“One particular feature of M&A is that in the past, almost 100% of such transactions used to be governed by English law, most of the transactions now are made under Russian law”.
Leaders League. What major changes have there been in the legal market after the Western sanctions on Russia?
Sergey Pepeliaev. If the repercussions of the sanctions Western countries have introduced reverberated on the legal market, the effects were felt by large international law firms that were forced to turn their backs on the companies falling under the sanctions regime. On top of that, some state contracts are entered into solely with Russian companies. This is obviously something that works in our favour.
The M&A market, which internal law firms have traditionally dominated, has been on the decline owing to sanctions and the overall economic downturn. However, it is fair to say that the volume of M&A transactions has started to grow over the past year or 18 months. One particular feature is that while, in the past, almost 100% of such transactions used to be governed by English law, most of the transactions now are made under Russian law. This is due to positive changes in the corporate law provisions of the Russian Civil Code.
With western markets now being closed, Russian companies have switched their attention to Asia and, specifically, China: the volume of trade has increased, while new joint investment projects and economic relationships are being developed both at the level of state-owned corporations and among medium-sized business. This has had an impact on the legal market. An increased number of Chinese clients have started to develop business in Russia, while Russian companies have started to take an interest in the Chinese market. Both sides require qualified legal assistance. At Pepeliaev Group, we launched a dedicated, specialised Chinese Desk in 2015. The firm has opened offices in Beijing, Shanghai and Guangzhou.
As far as the general economic volatility that occurred from March 2014 onwards is concerned, business was undoubtedly trying to cut any expenses it could, including on lawyers. Even today, this remains the case to some degree. Some issues are handled by companies' own in-house legal departments, while some projects are on hold.
But in any case, our firm has a considerable workload across all our practice groups. This means that we have come through the peak of the crisis without any serious losses.
Which Russian legislation changes in 2017 do you consider to be the most important?
The policy of de-offshorisation is one of the main recent trends in Russian legislation. The obligation of Russian legal entities to keep and, when requested, disclose information about their beneficial owners is in line with the worldwide demand for global transparency. However, it also pursues domestic goals within Russia. I believe that the information obtained will be used for tax control purposes in order to monitor whether a number of new obligations have been met, most notably the rules concerning CFCs, the beneficial owner of income, and the tax residency of legal entities. We should also not forget about the risks of the concept of an unjustified tax benefit being applied.
Another important trend is supranational regulation in the context of the Eurasian Economic Union (EAEU). What makes such an integrated association as the EAEU so important for Russia is that, unlike all previous unions with other states, this union has been granted many sovereign rights. This means that Russia may not independently regulate certain issues, among them customs rules and even foreign trade regulation. As a result, the law making process in these areas has become considerably more complex. Given its lack of certain powers, the Eurasian Economic Commission (EEC) has to overcome purely legal disagreements only by finding consensus. In addition, difficulties arise with respect to the different levels of development of the economies of the Union's member states. As a result, other members of the EAEU often just do not understand the problems that are encountered in Russia.
Another thing, though strictly speaking not a change in legislation but a business trend, is that intellectual property is starting to be ever more valued in Russia. This is mainly due to large international corporations that have come to Russia. They are trying, to the greatest degree they can, to safeguard the results of their intellectual activity and means of individualisation. We are handling a considerable number of such cases both with Asian (mainly Chinese) companies and Western corporations.
What are the particularities of the Russian legal market?
A distinctive feature of Russian legislation as a whole, I suppose, is that it is continuously changing. Legislation in Russia, regrettably, has never enjoyed the greatest stability, and it constantly undergoes fresh changes. Every year, hundreds of new laws appear, introducing thousands of amendments, modifications and additions. Among the most vulnerable branches of law in this respect is tax law. From this come an enormous number of requests for services relating to regulation: business simply cannot stay in sync with the rapid flux in the legislative reality.
As distinct from many other countries, the legal services market in Russia is absolutely open: any law firm from any country may come to Russia and its success will depend solely on its own efficiency and the quality of services it supplies.
How has the Russian legal market evolved over the last few years?
The main change and achievement of the national market is that, if 10-15 years ago only international law firms were engaged in complex or multidisciplinary projects, now Russian law firms have claimed a piece of the action. We have proven that we concede nothing in terms of experience and expertise (indeed, often ours is greater), and we offer the level of client service to accomplish the most complex and ambitious business goals. The scale of projects has also been evolving on the Russian legal market.
Twenty years ago, when the Russian market for legal services was still in its infancy as an institution, almost no companies had in-house legal departments. Only large businesses could afford such a luxury. Even in such companies, legal departments were rather small and unable to handle most of the work using their own resources. Therefore, professional legal advisers always picked up plenty of work. Today, legal departments in many companies are in effect full-scale law firms within a group of companies, and sometimes these departments are even fee earning. They do a great deal of the work themselves and resort to outside counsel only with respect to issues which require expert input. We do not suffer from this, because we have always positioned Pepeliaev Group as a law firm offering specialised services. We have 25 PhDs in law and doctors of legal sciences who are consummate experts in their own narrow fields. We find ourselves instructed with respect to issues that almost no one on the market can resolve.
In what ways have legal activities been impacted by the growing number of law firms? In your opinion have international law firms had a positive or negative impact on the country?
The Russian market of legal services is rather diverse: there are firms providing services to large and medium-sized companies, and there are firms that provide services to individual entrepreneurs or individuals. Operations may be diversified in terms of branches of law, geography, or the scale of tasks and projects. I can say with certainty that almost any advisor finds its niche and target audience in one way or another. At the top end of the legal market, the number of players has remained unchanged for several years now. These include boutique law firms and law firms providing the full range of legal services.
If we talk about the influence international law firms have on business in general, then certainly there is freedom of choice for the client, and it would be wrong to take this away. On the other hand, we understand that, even in those branches of law where international law firms have historically led the field, we have gained experience and expertise that are just as great or actually even greater. Therefore, we might supply the same services but at a lower cost.