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The great Russian freeze

The great Russian freeze

The Russian economy went into freefall as the global financial crisis collided with political instability on the Georgian border. The international legal market may never regain the promise of…

The Russian economy went into freefall as the global financial crisis collided with political instability on the Georgian border. The international legal market may never regain the promise of its glory years, but some early indicators suggest it may not be long before Russia reopens for some serious business, writes Angela Priestley

Like most of the developed world, the offices of law firms in Russia are quiet.

The country has felt the full brunt of the world recession. Although the region was late to join the economic freefall, the global financial crisis caught up with Russia quickly, resulting in billions of dollars being wiped from the Russian stock market.

Of course, big swings in the economic cycle are nothing new to Russia. When the Russian government defaulted on local currency debt in 1998, the country was thrown into a deep financial crisis that resulted in the value of the ruble dropping more than 70 per cent.

After a few years of recovery, the region was again reliving its glory years of the early 1990s. For international firms such as Clifford Chance, Baker & McKenzie and White & Case - many of which had built their presence following the collapse of Communism in 1991 - legal work was plentiful, and charged at a premium.

In the lead-up to the global financial crisis, finding talent was the biggest challenge facing these law firms. The competition for talent, especially Australian talent, was fierce. In Moscow, a city of extremely high office rents and lawyer salaries, law firms had more than enough work to pay for the expensive expatriate lifestyles of their employees coming in from all over the world.

These days, with most international firms in the region either retrenching or redeploying staff, managing talent is the least of their problems. For international law firms that either opened there, or significantly boosted staff numbers in their Russian offices to meet the country's burgeoning growth, reality dealt a particularly bitter hand as the economy tumbled, and legal work consequently dried up.

The bubble that burst

One firm hit by the recession was Simmons & Simmons. Having undertaken a significant amount of Russian work from its London base, the firm opened a Moscow office in September 2007.

"We started with four partners," says regional managing partner Tony Smith. "Since the market has gone very bad, two of the ex-pat partners have gone back to London to work on the Russian desk from there."

Moscow is an incredibly expensive place, says Smith, and keeping people in the region when the work isn't flowing just doesn't make sense.

"You've got to do some housekeeping when things get really bad. It's a tremendous haemorrhaging of cash if you have expatriates in a weak market, where you can't charge the premium fees we were charging when we first got here." Smith adds that once the market picks up, the firm will still retain its commitment to the Russian market, but may treat it a little differently.

"When [that market] comes back, if we recruit, and even if we second people in the future, we'll probably do it in a different way. Probably on local terms, not using the expatriates we used to get."

But for Clifford Chance, which has maintained an office in Moscow since 1991, the recession is just another chapter in Russia's turbulent economic history. "Since 2003 onwards, what we've seen is a rapid development of a first world legal market," says regional managing partner Michael Cuthbert. "We've seen capital markets develop, M&A develop, banking develop - all of which really are based on an English law model ... It effectively became 'Londonstan'. A lot of the work you did in London, you could equally do in Moscow."

Rebuilding the foundations

Now, it seems, a lot of the work that's done in Moscow can, and probably should, be done in London. But Russia is showing some signs of recovery. In recent weeks, the stockmarket has climbed 80 per cent from its low, and there's talk of transactional work picking up in the coming months.

Cuthbert believes the economy is much better placed than many Western economies to recover because of its substantial foreign reserves. He says the big question will be whether the Kremlin uses the cash for sustained programs of infrastructure investment and development.

"Having all that means that if you're looking from a strategic point of view as to why you should have an office in Moscow, I think ... you will see that the demand for foreign capital will come back very quickly," says Cuthbert. "I also think you're seeing the development of a very large domestic market that will look to the international law firms to help them manage risk and document those particular deals."

Cuthbert adds that a lack of appetite for risk by foreign investors has also hit Russia significantly, but such an appetite could easily return. "Russia moved into the 'too risky' category," he says. "When the appetite for risk comes back they will balance the decision to invest in Russia against what's available worldwide. And yes, China and Brazil may look more appealing."

Although Smith says that Simmons & Simmons may look at their deployment of lawyers in Russia a little differently in the future, he is confident about the position of the Russian economy in the global economy. "Russia is a big country and it's not going to go away," he says. "I don't think any firms are going to bail out."

But, says Smith, things are going to change. "In the future, it will be a much more frugal show," he says. Law firms will adapt their structure to suit economic conditions, "which is fine, because you can still make good money here", he says.

A future promise

For Australian lawyers, the years leading up to the financial crisis showcased Moscow as a far-off base presenting a wealth of unique opportunities. These opportunities have, for the most part, dried up significantly.

But with patience, and a sustained interest in the region to boot, the Russian drawcard could soon be in action again, as competition for talent once again heats up. "When the rest of the world is extremely busy, Moscow isn't a particularly attractive place to come to," says Cuthbert. "Everybody still thinks it's covered in snow for nine months of the year and that it's full of gangsters and people driving around in black SUVs with guns. That's not true."

Rather, Moscow is a legal hub of great future promise, within a country that will one day retain its legacy as a great economic superpower.

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The great Russian freeze
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