Abroadly speaking

By Tom Phillips

A changing regulatory landscape and the influence of international firms is set to make 2010 a significant year for the Russian legal market.

One popular argument in the theory of evolution is that major events occur in jumps. While much progress is made over long periods of time, there are key moments that have a greater effect on changing the environment than all the previous years combined.

The same can be said of markets. The Russian legal market in particular is currently midway through a defining year. The legal market in Russia is a story of success. Law firms in Moscow have grown in line with the economy and some now post remarkable figures year-on-year.

While the rush of international firms to the country over the past 20 years changed the market immeasurably, homegrown firms have also developed beyond recognition.

Firms such as EPAM, Magisters and Alrud have increased their turnover through the downturn and remain consistently competitive players. They are entrepreneurial, outward-looking in their approach and ready to take on the international firms.

However, growth is one of the only things they have in common because they all operate in different ways. The partnership and equity structures vary across this group, while further down the turnover pecking order there are even greater differences between smaller firms.

But this year a number of strands are coming together, making 2010 stand out as a tipping point for Russian law firms.

The maturity of the market, the influence of international players and a changing regulatory landscape are all combining to take Moscow’s law firms on an evolutionary leap into a new age.

Sounds grand? Let us consider the facts.

Watchful eye

One of the most tangible differences that makes 2010 a standout year is the move by the country’s Ministry of Justice (MoJ) to create a new regulator.

Russia’s legal market is unregulated and almost anyone with the inclination could set up a law firm. This leaves clients exposed and law firms able to operate largely with impunity. It also leaves the industry bereft of a law society and a best-practice whip to keep their peers in line.

This means the definition of ’equity partner’ is open to interpretation.

Vassily Rudomino, senior partner at Alrud, says that lack of regulation is a major factor in preventing Russian firms from expanding. “In the form prescribed by the law on advocacy it’s very hard to make equity partners,” he says. “Some firms are trying to organise a partnership within the prescribed form, but this is very far away from the standard European structure.”

Some of the most successful Russian firms operate like corporations - a legacy from an economy that has grown quickly but without the evolution of the professional services industry.

The ’Moscow Ltd’ model can make it very hard to evaluate a partner’s personal contribution.

Founding partners, often with 100 per cent or a large majority of the equity, see no reason to open it up to others.

One lawyer who has experienced life at the helm of both a Russian independent and a global firm is Andrey Goltsblat. The former joint managing partner at what was Russia’s largest firm - Pepeliaev Goltsblat & Partners - last year broke away from the Russian firm to form the Moscow office of Berwin Leighton Paisner (BLP), taking 70 lawyers, including eight partners, with him.

“The Russian market hasn’t yet matured enough and it has to or it won’t survive,” he says. “Russian structures are like a limited company. The shareholders don’t want to give up their shares.

“If international firms are able to offer a true equity partnership, then the Russian firms will follow.”

Goltsblat believes that more lawyers from Russian firms join international firms than vice versa. He adds that although many Russian firms claim to have equity partnerships that are presented as being the same as the international standard, they are held together by firms’ own internal rules that can be changed by the shareholders.

“In reality they don’t operate in the same way,” he confirms.

“The shareholding relationship between the partners often doesn’t correspond to the actual relationships,” adds Rudomino, who helped to create Alrud’s lockstep system. His research took him to London where studied the structures employed at he UK firms.

Ministry meetings

This month saw new law firm regulations come a step closer when the MoJ opened up discussions with Russian and international firms.

A series of meetings saw the deputy minister of justice Yuri Lyubimov hear arguments from stakeholders to understand the issues. The aim was to create a permanent institutional framework for a dialogue between law firms and government.

While some international firms fear a protectionist contingent at work in the Moscow market, they will be encouraged by their inclusion in these talks.

Such discussions have happened before and many lawyers are not holding their breath for real change. But what marks out these from previous discussions is the involvement of senior figures within the MoJ.

The creation of a regulator and standards of practice, including rules over ’equity partner’ status, would have the single biggest effect the market has ever seen.

New regulations would bring with them standardisation - something lacking in Russia’s law firms. With huge inward and outward investment still defining the country, Russia remains an emerging market, and it is against this backdrop that the diverse nature of the country’s law firms can be seen. It is perhaps the greatest example of an emerging legal market in the world.

The biggest firms are working on multibillion-euro deals with increasing regularity, not to mention the energy, PPP and regulatory work available.

Litigation, too, is a massive boon for Moscow’s firms - a practice area that most international firms will not touch.

Yet with all this growth, the firms remain individuals, operating their partnership structures as the founding partners see fit.

This can leave Russian associates on an uncertain footing. On the one hand, many lawyers mistrust international firms because of a historical lack of commitment to the market. But in general they cannot hope to make equity partner in most Russian firms because of equity partners holding the purse strings.

Some firms have a very small equity partnership with salaries based on anything from random bonuses to a lockstep system that mimics international firms.

Some partners don’t practise at all, but are professors at universities. Such professors are usually well-connected and can set up meetings between the firm and government officials, or simply make sure a tender reaches the right person’s hands.

One senior partner in the country tells an anecdote of a professor he knew. After retiring, the academic joined a law firm and was paid a retainer, equivalent to equity partner status.

To earn his money, the professor was given a dossier or document and asked if he could get it to the right person. He would never read the documents but he would set up a meeting (lunch, drinks) with someone who might help with their contents. For this he was ferried about by car, with his own chauffeur, and at the end of the month picked up an envelope full of money that was three times more than his monthly pension.

Such ’lobbying’ is not uncommon in the Russian market. But with profits being divided so randomly, it makes it hard for associates to climb the partnership ladder and break in.

Clearly, an effective regulator would go some way to preventing situations such as this from happening.

While such situations remain, however, many senior lawyers have been looking to international firms for a career, and the influence of international firms cannot be understated.

One firm that felt their presence to near devastating effect was Goltsblat’s former colleague, Sergey Pepeliaev. After Goltsblat defected to BLP, Pepeliaev changed the remaining firm’s partnership and opened up the equity.

Previously, Pepeliaev and Goltsblat were the only two equity partners, but the new-look Pepeliaev Group introduced a lockstep system for the first time.

However, he offers a different point of view to Goltsblat’s assertion that more Russian lawyers join international firms than the other way around. Pepeliaev Group appears to be an example of one firm that has benefited from the post-recession reorganisation of international firms, hiring more than 20 lawyers from global players over the past year.

After looking away from Russian firms to join their foreign rivals, could 2010 be the year when the Russian firms have the greater share of the talent?

Pepeliaev certainly thinks so, saying that he has seen a trend towards lawyers at international firms heading for Russian firms. Clearly there is an element of some jumping ship, or being pushed, but still he is not complaining.

“Russian firms were better prepared for the downturn; they are diversified and focus on regulatory issues,” he says. “Lawyers at international firms have been leaving for Russian firms, and this is also true for our firm.”

Partnership issues

Their revenue and workload may have grown hugely over the past few years, but their number of partners has not and Russian firms are still unbalanced compared with their international rivals.

The largest Russian firms have a very high partner:lawyer leverage ratio. Four Russian firms that operate international-style partnerships - EPAM; Pepeliaev Group; Magisters; and Alrud - have grown quickly at the bottom end while remaining largely static at the top.

Managing partner of Legalstudies.ru Alexander Kvoschinsky, who acts as a consultant to Russian firms, believes that many partnerships would now like to add equity partners but a lack of impetus on the side of the associates means candidates can be hard to find. Why bother aiming high only to hit a glass ceiling?

“This is a question of managerial maturity at Russian firms. Russian firms have a generation of strong, young partners that might not be inclined to move on,” he says. “Also, there aren’t many young associates who are inclined to work on their own career development.”

Out of the firms mentioned above, it is clearly EPAM that offers the most promise for associates. The firm’s leverage ratio of 1:14 means its partnership will have to welcome some new faces if it wishes to expand.

With the workload increasing rather than decreasing, the firm may be forced to open up. Until it does, EPAM, like most Russian firms, will find itself reaching a plateau.

Mathieu Fabre-Magnan, managing partner of Salans’ Moscow and Brussels offices, compares the Russian market today with that of his native France before the market developed and its firms grew beyond their borders.

“It’s something you would see anywhere there is an emerging market. It’s dominated by big personalities,” he says.

“Most of the lawyers who have created their own firms have never been trained in how to keep a modern partnership going. I can’t see a generation of founding partners giving up power very soon, but at some point they will be forced to because that’s the way things go in such markets.”

But giving up their equity hold is something they may be forced to do, says Kvoschinsky. While equity partners at Russian firms currently maintain a vice-like grip on the equity, the workload and opportunity to expand may prise open their fists.

“Partners are not opening up their partnerships,” says Kvoschinsky. “Russian and Ukrainian firms don’t apply much attention to their lawyers’ development and tend to focus more on individual performance. Structures aren’t standardised - some partners act as rainmakers while others stay in the office and do the work. This is an issue at law firms in Russia.”

Growing pains

Much of the varied nature of firms in this market is a generational issue to do with Russia’s emerging market status. Depending on who you speak with, the economy in Russia only really began to take off between 1987-1992. And the country’s largest firms only began competing with international firms in the late 1990s.

“This market is really very young,” says Kvoschinsky. “Expectations of Russian firms have been low, but this has changed now and there are half a dozen competing with international firms.”

It is easy to understand why partnerships have remained small at Russian firms. Lawyers who could be made up have not, until now, gained enough experience. Talented and experienced lawyers could find more opportunities to progress at Russian firms, over a decade later, than ever before.

With their progression, the success of their firms will surely follow. This could be the year when Russian law firms take a leap forward and raise the bar for international firms.