2 July 2012
The American Lawyer publishes commentary by Dimitry Afanasiev

Russian about

Corporate and joint venture work is up, and while the real estate market in Russia is still of interest to foreign investors, domestic companies are only growing stronger. Which practice areas are keeping the leading law firms busy?

Anastasia Hancock reports

A russification of the market' is how Andrey Goltsblat, managing partner of Goltsblat BLP describes the development of the Russian market in the wake of the downturn across Europe. Russia is strengthening itself from the inside out, and law firms are taking advantage of the increasing activity stemming from domestic clients. Russian companies and banks continue to be active in M&A, and, as Goltsblat explains, demand for sophisticated regulatory and tax advice from Russian and international banks with a Russian presence is on the up.

There has been 'growth of transactional emphasis on Russian to Russian deals and increased use of Russian law in project finance due to the role of Russian state banks and the liquidity crisis in Europe' adds Goltsblat. It's certainly true that Russian banks are offering more attractive terms of financing, and with the continuing sophistication of domestic investors, the move towards institution-alization is increasing - along with the level of competition between domestic and foreign companies operating here.

However, foreign investment in areas such as real estate, for example, is still very relevant for firms, and the market has seen some weighty deals arising from international companies keen for a slice of the action in Russia. Despite the gloomy outlook across Eurozone hotspots such as Greece, the Russian market is anything but quiet, with leading law firms leveraging off a number of significant factors. 'Recent developments in Russia such as the hosting of the World Cup 2018 and governmental initiatives like the Skolkovo Silicon Valley, the new privatization programme that could reach up to $15bn annually, and the new $10bn Russian Direct Investment Fund that seeks to attract up to J50bn of foreign investments into the country - all this determines the type of service on demand for law firms' points out Dimitry Afanasiev, chairman of Egorov Puginsky Afanasiev & Partners.

On the up

While the Russian M&A market did take a bit of a hit from continuing Eurozone turmoil, the outlook is definitely looking up. According the research by mergermarket in association with CMS, inbound M&A has remained strong and Russia is still popular for foreign companies. The past year has seen 70 inbound deals valued at a total €21.2bn which represents a 21 % increase in volume and all 6% increase in value on the year before.

Couple this with considerable strength in the consumer products, TMT, construction and transportation sectors, a doubling of deal volume in the €100m to €250m range and a significant increase in smaller deal size volumes and traditional continuing activity in the energy sector, it's fair to say that corporate work is still very high on the agenda for the leading law firms here. Rich Wilkie, corporate partner and partner in charge of Akin Gump's Moscow office, confirms that 'corporate work is definitely picking up', with his firm particularly active in Energy and TMT, having acted on top-tier deals such as representing ExxonMobil in its large joint venture with Rosneft.

And the positive outlook is not reserved for M&A, as many firms are looking increasingly towards an uptick in capital markets work. But to what extent is the rise in capital markets activity keeping the leading firms busy, and is this really likely to continue given the unrest that continues across Europe? Public capital markets activity has certainly taken a bit of a battering, and despite the steady interest shown by foreign corporates, Eurozone turmoil is still having a significant effect on public capital markets volumes - almost all the examples of which over the past year have been debt issues.

A number of IPOs have been either delayed or cancelled and it continues to be difficult to bring businesses to market. As Varun Gupta, partner and head of Akin Gump's Russian capital markets practice explains, some large high-profile deals are being prepared currently but 'these all assume that market conditions will be better in the second half of the year. At this point, even the old advice of being prepared for short windows if they open is being rejected by most issuers as they don't see how the European markets will eventually get out of the current malaise'.

Gupta does say, however, that a long-termist view of Russian equity and debt securities is more positive with investors expected to come back strongly in coming years. 'Russian issuers are still operating in an economy which is expected to continue to grow moderately and, with or without political adjustments, the Russian consumer will continue to drive growth. Moreover, oil prices will be supportive of the Russian economy and macroeconomic policy will remain relatively conservative'.

Real deals

While recent years have seen a drop-off in interest from foreign property companies casting their nets in Russia, the market has still seen some hefty deals, such as the $lbn acquisition of Saint Petersburg's Galeria shopping centre by Morgan Stanley, along with a number of other top-quality deals involving international institutional investors. The decrease, says Vlad Sourkov, partner and head of Akin Gump's Russian real estate practice, is 'a direct consequence of the recent economic crisis, relative shortage of quality income-producing assets and unwillingness by foreign players to invest in real estate at the development stage. Politics also plays a role'.

However, while the Eurozone uncertainty is putting off some foreign investors in the property industry, the real estate market in Russia is benefiting from an uptick in domestic interest. With financing prospects from domestic banks improving 'Russian investors are getting more and more sophisticated' explains Sourkov. 'Before the crisis, Kussian ana international investors were piaying in different leagues. If now the foreigners decide to come back, they will have to compete with a bunch of very strong Russian competitors'.

But while domestic investors moving towards institu¬tionalizing is good news for the market, it is not to say that foreign investors have taken their eye off the ball altogether. In fact, with an overall investment of $8bn over the past year, according to research by Jones Lang LaSalle, in the office and commercial sectors, certain areas are still attracting interest. The first quarter saw a decrease in foreign real estate investment' explains Richard Cowie, partner in Hogan Lovells Moscow office, 'but this is probably due to cyclical factors - Russia's lanuary holiday period - and political factors. As the elections have been completed, foreign investment should pick up - particularly as the presidential wish is to raise Russia from 120th to 20th in the World Bank investment attractiveness index' he adds.

Vitaly Mozharowski, real estate partner at Coltsblat BLP, describes the past year as 'tremendous', and is buoyant about foreign investment into the real estate sector. The past year has, in fact, been a record one for Russia in terms of investment in commercial real estate. Also indicative is the sharp rise in the proportion of foreign investment in this segment of the economy: 35 - 40% compared to 2 - 4% in 2009 - 2011'.

The retail sector has seen much of the activity, a particularly interesting trend since, as Mozharowski explains, it was 'against a backdrop of a relatively modest market for quality retail space'. That said, Russia still managed to enter the top five in Europe in terms of investment in retail real estate. And while vacancy rates have shown a significant decrease, international retail investors are continuing to cite mid-term investment programmes and expansion into the regions.

'Logistics projects frozen in the past are also attracting a lot of interest, especially considering the current average 3 - 5% vacancy rate for Class A warehouses, with retail networks consuming about a third of the warehouse space. There is already a shortage of quality warehousing and rentals have topped their 2008 peak' adds Mozharowski. The office real estate segment still demon¬strates its traditional shortage of quality facilities, with vacant space gradually decreasing and rentals in the city centre rising by approximately 15%'.

No disputing

Dispute resolution in Russia has long been a busy area for the leading firms here, with high-profile disputes and large-scale litigation keeping steady levels in Russian courts, as well as being heard in London. Wilkie confirms that his firm has seen a lot of international disputes work 'in particular arising from Russian oligarchs and Russian groups in disputes with one another. Very often, jurisdiction for these cases is outside Russia -- in European arbitration venues, English High Court or even US courts'. Cowie also notes this trend, citing high profile CIS disputes heard in the Commercial Court in London such as Berezovsky v Abramovich and BTA Bank v Ablyazov, 'The volume of Russian and CIS-related arbitrations currently being heard in London and other leading arbitration seats is high' he notes.

However, the Russian courts are seeing their own fair share of the action, and leading domestic firms are focussing their attention on developing top quality litigation departments. The growth of confidence in the Russian court system sustains the demand in high-profile litigators and services provided by dispute resolution department in our firm' says Afanasiev. 'We also see that the amount of Russia-related international disputes is continuing to grow*.

Eyes forward

In contrast with floundering economies across the Eurozone, Russian markets are looking comparatively upbeat. Deal volumes are certainly not yet at pre-down-turn levels, but a number of factors point to a much more optimistic view here than they do in other major western hubs. This is good news for law firms - 2012 is pointing to upticks in corporate, M&A and joint ventures work, while strengthening capital markets, real estate and private equity are growing stronger and are increasingly significant areas for law firm profitability. Privatization work is also expected to keep the firms who can prove good understanding of government practice in work, although areas such as PPP do remain underdeveloped in Russia.

The Russian government has also demonstrated its intention to develop Moscow as a financial hub, with an increased transparency in business practice necessarily coming hand in hand with this. There is an increase in compliance related requests, including inquiries for the internal anti-corruption investigations' notes Afanasiev.

'One reason is, of course, the initiatives of the Russian government - such as criminal liability of companies, a novelty for the Russian law, or the most recent initiative of the government obliging certain businesses to disclose the beneficiaries of the contracting parties and to report the incomes of the management and their relatives'.

Russia has, in the past, experienced sharp market falls and equally sharp rises, and investment yield in Russia has typically proved greater than other major hubs. As Mozharowski explains, 'all this has resulted in a paradoxical situation with a marked rise in investment risk being observed on international markets, combined with the risks in Russia remaining at the same level'.

'From the global viewpoint, the Russian economy is demonstrating quite an impressive performance com¬pared to, for example, the EU countries' adds Mozharowski, who puts this down to 'a low level of sovereign debt, high gold and currency reserves, amazingly low unemployment, a comparatively low credit level of the economy, high oil prices, steadily falling inflation, and only moderate dependence on the outside market situation'.

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