8 December 2014
The Lawyer publishes a commentary by Markiyan Kliuchkovskyi in a special report on Ukraine

Special report: Ukraine – No place for lawyers?

The Ukraine crisis has raised questions over which rule of law to follow, but the flight of international investors is giving local firms an advantage.

In April 2013, pro-Russian activists seized control of government buildings in eastern Ukraine, sparking a revolution that tore the country apart.

One year later, eastern Ukraine is a war-torn no-man’s land and Crimea has taken on its own rule of law, leaving local businesses little choice but to adapt in order to survive. With a revolution on their doorstep and a new government promising hard-hitting reforms, Ukraine’s law firms are contemplating the potentially lasting repercussions to the legal market.

Ilyashev & Partners managing partner Mikhail Ilyashev v says that decisions adopted in Ukraine are impossible to enforce in Crimea. “They are ignoring the decisions of the Supreme Court in Ukraine. Most things are controlled by force. That is the reality of Ukraine,” he explains.

“We can’t combine these two regions [Crimea and eastern Ukraine] under one umbrella. They are now completely different. In Crimea you have the rule of law, though it’s not Ukranian law or international law but Russian law. It isn’t dangerous for a person to go there. But in Donetsk and Luhansk there is no law.”

Ilyashev refuses to send any of his lawyers to the front line. “There is no place for lawyers there,” he says. “Nobody is working there.”

Those businesses that do decide to maintain operations in Donetsk and Luhansk are facing a legal dilemma.

Aequo managing partner Denis Lysenko explains: “The way some of our clients are being approached in this area is that they are being pushed. If they are willing to continue their operations they are being pushed to pay a certain amount of taxes to the so-called new authorities, which is not legal under Ukrainian law because none of these authorities is lawful.”

This can result in legal problems for companies, which may face criminal and civil charges from the Ukranian government for providing financial support to unrecognised groups.

“Clients are afraid of being subject to prosecution,” Lysenko adds, “especially those who have headquarters based outside these areas.”

Lysenko says that the Ukrainian government is “cautious to distinguish between genuine support and those businesses that have been doing legitimate work continuously in that area and now face pressure from the authorities to pay certain money – in most cases in cash.” 

Sayenko Kharenko managing partner Vladimir Sayenko believes that clients in the area are looking for asset protection.

“Many high-net-worth individuals have realised the real threat to their assets and to their lives, so have started to make contingency plans,” he says. “Many companies in Ukraine are afraid of being raided, given that we are in the middle of a conflict, and some are trying to use the situation to get hold of 
lucrative assets.”

Ukraine’s situation is still too risky for many international investors, who are looking to offload their assets in the area as quickly as possible. This has become quite a profitable pipeline for independent firms.

Ilyashev explains: “A lot of foreign investors are frightened by the situation and are getting rid of Ukrainian assets. This is helping Ukrainian firms maintain their workflow.” 

Asters senior partner Armen Khachaturyan believes that some companies are considering leaving the country completely. “Many businesses are considering this as an option, just to get rid of it,” he says. 

Local conditions

The transactions that are happening tend to involve domestic players or international companies that are already established in the Ukranian market. 

Aequo’s Lysenko explains that the majority of work is devolved from previously issued assets or restructuring work. “There’s very little fresh money coming in, other than micro-financial assistance coming from the EU, the US or other international states,” he says.

Silver Seal Advisers managing partner Artur Yalovyy thinks that many are interested in the price difference in the market. “I think local investors will try to buy some cheap assets for nothing, especially relating to Crimea and the Donetsk and Luhansk regions,” he says. “It is a quite difficult and risky move when you don’t know what you are going to do with them.”

Local investors are playing a larger part in transactions in the area, although legal work has become more complex. With deals concerning Crimea, investors have to obtain permission from both Ukrainian and Crimean regulators. 

Russia has played a crucial part in the recent changes experienced by Ukrainian law firms. Doing business in eastern Ukraine and especially Crimea has meant adopting the Russian rule of law. In Crimea, Russian law prevails. In the unstable east of Ukraine, Russia’s laws can hold some weight with the new local authorities. 

Yalovyy explains: “You are not obliged to be specifically qualified in Russia to practise law; you just need to collaborate with Russian lawyers.” The majority of Ukrainian firms, which do not have a presence in Russia, opt for collaboration as a solution to many transactional and regulatory issues.

For clients, this means paying two different firms for a single transaction in order to comply with the legal requirements of both countries.

This has been particularly problematic in terms of taxation. Until earlier this year when Ukraine passed a new law regarding Crimea, businesses were faced with two tax bills: one from Ukraine and one from Russia.

“They considered the amount they had to pay in Ukraine and Russia, and depending on the amount they decide to pay both or they withdrew payment to Ukraine,” Yalovyy says, explaining that is because clients consider that the safer option. “Even if Ukraine sued you, they would not be able to implement it,” he explains. 

Sayenko’s firm was heavily involved in the drafting of that law, which was passed in May 2014. “The issue has already been resolved from the Ukrainian side,” Sayenko explains. “Businesses in Crimea don’t have to pay tax to Ukraine. Criminal proceedings were too harsh because businesses were suffering as a result of the situation.”

Khachaturyan adds: “It has yet to be seen whether the government will be persistent and strong in defending its programmed reforms and doing something in reality. All of the words said up until now are all right but there is no action.”

Assisting nervous clients 

Have Ukrainian firms’ client relationships changed?

“It’s complicated,” Ilyashev says. “They are completely disorientated; they don’t know how to approach this situation, which is why they are contacting us.”

He says tensions are high between the two countries, but makes something clear. “We need to solve their problems, not speak like politicians.”

Lysenko adds: “There is clearly a decline in levels of business activity and capital expenditure investments, and a significant decrease in M&A activity. We are not seeing any big-ticket transactions.”

“This past year has been nothing but extraordinary,” Egorov Puginsky Afanasiev & Partners partner Markiyan Kliuchkovskyi says. “We like to think about the legal industry as a wider reflection of the economy. This turbulence – we can’t say it just goes by and we just watch it, we are in the middle of it.” 

Some firms have been ramping up their Russian ties to be able to improve their offering to clients and prepare for possible collaborations that require Russian law knowledge. A good example is Ilyashev & Partners, which has adopted a strategy that includes a new office opening in September 2014, with two lawyers from St Petersburg and Crimea.

“If all Ukrainian investment goes out, then our office will not have any future,” Ilyashev explains. “But on the other hand, the situation could stabilise and this office could be great.”

In the last year, the firm has grown from 25 to 33 lawyers and Ilyashev believes that next year it will grow by 10 to 15 people. “It’s only a question of how fast we’ll grow.”

Other firms have decided to stick to their guns. Sayenko Kharenko has one office in Ukraine because its partners believe that being centralised is more efficient. Sayenko says that the firm cooperates with various security agencies and boasts contacts within the military to help if their presence is required in the conflicted region.

“We have a friendly relationship with the military – if you have a court order it is hard to enforce it without the manpower,” he says.

Yalovyy thinks that client demand for local know-how and a discreet approach to handling legal issues has increased over the past year, with clients going to lesser-known firms to find advice that is free of any possible conflict of interest.

He says: “We have many new firms appearing this year. I think everyone is trying to make a smaller and closer approach to get closer to the client.”

Vasil Kisil & Partners lost five M&A partners out of its 11 partners in August when they decided to branch off and create their own law firm, Aequo. But managing partner Andriy Stelmashchuk suggests the loss might have been a blessing in disguise.

“We didn’t make a decision, it was completely unexpected,” he comments, “although we have noticed that there isn’t much M&A work at all now.”

Like some other Ukrainian firms, Vasil Kisil has focused on the practice areas with the best performance with a view to increase activity in the future.

“We have a really strong real estate team that also does real estate M&A – that is our strategy to regain what we have lost,” Stelmashchuk says. 

But the major problem that Ukrainian firms face right now is uncertainty.

“Everyone’s just waiting,” says Yalovyy. “Even people who moved from Donetsk and Luhansk initially thought ‘It’s OK, we’re going to wait for three months and by autumn 
we will be back’. Now our strategy is to wait and see how things will move on.”

Sayenko agrees. “We cannot predict exactly how our neighbours in the north will behave: there are both optimistic and pessimistic scenarios. We are cautiously optimistic because we think after all these changes this will improve our economic climate once more,” he concludes.