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Moscow Times
January 23, 2003
Building an Empire Based on the Rule of Law
By Alex Nicholson
Staff Writer

A linchpin of economic development, the legal profession, like most industries, has undergone a fundamental shift since that fateful summer of 1998, when the economy's legs were sawed off.

Unlike most industries, however, commercial law in Russia continues to be exclusively the dominion of foreign firms. Their ranks may have thinned since the August collapse and those that remain may be relying more and more on a new breed of domestically trained natives, but their importance to the economy has not waned.

In fact, if anything, their influence is growing along with the economy -- and knowing how they got here, how they survived and what they learned along the way sheds some light on what the future holds for Russia's peculiar brand of business.

A New Country

It was the efforts of a few pioneering enthusiasts working out of ramshackle offices in the early 1990s that paved the way for the roughly 40 international firms now working in Moscow, about half the number that were here in 1998.

"As with all emerging markets, you start in an apartment and you get a call on a poorly connected telephone and the client asks you whether its safe to invest in the country," said Baker & McKenzie's Max Gutbrod, a German expatriate who has been here for the better part of a decade.

"You say, 'Well I don't really know,' and the client says, 'Well I need a memo for my board of directors.' And you answer, 'Excellent. I'll write it for you in three weeks,' for which you charge 10,000 bucks. You charge 10,000 bucks not because the information is very detailed but because the information is very difficult to get."

White & Case, a U.S.-based firm active in more than two dozen countries, wasted no time moving into the new Russia.

In 1990, Alex Papachristou, a lawyer from Washington, offered to set up an office for White & Case, and within a year the firm had a few rooms in the Central Telegraph building on Tverskaya Ulitsa.

"We had a contractor who helped expand the premises," White & Case partner Eric Michailov said. "There were four of us lawyers, and we were taking out the garbage and helping the builders."

Dominic Sanders told a similar story. In 1992, Sanders, then in his mid-twenties and fresh out of law school, was sent here to open British-based Linklaters' representative office and set up shop in a couple of rooms in the Academy of the National Economy.

In those heady days, Sanders says, legal databases were non-existent and getting copies of new legislation was virtually impossible, so he had to resort to snipping the text of laws out of newspapers.

Salans, on the other hand, is something of an oddity among the top firms, having been advising multinationals on doing business in Moscow for nearly three decades.

Working out of Paris in the early 1970s, founding partner Jeff Hertzfeld was one of only a handful of people advising multinationals on transactions with the Soviet Union. Now Salans' business in Russia accounts for a quarter of its global revenues.

A Maturing Market

The collapse of the economy in 1998 and the emergence of President Vladimir Putin's regime has had a profound effect on the commercial law industry.

For those that were here before the summer of 1998, the difference between the two eras is night and day.

"There has been a radical change in the climate from virtually the moment president Putin came into power," White & Case managing partner Hugh Verrier said.

"Since Mr. Putin came to power, the level of political stability and corresc stability has allowed our clients and therefore ourselves to function with greater scope and efficiency."

That stability, combined with four consecutive years of economic growth and a raft of new legislation, has been a boon for the legal community.

A wave of restructuring work flowed out of the wounded economy, and the emergence of leaner, meaner domestic companies in 2000 kept the ball rolling.

With mergers and acquisitions among domestic companies picking up pace and foreign companies clamoring to enter the market, the leading law firms are getting as much work as they can handle and are on the lookout for new help.

"There's been a vast shift," said Michael Cuthbert, senior partner at Clifford Chance Punder.

"We're seeing more of the big Russian companies coming to us as they begin to expand internationally or begin to access international capital markets."

And the companies themselves are easier to work with, mainly because many of them, especially banks, have hired in-house lawyers who have cut their teeth working for major international law firms.

"The Russian commercial environment has matured a lot," Sanders of Linklaters said. "And it's often to the credit of the very young people in the bigger Russian companies who are very proactive and very pragmatic and sensible about how to run things."

Like Sanders, most expatriate lawyers who have been here for several years say it is now easier to work with some Russian companies than Western companies -- a situation that would have been almost unthinkable just a few years ago.

"If you go to a Russian company and you have won its respect, then they know you know what you're talking about and they take your advice," Baker & McKenzie's Gutbrod said.

Gone too are the days when Russian businesses hire Western firms just to improve their image and, for the most part, the danger associated with taking on new clients.

Normally associated with long working hours, fat compensation packages and fine dining, expatriate lawyers have also experienced their share of the physical danger that was once synonymous with doing business here.

Tales abound of lawyers being locked into meeting rooms by frustrated and aggressive clients or learning from the media that their lives are in danger because of a murder plot against one of their clients. But those days, for the most part, are gone, Gutbrod says.

"If you compare us to our poor colleagues in Venezuela or Brazil, then in terms of day-to-day safety, we're much better off."

Adapting to the Times

As the economy continues its ascent, firms are expanding disciplines and looking forward to new types of work.

One developing area concerns production-sharing agreements, which provide political risk insurance for natural resource companies that want to invest heavily in a project but may not see that investment pay off for years.

Foreign oil majors say they are willing to invest billions of dollars here if the government puts a proper PSA regime in place, and Russia's new energy partnership with the United States has put the issue, opposed by domestic oil companies, once again on the front burner.

Law firms are also diversifying into areas that have recently taken off, such as retail, telecommunications and real estate.

As the economy matures, so do the markets, and Russian companies are increasingly looking to borrow money and float their shares both at home and abroad.

Freshfields, Bruckhaus Derringer, for example, helped Internet media company RosBusinessConsulting place its shares on the domestic stock market last year, which was Russia's first initial public offering, and is helping drugstore chain 36.6 do the same Thursday in the country's second IPO.

"I could almost say I've done more IPOs than Frankfurt has," managing partner Tobias M?ller-Deku said.

The trend is likely to accelerate, lawyers say, because the pace and quality of change is putting more distance between Russia and other emerging markets.

"Those emerging market funds -- where do they want to go?" M?ller-Deku says. They're not likely to buy Venezuelan or Argentinean bonds or do Argentinean or Brazilian IPOs at the moment. So if you do need emerging markets, and quite a few do need emerging markets, then where should they turn other than Russia?"

Clifford Chance this week, together with PricewaterhouseCoopers and the Russian Trading System, the country's benchmark stock market, created an consultation center for domestic corporations thinking about listing their shares here or overseas.

Linklaters also sees the opportunities and is transferring some lawyers from London to Moscow to beef up its capital markets and project finance divisions.

One area that vanished overnight when the crisis hit is also giving lawyers the kind of work they would expect in the West -- real estate, Sanders of Linklaters said.

"There are true possibilities in real estate," he said. "There's a possible watershed because you've got international institutional money coming in as opposed to just acting for the developers. Now the developers are starting to get their funding from real estate funds. That's the sort of client our practice in mature markets is based upon."

A New Breed

Junior Russian lawyers have come of age, the role of the expatriate lawyer is dwindling and the firms here are thinking carefully about who to bring in from other offices.

"The importance and the number of expats will go down, and it has to go down because these guys [Russians] are getting better by the minute," M?ller-Deku says.

"Most of my Russian colleagues studied at Moscow State University or the Moscow State Institute for International Relations and almost all of them have also studied in Britain or America," said David Marshall of the firm Cameron McKenna.

"These are without doubt some of the most impressive lawyers that I have worked with."

The quality of Russian lawyers, who now outnumber expats at most foreign firms, has been a driving force in the development of commercial law here since the crisis.

"Before the crisis, I think the work people were doing was uneven at all the firms," Verrier of White & Case said.

"At the time, the market was immature, and the lawyers were learning alongside their clients in those crazy, bonanza days," he said. "I think real business is happening now."

"It was like having a hospital where the doctors have only practiced for two years," said a lawyer at a major foreign firm.

"What kind of hospital is that? You can imagine the malpractice, right?"

"In money terms, we can achieve better results with two-thirds the staff than we could before the crisis, which is a real testament to the quality of the people," said Sanders.

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