21 May 2012
The Lawyer publishes commentary by Dimitry Afanasiev

Bear freshener

By Ruth Green

Russian lawyers scent a rosier future as transparency and stability top the political agenda

2011 was an eventful year for Russia. Not only did it feature the run-up to and culmination of the presidential elections, but there was a sea-change in proposed legislative reform, with the potential to rock the country’s legal landscape.

Although the economic crisis hit Russia later than many of its European counterparts, it has weathered the storm better than much of the rest of Europe, with its economy growing by 4.3 per cent in 2011.

However, according to the Central Bank of Russia, capital outflow from the country reached $35.1bn (£21.7bn) in the first quarter of 2012, compared with $19.8bn in the first quarter of 2011. As Chadbourne & Parke partner Konstantin Osipov explains, this trend shows that more money is leaving Russia.

“This could be a result of uncertainty over the ways the country will develop after the presidential elections - I’m not sure,” adds Osipov. “But in any case, it’s always better when money is coming into rather than going out of Russia.”

Certainly, on the transactional front, things have not been completely rosy, comments Moscow-based Cleary Gottlieb Steen & Hamilton partner Scott Senecal.

“There was an overall decrease in M&A activity in Russia throughout 2011,” Senecal says. “As for capital markets, there was a lot of preparatory work done in the first half of last year and in the second half things died down due to the economic situation in Europe.”

As Senecal notes, “the macroeconomic situation and the uncertainty and unavailability of finance have seen things slow down”.

However, although certain sectors were particularly affected by the eurozone crisis, there were also a number of deals that pointed to a promising 2012.

“With deals such as Luna, the joint investment vehicle of TPG and VTB Capital, we are hopeful that more private equity players will see this as a reason to enter the market,” Senecal adds.

Turning point

Although the Luna deal was not one of the largest transactions of 2011 by deal value, it brought to an end the longstanding dispute between Lenta shareholders, which involved court cases in Russia, the London Court of International Arbitration (LCIA) and the British Virgin Islands. Cleary advised Luna on the deal, which saw shareholders of St Petersburg retailer Lenta, led by Svoboda Corporation, sell a 44 per cent holding stake to Luna, the European Bank of Reconstruction and Development (EBRD), US private equity firm TPG and Russian bank VTB Capital for $1.14bn.

Egorov Puginsky Afanasiev & Partners (EPAM) advised VTB, Freshfields Bruckhaus Deringer acted for TPG and Salans advised the EBRD, while Magisters and SJ Berwin were retained to advise Lenta and its founder August Meyer.


Another indicator of the country’s economic resurgence is the recent $7bn eurobond issue, which is believed to be the largest eurobond deal in emerging markets since 2000. Cleary represented the Russian government and Linklaters represented thelead arrangers on the deal, which closed on 4 April.

“I think the success of the deal is interesting in contrast to the sovereign debt crisis facing the developed world,” comments partner David Gottlieb, who led the Cleary team. “We expect the transaction to pave the way for many Russian corporates to return to the international debt markets after a hiatus,” he adds.

Senecal also points to the Russian government’s much-lauded privatisation programme which has already produced some interesting deals.

“This has resulted in significant work for Cleary, with us representing VTB in the first phase of the government’s privatisation programme, and we’ve also been advising Sberbank on its proposed privatisation, which we hope will happen this year,” Senecal reveals.

EPAM also acted on the VTB privatisation, which was the first-ever sale of Russian state-owned property via a secondary public offering that involved international financial institutions acting as the agents.

Market conditions, however, have thwarted the government’s privatisation drive and many companies like Sberbank have been forced to put their plans on hold while the market recovers.

Sell block

Although this is a disappointing start to the much-talked about programme, which has seen a number of revisions since it was conceived, it is logical that the plans have been put on hold given the economic climate, says Pepeliaev Group managing partner Sergey Pepeliaev.

“There were a lot of discussions last year about the programme and it was decided that it was not the right time to sell off government-owned shareholdings as the market value was too low,” Pepeliaev notes. “It would be silly to sell off government-owned assets for peanuts, so that’s why we’re not seeing any progress right now and are waiting for news from the government.”

Certainly, many lawyers are hopeful that, as market conditions stabilise following the presidential elections and the inauguration of President Vladimir Putin on 7 May, the privatisation programme will lead to more work for law firms.

“Hopefully, it will have an effect on the M&A market and create more work,” says Osipov. “These are normally large and complicated deals so there’s always room for outside counsel and I think it would be a healthy measure for both the Russian state and the market.”

Debevoise & Plimpton corporate partner Geoff Burgess believes that the programme offers other wider benefits. “Like a number of other things, the privatisation programme was put on ice while the elections were happening,” he says. “It’s an ambitious programme, but public shareholding is a great thing as it helps to clean up governance.”

Clear objective

Despite the dip in deal activity, many are convinced that recent changes to legislation will have a direct effect on encouraging foreign investors and bringing more business into Russia.

In December 2011, Russia was ranked 143 in Transparency International’s Corruption Perceptions Index (CPI), on level pegging with the likes of Belarus and Nigeria with a score of 2.4. In response to the ongoing concern over corruption in the country and its inimical effect on foreign investors, in January 2012 Russia ratified the Organisation for Economic Co-operation and Development’s (OECD) convention on combating bribery.

This and other recent revisions to Russia’s anti-corruption laws have kept a number of law firms busy.

“We’ve seen an increase in compliance-related requests from clients, including enquiries for internal anti-corruption investigations,” notes EPAM chairman Dimitry Afanasiev. “One reason [for this] is, of course, the initiatives of the Russian government such as criminal liability of companies, a novelty for Russian law, or the most recent initiative obliging certain businesses to disclose the beneficiaries of contracting parties and report the incomes of the management.”

However, he also notes that international pressure has made anti-corruption measures all the more important to Russia.

“The other reason is the change of approach to compliance globally,” Afanasiev explains. “A sophisticated internal compliance system has become an absolute must for most Russian companies that have to compete internationally, or deal with international suppliers or consumers.”

“It’s hoped that Russia’s ratification of the OECD anti-bribery convention will facilitate more cross-border deals in Russia,” says Burgess.

For Osipov, there are even greater underlying issues related to corruption in the country.

“Separate from anti-corruption, the biggest goal in Russia is to tackle corruption in state-owned companies and among government officials,” he says. “This is one reason the recent OECD ratification has been such an important step for Russia.”

In addition to new anti-corruption measures, King & Spalding partner Sergei Komolov points out that there have been a number of other interesting recent amendments to the country’s legislation.

“There’s been a flurry of legislative activity recently,” reports Komolov. “Of course, there will be more attention on anti-corruption and compliance in 2012, but other developments, such as recent amendments to competition law and strategic investment law, have also changed things.”

In November 2011 amendments were made to the Strategic Investments Law to liberalise the rules regulating foreign investments in Russian companies that are involved in strategic activities, explains Anatoly Andriash, joint head of Norton Rose’s Moscow office.

“A law passed in 2008 established limitations on how much control foreign investors could acquire in strategic energy companies in Russia,” he comments. “The Russian government has tried to address the concerns of foreign investors and raised the threshold from 10 to 25 per cent.”

Several clarifications to the law are also likely to encourage investment from foreign companies with Russian holding companies, highlights Burgess.

“The law itself simply does not apply to transactions between many entities exclusively controlled by Russian persons,” he says. “This has been a major roadblock, so this clarification will encourage a lot of companies in this kind of set-up to invest inRussia.”

Bosses on the spot

Some other legislative changes have been less well-received, however, stresses Osipov.

“There’s been a longstanding discussion over a draft law that may, if enacted, affect the landscape of directors’ and officers’ [D&O] liability in Russian companies and affect certain aspects of the regulation of D&O insurance contracts,” he notes.
There have been some recent examples of large Russian companies, such as Sberbank, purchasing D&O insurance policies for their directors to cover primarily domestic risks.

“To some extent these amendments contradicted changes proposed to the Russian Civil Code, so this has caused a certain amount of criticism,” Osipov comments. “In April 2012 then president Medvedev submitted to the State Duma an amended draft law proposing changes to the Civil Code. Therefore, the discussion may continue but it’s likely that the legislators’ focus in the near future will be on the proposed changes to the Civil Code. However, it is essential that companies are liable for what they do.”

Competition time

Recent amendments to Russia’s competition legislation have also resulted in more work for lawyers. As a result, a number of law firms have boosted or established their competition practices.

Salans Moscow managing partner Florian Schneider says the amendments to the competition law have had a huge impact on his firm.

“We realised some time ago that we needed to have a competition practice as it has become more and more complicated - 10 years ago there were only some filings and competition wasn’t sexy at all,” he adds, laughing. “Now, with the new legislation, there’s a lot to advise clients on and it’s really sophisticated work. That’s why we decided to build a competition practice at the beginning of this year.”

In response to the growing workload, in January 2012 Salans hired Marat Mouradov from Baker & McKenzie to spearhead the Moscow office’s competition practice group.

“Anti-monopoly issues are becoming more complicated. As a result, this is requiring more attention from outside counsel and leading to more work in this area,” says Komolov.

High energy

As for developments in Russia’s ¬coveted energy sector, Andriash points to last year’s deal between ExxonMobil and Russian oil giant Rosneft to explore oil and gas ¬reserves in Russia’s Arctic shelf.

“This strategic agreement was a good sign that Putin is interested in supporting foreign investment in Russia,” he comments. “This, in turn, is an indicator of the foreign investment climate and it’s hoped that more foreign investors will be interested in signing similar deals with Russian companies.”

Freshfields advised Rosneft on the $3.2bn tie-up, with Skadden Arps Slate Meagher & Flom retained to advise ExxonMobil.

Sporting chance

Meanwhile, as Russia looks forward to hosting its first-ever Olympics, with the Winter Olympics in Sochi in 2014, as well as its first FIFA World Cup in 2018, there are strong hopes that both will have a further boosting effect on Russia’s economy.

What’s more, Russia’s accession to the World Trade Organisation (WTO) last December after an 18-year battle to join is a sign that the country’s legal and business environments may indeed be turning a corner.

Salans partner Edward Borovikov, who has been advising the Russian government on its bid to join the WTO since the early 1990s, believes that Russia’s accession to the WTO is a giant leap forward for its economy and potential growth.

“I strongly believe that WTO accession is a positive move for the Russian economy and all its trading partners,” he says. “It will improve the country’s economic performance and attract foreign investment, which will, in turn, boost growth and trade in general.

“Accession is important to almost every aspect of business, [both] for local lawyers and foreign ones wanting to invest in the Russian market.”

As for the broader effects on the legal market, Borovikov believes things will only get better now Russia is part of the WTO.

“It will improve both transparency and accountability, and have a constructive effect on legislation and the law-making process,” he concludes.

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