Doing business in Russia was never for the faint of heart. Now, as the grip of Western sanctions tightens, the global law firms that helped create a modern Russian legal market are finding it harder than ever to compete.
The United States and the European Union first hit Russia with extreme economic sanctions in 2014, following the invasion of Crimea. Responding to alleged meddling in the 2016 election, the U.S. doubled down on 24 specific oligarchs allied with Russian President Vladimir Putin in April. As the relationship between the two nations continues to deteriorate, the prospect of further sanctions hovers.
The growing tensions are posing new obstacles for international law firms that have proliferated in Moscow since the collapse of the Soviet Union. And they’re creating new opportunities for Russian firms—demonstrated most recently by a high-billing team that decamped earlier this month from Akin Gump Strauss Hauer & Feld to launch their own Moscow boutique.
At the same time, many of these firms have a 25-year legacy in Russia that won’t be easily dislodged.
When Doran Doeh, now a senior counsel with Dentons, first arrived in the country in the early 1990s as an oil and gas specialist with Allen & Overy, one consequence of the transition away from the Soviet system was the near impossibility of finding the people necessary to run an outpost of an international law firm.
“You needed people who were good lawyers, who could speak fluent English to the level necessary for an international law transaction, reason carefully, and be adaptable enough to make transactions work,” he said.
International firms invested heavily, recruited and trained generations of top university graduates, reaching their high-water mark in 2007, before the global financial crisis. And while some firms, like Orrick, Herrington & Sutcliffe and K&L Gates, have exited completely in recent years, other players have built a legacy and a client base in Russia that will likely enable them to ride out the storm, even with local players growing increasingly capable.
“It’s clearly a much tougher market now. You have the sanctions issues, as part of that you have a greater sense of nationalism, and also you have some damn good Russian firms,” said Jomati Consultants principal Tony Williams, who was managing partner of Clifford Chance’s Moscow office in the 1990s before he became the firm’s managing partner. “All of that makes it more challenging for [international] firms with a Russian presence.”
Trouble Across the Board
There’s little mystery to the forces behind foreign law firms’ Russia woes. In concert with the global recession, oil prices crashed, hobbling the country’s economy and putting a damper on foreign direct investment. The first round of sanctions provided further disincentives for multinationals to play in the Russian sandbox.
The changes made it especially important for international firms to cultivate Russian clients. And, for a number of years, Russian oligarchs, and the businesses they controlled, provided ample work. One example is Viktor Vekselberg, the billionaire owner of the Renova Group conglomerate, who has kept Ilya Rybalkin, the rainmaker who recently left Akin Gump, and lawyers from White & Case busy with deals and disputes work. Cleary Gottlieb Steen & Hamilton, meanwhile, pulled in big fees in work for aluminum giant Rusal, controlled by Oleg Deripaska.
Both men are now on the list of sanctioned oligarchs closely tied to Putin.
“That has an immediate impact on lawyers in Russia,” said Vassily Rudomino, the co-founding partner of 100-lawyer Alrud, one of the thriving firms in the local marketplace.
Sebastian Rice, the partner-in-charge of Akin Gump’s London office, formerly headed the firm’s Moscow office. He acknowledged that the sanctions played a key role in Rybalkin’s departure.
“There are certain clients we can’t act for other than in very restricted areas because they are subject to sanctions, and unfortunately that means that Ilya Rybalkin has clients that have been affected,” he said
Sanctioned oligarchs aren’t the only source of big-ticket legal work in the country. But other clients are beginning to rethink their relationships with the international firms, Rudomino says. Some of them don’t want to pay the fees the top firms command. Others feel that local firms are more attuned to current geopolitical realities, or they should simply be supporting these firms in this fraught moment.
There’s also a catch-22 for international firms that have downsized in response to decreasing demand. Doeh says that the critical mass of in-country attorneys necessary to compete is around 20. That’s where Akin Gump now stands after losing 10 professionals to Rybalkin, Gortsunyan & Partners. Any fewer, and the ability to provide key services is thrown into question.
“We recently had a client come and say, ‘We are planning an acquisition in Russia, we used to work with an international firm. But it’s now at such as size that it will not be able to handle such a big matter,’” Rudomino said.
Down but Not Out
The future isn’t irredeemably grim for international players in Moscow. Firms with substantial international trade practices, stocked with sanctions experts, are in a position to advise Russian and international clients about compliance.
Mergers and acquisitions involving Western businesses may be down, but the deals haven’t disappeared entirely. And Russia is increasingly connected to Asia. Last week, Chinese e-commerce giant Alibaba announced a $2 billion joint venture with two leading Russian tech businesses and the country’s sovereign wealth fund. (Parties to the deal would not reveal the law firms involved.)
Hogan Lovells Moscow managing partner Oxana Balayan said that her firm work in technology, logistics and real estate-related M&A matters has not been affected by sanctions. The firm was fortunate in downsizing its project finance practice four years ago, just before Russia invaded Crimea and triggered the first round of sanctions. Consequently the firm has stayed steady at 45 fee-earners over the last year.
“It doesn’t mean business as usual for us. It’s been a lot of work to focus on the right areas,” she said. And, Balayan added, the firm can’t take even the unsettled current status quo for granted.
“Everything can of course collapse if new sanctions are introduced and things change politically,” she said. “Sometimes it’s pure luck whether your clients are affected by sanctions or not. But it’s also having a vision of what areas we wanted to develop.”
Dentons, whose roughly 150 lawyers make it one of the three largest firms in the country, has also been in a fortuitous position with its client base. While the firm advises state-owned petroleum giant Gazprom, it has a larger number of small and medium-sized clients in the life sciences and oil and gas industries that were not directly affected by sanctions.
“Fortunately or unfortunately, we have not had a lot of oligarchs for clients,” Doeh said.
International firms in Russia can also point to some institutional advantages over their smaller, homegrown rivals. They’ve been investing for years in new products, such as project management software and artificial intelligence, to deliver legal services more efficiently.
“Russian firms simply do not have the money to do that,” Balayan said.
Firms selling these capabilities to an audience of Russian businesses—and able to boast a roster of predominantly Russian attorneys tackling issues under Russian law—may be well positioned to ride out the storm.
“We’ve always prided ourselves in acting for Russian clients, and our lawyers in Russia are Russians,” Rice said. “We do have foreign qualified lawyers as well, but the overwhelming majority are Russian lawyers doing Russian work for our Russian clients.”
The prospect of further sanctions may be the primary source of uncertainty right now, but it’s not the only one. The Russian Ministry of Justice has expressed interest in reforming the regulation of the legal profession.
Presently, only the roughly 75,000 “advokats” in the country—a designation comparable to the English “barrister”—are subject to regulatory authority. All other legal professionals are exempt.
Over the past 25 years, Russian businesses benefited from the lack of regulations, which allowed them to secure top-notch legal counsel.
“All the top international firms didn’t need to think too much before opening up in Russia,” Balayan said.
Russian lawyers for these firms were also happy with the system, according to Doeh.
“They feel an system of regulation would be open to corruption,” he said. “In other countries, there’s been pressure brought onto legal professionals in a rather unpleasant way.”
Draft regulations were released in October, and they included a provision—alarming to international firms—that would prohibit direct control of Russian firms by non-advocates, including foreigners. But resistance followed, and the Russian presidential election in March shifted attention away from the subject. Decision-makers are reportedly looking at the subject again, and it’s an open question whether the next attempt will be as severe.
A separate draft measure, introduced in Russia’s Parliament in April, also has unnerving implications. The proposed “antisanctions” contain a provision that would bar entities under the jurisdiction of the U.S., and potentially other foreign countries, from providing legal services in the country. Essentially intended to punish entities that follow U.S. and European sanctions, they would make operations impossible for international firms.
“These draft laws are absolutely on hold for the moment, but if the geopolitical situation changes, they could be restored in a milder form,” Balayan said.
Of 13 international firms—mostly based in the U.S.—with prominent Russia practices contacted by The American Lawyer, 10 were unwilling or unable to make leaders available to talk about the prospects of the Russian legal market. Compare that to 15 months ago, when 12 firms participated in an earlier article on the subject.
For some of them—a group accustomed to demanding sky-high rates from clients across the world’s financial capitals—Moscow might simply not be worth it for much longer.
Or they may at least need to have to tighten their belts, and adjust their approach. Balayan suggested that the same sanctions regime that is restricting Russian operations of international firms is also forcing them to look at new opportunities in other markets in the region, including former Soviet states in Central Asia. There, leaders still speak Russian, and there’s substantial trade between the two entities.
“The Russian legal market is simply too important for every firm that’s a global player,” she said. “It’s a huge opportunity.”