On a Sunday night in mid-November last year, people gathered on the streets of Bucharest in their thousands to celebrate the choice of Klaus Iohannis as Romania’s next president; a liberal thinker and the first person from the country’s ethnic German Protestant minority to be elected. With a voting turnout of 62%, the highest in 14 years, Iohannis’s appointment was considered a surprise for this conservative, majority-Eastern Orthodox country.
While in essence a protest vote against the incumbent government and its socialist prime minister Victor Ponta, who ran a staunchly nationalist campaign, Iohannis’ election may well prove to be an asset for the nation. The centre-right leader’s plans to modernise Romania include establishing an anti-corruption regime – the country is widely regarded as among the most corrupt in Europe – focusing on the rule of law, safeguarding the independence of the judiciary and, equally important, winning western investment (well before the election, Romania regained its investment credit rating for the first time in six years from Standard & Poor’s). Most importantly, Iohannis’ election signals the increasingly progressive mood of the Romanian public, which is good news for the domestic and international law firms operating there.
Ştefan Damian, deputy managing partner at Ţuca Zbârcea & Asociaţii, one of Romania’s largest independent law firms, is optimistic about recent developments and says: ‘Having this election with a new president means things should improve across the board. The incumbent government didn’t take any courageous measures that would have any impact or be useful in political debate.’
In 2014, two major international firms withdrew from the Czech Republic. On 1 May Norton Rose Fulbright closed its Prague office, relocating its office head to London, while Pavel Kvíčala joined Czech-Slovak law firm Havel, Holásek & Partners along with his immediate team. It was the second time Norton Rose had exited the Czech capital, having previously closed its doors in the region in 1996.
At the time of closure, deputy managing partner for the Europe, Middle East and Asia regions, Tim Marsden said: ‘Prague is a difficult market for firms with a global business model to compete in. We have been keeping the Czech market under review for some time. With no strong signs that market conditions are likely to change, we have decided that now is an appropriate time to effect a managed exit.’
Less than a month later, Hogan Lovells announced it would be closing its two-partner office in the summer ‘following a strategic review of the market’, citing difficult conditions.
More recently, the Russia/Ukraine crisis has created pressure on deal flows from the opposite direction, with investors from the east conspicuous by their absence in the region. But while some of the leading global law firms may have turned their back on CEE over the last five years, many domestic and international firms have made the most of the region through significant commercial mandates, particularly in increasingly stable economies such as Poland and, strangely, the Czech Republic.
Old money
For CMS Cameron McKenna’s Warsaw managing partner, Andrew Kozlowski, Poland and the Czech Republic are considered bright spots, in particular for corporate M&A and real estate work. This isn’t surprising, given Poland’s FDI totalled around $94.9bn between 2006 and 2011, the highest in the region, while the Czech Republic ranked second with some $36.8bn. The Czech Republic notably landed the second biggest deal of 2014 by value in CEE, with GSG Group’s $3.9bn buyout of property developer Radovan Vitek’s Czech Property Investments in June.
A deal exemplifying Poland’s burgeoning market was Deutsche Asset & Wealth Management’s acquisition of the landmark 66,000m2 Rondo 1 skyscraper in Warsaw during the summer, on which Kozlowski advised. ‘We see a lot of investment funds doing large acquisitions in real estate – these are considered trophy assets,’ he says. ‘Poland is viewed as a fairly stable economy and investment yields are still higher than western Europe. Investors are looking to get a better return with the same amount of risk. They view Poland as an emerging economy that offers higher returns, that’s why there’s activity.’
Kozlowski is also optimistic about potential finance work across the region ‘because of the philosophy of the European Central Bank (ECB) to lend more. The ECB is encouraging lending, so there’ll be more leveraged transactions and that will increase M&A work and private equity houses to acquire more companies.’
Other recent strategic moves by international firms into the region saw Bird & Bird enter into a co-operation agreement with Istanbul IT and telecoms boutique BTS & Partners in July 2014 to provide domestic legal services for multinational corporations competing in the Turkish market and for the growing number of Turkish companies competing in global markets. It also added to its corporate practice in Poland with the hire of a new M&A head in Rafał Dziedzic from Gide Loyrette Nouel in October.
DLA Piper, meanwhile, bucked the trend for international firms to pull out of the Czech Republic last year and pledged its commitment in September through the expansion of its Prague office with a local bolt-on, Haškovcová & Co, effectively doubling the headcount with two partners and seven associates joining the firm.
And with its $1bn tripartite merger approaching its second anniversary, Dentons has made efforts to enhance its offering, building on a strong CEE practice established in particular by legacy firm Salans. Having elected its Warsaw managing partner Tomasz Dąbrowski as its European chief executive seven months after the union went live, the firm has since recruited Clifford Chance partner Perry Zizzi back to head up its banking and finance group in Bucharest, and has also added Chadbourne & Parke corporate partner Adam Mycyk following Chadbourne’s decision to close its Kiev office.
Russia: Biting Cold
Traditionally weathered by political and economic turmoil, Russia’s most seasoned lawyers faced a fresh onslaught of volatile market conditions last year, with sanctions imposed by the West over pro-Russian unrest in Ukraine becoming impossible to ignore. Low confidence levels by western economies and the aggressive tone expressed by Russia continues to disable business and dissuade potential investment, with the fallout heavily affecting its financial and energy sectors and halting many major corporate M&A transactions for the foreseeable future.
The knock-on effect of the disruption on dealflow in the CEE region is palpable. Research by Mergermarket, for example, shows the value of CEE transactions, which includes Russia and the CIS, dropping dramatically by 65% to $30.9bn for the year ending December 2014, down from $88.4bn in 2013, while the number of deals decreased to 180 from 214.
Björn Paulsen, partner-in-charge of Noerr’s Moscow office, says the situation has unsettled clients in countries outside Russia and the CIS. ‘Many companies who invest from Continental Europe still look for cheap production costs – which is a certain attraction in CIS countries, in particular Russia and Romania – but the Ukraine unrest has pushed people to relocate or suspend their investment plans to go there.’
Serbia in particular has suffered indirectly from EU sanctions on Russia, after Moscow announced in December that it had abandoned plans to pipe gas to Europe through the South Stream project. Serbia was the only non-EU country on its route. ‘Serbia hasn’t felt the impact of Russia and Ukraine,’ says Nenad Popovic, of Jankovic, Popovic & Mitic in Belgrade. ‘What we have felt as a firm, and as a country, is the effect of the collapse of the South Stream gas project. We have been involved in negotiating the package between the Republic of Serbia and Russia. There was a significant amount invested in that project and expectations are high. It’s economically very important for Serbia because it’s only able to produce 25% of its needs for natural gas.’
Other CEE lawyers are yet to report a significant effect on deals taking place outside of Russia and the Ukraine. ‘There’s a lot of turmoil in the East but it hasn’t affected investment activity except maybe a drop off in Ukraine,’ says Andrew Kozlowski, CMS Cameron McKenna’s Warsaw managing partner.
Nonetheless, international firms with meaningful CEE operations are also dependent on the dominance of Russian and CIS work, which may cause a domino effect on offices in CEE states. ‘We represent many Russian investors as they align and modify their investment in Ukraine. That isn’t a sustainable work model to rely on,’ says Ron Given, managing partner of Wolf Theiss’ Zagreb office. ‘The reality is unless we see some degree of certainty – it doesn’t have to be perfect – the law business will be deeply impacted. Investors will go elsewhere. There’s only so long you can wait.’
For Oxana Balayan, Hogan Lovells’ Moscow managing partner and head of Russia’s corporate practice, attempts to remedy the situation have meant Russian clients forging stronger relationships with new allies. ‘The regime shifted the focus for many firms – that focus is shifting the interest of Russia generally from Europe, and from the US, to Asia and to countries which have been friends and helped during the sanctions regime. International firms here are networking much more with their Asian friends than with their European ones to service the Russian market.’
Dentons’ Moscow managing partner Florian Schneider agrees, and says the firm’s 2015/16 strategy in the wake of Russia’s sustained crisis with the west will include expansion in the east for fresh opportunity. ‘From a jurisdiction point of view, we want to go east – we already have three offices in China – but we get more requests for proposals from our clients in China and cross refer them – this will be increased. We want to have co-operation with Japanese and Korean law firms too.’
New riches
The consensus among interviewees is that Slovakia, Slovenia and Romania are perceived as increasingly attractive markets. Jörg Menzer, head of Noerr’s Bucharest, Bratislava and Budapest offices, comments: ‘On a macro level, if you look at stability, places like Romania have low debt ratios and savings – there’s sometimes an imbalance of exports and imports but we have to take it that these countries still have many opportunities and potentials that aren’t recognised, such as highly qualified professionals, low taxes and big internal market opportunities.’
He says: ‘Serbia has had a tough year – for the market as a whole – but we’ve had our best year. Harrisons played a key advisory role in assisting Abu Dhabi-based firm Al Dahra in a $400m joint venture to buy eight Serbian farm companies, a deal which Harrison says was a ‘massive boost’, constituting the biggest investment in Serbian agriculture for decades. He says: ‘The priority is to take advantage of productivity and improve levels of investment. Getting that job off the ground was a big one for us.’
Montenegro has itself become a hotspot for local firms. Harrison says the state has been a ‘jewel’, predominantly due to infrastructure and tourism projects, and energy work flowing from Italy. To meet the demand, the firm increased its headcount in Podgorica by six lawyers last year.
Stick or twist
CEE economies have been in a continuous state of flux over the last 20 years. According to a report published by PwC at the end of 2013 – ‘Economic growth in Europe, can you CEE it?’ – international and local businesses have become used to continual reform during this period and consequently have become more agile and less fragile. With the majority of CEE countries being small and still dependent on exports from the EU, their status is unlikely to change anytime soon, although economies such as Bulgaria, Romania and Poland, with increasingly entrepreneurial business environments, are expected to grow by around 2-5% annually over the next five years, leaving the door open for law firm opportunities. The big question is whether the knock-on effect of the Russia/Ukraine crisis and the drying up of deals will have a wider effect on the CEE region as a whole (see box, ‘Russia: biting cold’).
Managing partner Jason Mogg says the firm opted to open in Sofia because it is an untapped market relatively untouched by international firms. He is confident of the prospects for the CEE region due to the changing faces of potential investors. He says: ‘I’m optimistic about investment activity – western Europeans are sellers, and buyers are increasingly from other parts of the world such as the Middle East and China. That’s new – it was always dominated by Russian and European buyers for years.’ As a result, he adds the firm is now further encouraged to grow the business further in south-east Europe, with an eye on central Asia too. ‘For that, we would bring our own operations and people,’ he says.
Client behaviour in the CEE region will inevitably dictate law firm strategy. Unlike business in Asia, where international firms have traditionally struggled to win mandates from domestic competitors with experience of local customs, those interviewed observe work is more evenly allocated between the local and global firms. It is, however, obvious that the lion’s share of more lucrative mandates are frequently handed to international firms. But against this, a saturated legal market, stalling deal flow, political upheaval and a sluggish eurozone – the euro sank briefly to a nine-year low against the dollar in early January – means many international firms will face further pressure to justify their presence altogether.
Such is the pressure to stay in the game, one regional managing partner at an international firm adds: ‘Most firms simply cannot keep up with this competitive environment – in the end, you make a choice about your priorities.’
Allen & Overy Budapest-based corporate partner Hugh Owen concludes: ‘To sustain a practice, firms need a good blend of local and international clients. You get the local picture, and mix of local and international activity. During different economic cycles we benefit hugely from our international network because we spot the trends earlier than other firms and can share knowhow on those trends. We thrive on change – clients want creativity in evaluating their options, whether that means growing or shrinking.’ LB
sarah.downey@legalease.co.uk