The Legal 500

Overview

It was in August 1998 that Russia was hit by one of the worst financial crises of the modern age. The government defaulted on its short-term local currency debt, the banking system ground to a halt and the majority of Russian banks failed. The rouble lost over 70% of its value in just three weeks, leaving Russia’s economy in tatters. Foreign investment into Russia fell by 80% that year, while $100bn was wiped from the country’s GDP. A decade later, the economy is once again under serious threat.

Although Russia is now far more internationally integrated than it was in 1998, the country initially proved relatively resilient to the global market malaise. As work progressively tailed off throughout the UK and Western Europe, Russian transactional mandates provided a highly remunerative fillip for law firms’ beleaguered corporate teams. In September, however, that lifeline snapped, with the collapse of Lehman Brothers combining with issues such as the TNK-BP dispute and Russia’s invasion of Georgia, to devastating effect.

Having generated some of the world’s largest IPOs in recent years, Russia has seen just five listings this year. Although some corporates optimistically continue to do prep work for new issues, the reality is that all debt and equity deals are on hold for the foreseeable future. Russia’s two largest investment banks, Renaissance Capital and Troika Dialog, recently announced significant redundancies. Law firms with large finance and capital markets practices will also be feeling the strain.

Real estate was formerly one of the country’s most significant sectors, yet JPMorgan is now advising clients to steer clear of Russia, while global ratings agency Fitch believes that Russian developers will be hit harder than those elsewhere. Even the oligarchs, who provide a crucial flow of instructions for the leading firms in Russia, have been revealed to be more highly leveraged than anybody anticipated. According to Forbes, the combined wealth of Russia’s top 25 richest men dropped by almost two-thirds between May and October 2008 – an almost identical drop to MICEX, which has fallen by 61% since its May 08 peak.

The good news is that, unlike in 1998, Russia’s government has reacted swiftly and decisively this time around. Russian prime minister Vladimir Putin has given state-owned Vnesheconombank (VEB) access to $50bn of state funds, to be used as a rescue package to repay the foreign debt of struggling Russian corporates. The Russian economy is also much stronger than the one decimated by the last financial crisis. In 1998, the country reserves totalled just $12.3bn. Now that figure stands at over $500bn (although the combination of VEB’s corporate bailout scheme and the cost of propping up the rouble saw reserves drop by more than $30bn in one week during October 2008 alone), with a separate stabilisation fund of $175bn.

It is important to maintain perspective: Russia is not facing an actual decline in the market, only a decline in its growth. The most recent IMF World Economic Outlook predicts that Russia’s GDP will grow by 5.5% in 2009 – compared to a -0.1% fall in the UK. So while many firms significantly scaled back their Moscow presences in 1998, and some even left Russia altogether, such drastic action now seems unlikely. That said, some firms have already made redundancies and more will surely follow.

In addition to the radical alteration of the market, there have been a number of significant developments among the country’s international legal elite. Perhaps most notable of all was Berwin Leighton Paisner LLP’s shock Moscow launch with the hire of nine partners and over 70 lawyers from leading Russian firm Pepeliaev, Goltsblat & Partners, including renowned name partner Andrey Goltsblat.

CMS Cameron McKenna LLP, CMS Bureau Francis Lefebvre and CMS Hasche Sigle’s Moscow offices finally completed their long-mooted merger and now operate under the unified CMS banner. With 130 lawyers, the combined entity is the largest international firm in Russia.

Elsewhere, Baker & McKenzie – CIS, Limited’s Russia presence was significantly bolstered by a 22-lawyer raid on PricewaterhouseCoopers CIS Law Offices BV– including highly regarded real estate head Konstantine Kouzine and two other partners, while Denton Wilde Sapte entered into a strategic alliance with St Petersburg firm Duvernoix Legal.

Among the Russian firms, few have managed to challenge the dominance of the Western interlopers. For corporate matters, the international nature of many Russian transactions – and the fact that most transactions are governed by English law – means that the majority of domestic firms cannot compete, as they have no international presence. Nevertheless, several do provide strong advice and are regular referral favourites with Western law firms that do not have a practice on the ground, most notably Pepeliaev, Goltsblat & Partners, ALRUD Law Firm and Egorov, Puginsky, Afanasiev & Partners, which became the first Russian firm to open an office in London (fast-growing CIS firm Magisters has since followed suit). It is in niche areas such as litigation and IP that Russian firms can level the playing field, and as the rankings for those areas indicate, there are several eminently instructable Russians firms.