Russia’s economic crisis and political tensions with the West have not dampened spirits in Moscow and St Petersburg, where firms are intent on diversification and new business streams.
Russia’s propensity for volatility is infamous. Since its revolution 100 years ago, it has lived through events that the Soviet Union’s founders would never have imagined. Today, amid heightened geopolitical tensions, it continues to face huge uncertainty. But its law firms are adamant that it will continue to provide solid revenues.
‘Reports of Russia’s decline are much exaggerated and most of the issues with the West are not business-driven,’ argues Dimitry Afanasiev, chair and co-founder of Egorov Puginsky Afanasiev & Partners (EPAP). ‘When oil prices head north of $60 and the cycle in hard assets turns, we will remain strategically-placed to capitalise on the opportunities.’
Such optimism is not isolated. In September, Eversheds Sutherland launched a presence in Moscow and St Petersburg, taking over the offices of Nordic firm Hannes Snellman. Executive partner Ian Gray says: ‘Our strategy is to be established as a leading global law firm and even with the political uncertainty, Russia remains a major economy in the world. What we are doing is following our clients and a lot of them are still doing business in Russia.’ The firm is sole global legal adviser to Turkish Airlines and exclusive EMEA legal adviser to Eaton, the power management company, and both clients are ‘active’ in Russia according to Gray.
Eversheds sees Russia as key to its international offering, despite three economic and financial crises in the last 20 years. Russia has been blacklisted by international leaders for its annexation of the Crimea region and condemned for its military intervention in Syria. Sanctions imposed by the EU and the US have pushed it to the global economic margins, but while this has posed significant challenges to the nation since 2014, it has posted resilient recent financial performance. Russia’s economy ministry predicted 2.1% GDP growth in 2017 and inflation dropped to 3.3% in August 2017, a landmark low given the nation’s chronic fiscal problems in the early 1990s when inflation reached 2,333% in December 1992. The value of the rouble has steadied following a period of volatility linked to the sanctions, and unemployment dropped to 5.1% in June 2017, having stood at over 14% in the late 1990s. The Central Bank of the Russian Federation has been praised for its handling of the latest financial crisis, by keeping interest rates relatively high and curbing inflation.
Confidence is creeping back, even if Donald Trump’s election as US president has not heralded the thaw between Russia and the West that many had hoped for.
Bread and salt
Investors hoping for better relations with the West and a dismantling of sanctions have recognised that tensions are unlikely to disappear in the foreseeable future.
Alexander Zharskiy, a partner at ALRUD, believes that business is no longer willing to wait for the political climate to change: ‘Most clients consider that there are going to be no changes over the next two or three years with sanctions. Some investors, foreign companies and Russian companies are using the opportunity to become stronger and get more market share.’
The firm is currently advising an agricultural business on its sale to a foreign strategic buyer that Zharskiy says has been circulating the market for some time: ‘It came to understand that it is losing out on potential opportunities and it is time to do a deal.’
Laura Brank, head of Dechert’s Russia practice, also believes the tide has turned and the volume of cross-border transactions is poised to increase: ‘Private equity funds are looking at the market again as they see an undervaluation of Russian companies.’ Brank says that while cross-border transaction activity is poised to pick up, it is not as if firms have had nothing to do. Among other engagements, the firm is advising the ad hoc bondholder group in the financial restructuring of FESCO, the Russian transportation group.
Russian banks that have stood up to the financial crisis have accumulated high levels of cash as Russian companies have repatriated capital in fear of the effect of western sanctions. For example, Sberbank and VTB now have significant cash piles from corporate deposits that have been used to finance the wider economy. Despite the harsh effects of the oil and gas price slump, corporate bankruptcies have been fewer than expected as finance remains readily available.
Murat Akuyev, a Moscow partner at Cleary Gottlieb Steen & Hamilton, says that many Russian corporates are also coming back to the capital markets, particularly as investors are lured in by the high yields offered by non-sanctioned debt. Akuyev also believes that Russian issuers are looking to the equity markets and that this is promising business for international firms: ‘Russian businesses are trying to do international offerings with a Moscow-only listing. Most of the companies we are talking to are seeking a 144A/Reg S deal. It is good-quality work from an international perspective.’
Cleary Gottlieb’s Moscow office advised the Ministry of Finance of the Russian Federation on a series of bond issues in 2016 and 2017, including its return to the capital markets in 2016 through a $1.75bn eurobond offering. In 2017, it advised RUSAL, the aluminium giant, on its debut $600m eurobond offering, followed by a $500m eurobond issue.
The Asia pivot
Moscow’s tilt towards Asia following western sanctions continues to attract the attention of firms. Transactions involving Asia have not completely filled the deal gap but it represents a valuable business flow for the legal sector.
In September, it emerged that CEFC China Energy was seeking a $9bn acquisition of a 14% stake in Rosneft, the state-controlled oil company, from Glencore and the Qatar Investment Authority; legal advisers for the deal have not been announced. In a further sign of China-Russia co-operation, CEFC turned to VTB, Russia’s second-largest lender, for a $5.1bn short-term loan to finance the acquisition.
Frequent meetings between Russian president Vladimir Putin and Chinese premier Xi Jinping are bringing the two nations ever closer. In July, Xi completed a two-day visit to Russia, by announcing that a $10bn Russia-China RMB Cooperation Fund was to be invested in infrastructure projects related to China’s ‘One Belt, One Road’ programme. Xi said that relations with Russia had never been closer.
In 2016, turnover with China accounted for 14% of total Russian trade, according to the Federal Customs Service of Russia. A report by EY also highlighted that imports from China accounted for 21% of total Russian imports, up from 17% in 2012.
Oxana Balayan, Hogan Lovells’ Moscow managing partner, says that advisers need to work harder to integrate their Russia offices into the wider network, including with Asia. Yet Andrey Zelenin, the managing partner of Russian firm Lidings, observes that it is easy to become too bullish about investment coming from Asia: ‘You are never going to see the billions that were invested from the West now coming from the East, because it doesn’t work like that. There are still risks for Chinese banks and institutions because of western sanctions and pressure from business investors. They are not rushing into Russia, because they have a bigger market to access themselves.’
Spreading the net
With fewer cross-border deals, firms have had to reassess their strategies and become more versatile. Balayan talks of associates being ‘universal soldiers’, able to switch from M&A and private equity deals to sanctions and investigations-related work as part of an effort to deliver more rounded ‘cross-practice advice’.
Afanasiev says that his firm is targeting ‘crisis-driven M&A’, while complex disputes and special situations matters ‘are on the rise’ in its litigation practice. He indicates that while there has been ‘no real shift of emphasis’, there has been an ‘organic shift of some personnel’ to hotter sectors. ‘As a full-service law firm, we always had a diversified business that could hedge the good times for M&A against the new normal and a heightened focus on restructuring and disputes,’ he notes.
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Cris Crowe, 11 December 2017