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Sanctions 'Boomerang' Comes Full Circle: Investment in Russia on the Rise

Russian law firms say Western sanctions against Russia sparked government reforms, resulting in a healthier business climate 

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This article originally appeared
at The Lawyer

Sanctions imposed by the EU after Crimea’s annexation have caused upheaval in the Russian market, but law firms remain optimistic.

Q:  What has been the impact on your firm’s business of the sanctions imposed against Russia by the EU in response to the Ukraine crisis?

Sergey Pepeliaev, managing partner,Pepeliaev Group: Initially, many investors got scared and froze their investment projects, which for us meant that our M&A practice saw some of its projects suspended. The measures that the Russian government has undertaken in relation to the economy (letting the rate of the national currency drop, establishing favourable conditions for business, and making improvements in corporate legislation) have contributed to making Russia more attractive for investment. 

Today, we see that a new investment stage is under way, with new projects being initiated that involve acquisitions of business and real estate. We are optimistic about the prospects of legal business in the second half of 2015.

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Artem Paleev

Artem Paleev, managing partner, Korpus Prava:The biggest impact is on the business of our clients – because of higher rates of financing from banks – which is negative. On the other side we see the development of domestic industrial and agricultural sectors. That’s positive.

Our firm as a business sees that Western European colleagues start to look at Russia as an extremely high-risk jurisdiction.

But in general I think that the bigger problems for business in Russia are generated by the devaluation of the currency and lack of credit 

Alexander Konkov, partner, Khrenov & Partners: The EU sanctions imposed against Russia had very little, if any, impact on our firm. If anything, the firm’s overall workload slightly increased as a result of the due diligence and self-assessment requests made by, mostly, the European companies and their Russian offices in connection with their planned transactions with the region in order to avoid potential violation of the EU sanctions.

Our firm’s core client base is comprised, mainly, from the local Russian businesses which are not engaged in the international trade. The firm’s strategy is to continue on its path to becoming the leading national provider of the legal services to the local businesses.

Q: Do you think that the current situation will lead to more clients choosing Russian firms over international firms for their business in the jurisdiction?

Pepeliaev: Yes, many law firms specialise in investment projects and, therefore, are facing certain difficulties in overcoming present turbulent times. The business of Russian law firms, meanwhile, is more diversified and, as a result, they are more financially stable. As opposed to international law firms, Russian law firms did not see large-scale redundancies. Therefore, our national firms are better prepared for new projects. 

Paleev: Indeed, Russian law firms are starting to be much less expensive in comparison with international law firms. A year ago they were two or three times cheaper, now they’re five or six times cheaper. Businesses that generate their incomes in Russia (calculating budgets in rubles) will start to look for alternative suppliers of legal 

Konkov: Absolutely, yes, but with a caveat that certain practices, like, for instance, M&A, corporate finance and capital markets, will continue to be dominated by large international law firms. One should also account for the response made by the Russian Government to the EU sanctions and the overall business climate and public opinion geared towards selecting the national (domestic) legal service providers, particularly, in situations where public or government provided funding is involved.

Q:  What practice areas are busiest right now for the firm and what sort of work are you seeing coming through?

Pepeliaev: The make-up of the instructions we receive has changed of late, with antitrust, employment, bankruptcy and IP projects dominating. Our life sciences and telecoms groups and the offshore projects and PSA group have also demonstrated significant development recently. Thanks to a state support programme, the number of Far East projects has also been growing. We have been active in expanding the work we do with China, Korea and India.

In February, we made an official announcement about launching a bankruptcy and anti-crisis protection practice. The current economic realities are forcing businesses to adapt to the new conditions. With bankruptcy and corporate restructuring booming, we have approached the market with new offers to meet the demand at this time. For instance, we are offering a completely new ‘bankruptcy compliance’ service.  We treat bankruptcy as a tool enabling businesses to make a fresh start. Our objective is to provide the much-needed legal support that will help the client to navigate through its troubles and to make the most effective use of all the options the law affords.

Paleev: During a crisis, there is usually a growth in litigation and insolvency practices as well as restructuring. Also because of dramatic changes in taxation – the Controlled Foreign Companies Law came in force from 1 January 2015 – we are seeing a growth in our international tax and national tax practices.

Konkov: Financial restructuring, debt collection and corporate work (in part related to the Russian de-offshorisation program) are the three main areas that saw the highest increase in terms of our work load and volume. Of the above three, it is the financial restructuring which holds the lead due to the overall economic slowdown.

Q:  What is your outlook for the rest of 2015?

Pepeliaev: It is difficult to make any projections for 2015 in today’s economic environment, but we feel that we are quite stable and that our prospects are, therefore, positive. We are ready for a new wave of investment activity in the second half of 2015.

Naturally, we are cautious and reconsidering budgets in terms of non-essential items, given that in this climate our clients do not welcome any flashiness.  As earlier, we witness the trends when clients are trying to restrict the scope of services by fixed budgets and to set fixed exchange rates for the Russian rouble.

Paleev: We expect the increase of liquidity problems in the business of our clients. Litigation and insolvency practices will grow but client debts will grow also. Tax and financing will be key issues for Russian clients during this and (we expect) next year.

Konkov: Undoubtedly, falling oil prices, weakness in Germany, the difficult political situation in the European Union itself, tumbling currencies in the emerging markets, tensions between the US and Russia will take their toll on the state of the international economic affairs. The world economy is so global and so interdependent that it would be very difficult not to admit that the Russian economy, too, will be affected. That said, there have been even worse years before and the Russian economy survived. As mentioned previously, the local Russian businesses are our core client base. We are quite optimistic in our outlook and year 2015, in our view, will be no exception.

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