi-Butler, a partner at Moscow law firm Phoenix Law Associates. "Many of the large international law firms are dependent on the foreign or international law side and do not have strong Russian law capabilities."

Andrei Gorodisky, head of the 15-lawyer Russian firm Andrei Gorodisky and Partners, said recent amendments to tax, joint stock and labor laws have resulted in steady work from both Russian and foreign companies.

"We have seen a lot of work -- driven by the changes in the tax law -- on reorganizing and restructuring Russian and foreign companies to reduce their number of legal entities," said Jack Robinson, partner at Ernst & Young.

Though partners at some large firms say restructuring of companies has slowed, smaller law firms say they are busy reorganizing companies, and not just in light of tax law. In order to tap international capital markets or find foreign partners, Russian companies are being forced to bring their corporate structure into compliance with Western standards. And that, lawyers say, requires a considerable amount of legal work.

Lawyers say overall the legal work is getting cleaner and more predictable these days. Companies do not have the stomach any more for the "gray market" deals they got burned on in the late 1990s and have become more cautious with the legal terms of their deals. And the improved legal system within Russia has made doing things by the books more rewarding. As a result, foreign companies are more willing to fight things out in court.

"Russian tax rules were strange and vague, and if companies had a problem with the authorities, they either paid or left the country," said Paul Melling, partner at Baker & McKenzie and founder of the Moscow office. "Today, companies can do something about it if a complaint arises."

Bob Wallingford, a tax and legal partner at KPMG, said his company has won several tax cases for its clients this year. But the legal system still has a way to go, lawyers say, before it reaches Western standards.

The growing sophistication of projects and deals undertaken in Russia have forced law firms to reorganize themselves to stay competitive.

"Gone are the days when lawyers at international law firms were just country specialists handling a wide range of issues," said Baker & McKenzie's Melling. "Overseas clients want lawyers to be specialized in a certain area."

For MT

Phoenix Law Associates' Gashi-Butler

Larger companies also have lawyers specializing in certain industries such as oil and gas and information technology, but specialization does not exclude lawyers from working on different issues.

Though many foreign law firms cut staff immediately following the crisis, some partners say smaller Moscow offices will need to build up their staff in order to specialize and still remain full-service law firms. Some have put that figure at around 20 to 25 lawyers. White & Case increased its staff from 10 lawyers in 1998 to 40 today exactly for that reason, Verrier said. Andersen also almost doubled its office last year to 60 lawyers.

Verrier said smaller Western firms do not have a bright future in Moscow and will have to expand or merge if they want to remain. Phoenix Law Associates, a young, five-lawyer practice, is in the process of merging with the 20-lawyer Russian firm of Kakabadze, Kachev, Pipia & Maksimenko. Phoenix Law's Gashi-Butler said the reason for merging with a Russian law firm was to increase the ability to specialize.

Calling firms "foreign" or "Russian" has lost meaning, the big foreign firms say, as the number of Russian lawyers at these firms grows. Foreign firms with 20 to 40 lawyers tend to have about four to eight expats, and that trend is expected to continue.

"Foreign lawyers will become less and less relevant, and that is already the case," said Baker & McKenzie's Melling. "The sole criteria for how successful a law firm will be depends on the quality of Russian lawyers."

This development, partners say, has helped foreign firms grab more Russian clients. But the growing trend for Russians to run the operations of Western companies here has also meant that some are increasingly turning to Russian law firms.

And partners at foreign law firms say it is not simply a matter of the Russian-Russian connection, but the fact that Russian law firms have become stronger and more "Westernized" in their practice and simply know the intricacies of Russian law better. That their prices are two to three times lower also plays a role. Big Western firms may lose the "day-to-day stuff," but will continue handling the largest projects.

Law firms are also facing more competition from The Big Five accounting firms, several of whom are trying to build up their practices in Moscow. Accounting firms say they can win over clients from big law firms by combining business consulting with legal services.

"Clients want a packaged service for their goal," said Bob Wallingford, a tax and legal partner at KPMG. "Most services are now multi-disciplinary services and will become more so in the future."

Some foreign lawyers say they are not intimidated by the big accounting firms' move into the market, saying they haven't seen "exciting things yet" from them, but others say they have potential here.

"These are huge companies that have a lot more resources at their disposal than big international law firms," said Coudert Brothers' Keefe.