Changing tack

Amid leaner times in the Gulf and a flat economy in Dubai, international clients are moving their focus to other key Gulf states. LB canvasses the leading domestic and international firms and asks, what next?

In early 2012, the sailing dhows off the coast of Abu Dhabi will have some serious competition on their hands. The emirate is due to play host to the yachts of the round-the-world Volvo Ocean Race, in another sign of its growing profile and confidence on the world stage.

Although it has spent recent years in the shadow of its brasher neighbour, Abu Dhabi is emerging as a much safer bet for international business. Law firms have clearly picked up on the prevailing wind and have shifted their focus to the emirate, attracted by an ambitious domestic investment programme backed by the government and a group of sovereign wealth funds which, in a moribund M&A market, have become valuable global dealmakers.

And it’s not just Abu Dhabi that has supplanted Dubai as the focus of most firms’ strategies in the region. Construction may be on hold in Dubai, but the cranes are swinging into action in Saudi Arabia, the region’s true economic heavyweight. The $80bn King Abdullah Economic City on the Red Sea coast is slowly taking shape, complete with six-star hotels, an 18-hole golf course and gleaming glass buildings.

Such ambition might have made even Dubai’s top-of-the-market rulers blanch, but there’s a key difference. This project is backed not by a cash-strapped emirate, but by the oil wealth of the Saudi Arabian government, which is predicted to post a $24bn budget surplus this year. Following Dubai’s precipitous slump, international law firms have been keen to cash in: Freshfields Bruckhaus Deringer, Allen & Overy and Norton Rose have all picked up roles in the mega-project at various stages.

‘Saudi Arabia has always been at the centre of everybody’s plan. It’s the big hitter of the region.’
Morris DeFeo Jr, Crowell & Moring

‘We are not like Dubai or Bahrain who try to do clever things with financial markets. We actually produce things,’ says Andreas Haberbeck of Saudi firm Hatem Abbas Ghazzawi & Co, which itself picked up a role in the construction of the Economic City. ‘Dubai will continue as a hub to service other regions, but there is plenty of work in Saudi Arabia,’ he adds. ‘There is gold to be made here.’

Dubai’s travails have been well publicised over the past 18 months, and as work in the wider economy has ground to a halt, law firms have been forced to spread their net wider, looking for other opportunities in the Middle East. Saudi Arabia and Abu Dhabi have become the obvious alternatives. In the past two years, the likes of Lovells (now Hogan Lovells) and Latham & Watkins have opened associate offices in Riyadh, while Baker & McKenzie and Freshfields Bruckhaus Deringer are among those that have set up shop in Abu Dhabi.

Dubai will remain a gateway country for law firms venturing into the Middle East, but the boom years are over. Law firms are being forced to hustle for work like never before.

Mass appeal

Saudi Arabia has always been an enticing, if slightly tough, market to do business in, but as Dubai has suffered it is becoming even more attractive for international firms. The country now has most of the big UK names present – eight of the top ten British firms ranked by revenues have a presence in the country (Linklaters and Slaughter and May are the exceptions).

US firm Crowell & Moring is the latest overseas practice to open an office in Riyadh, announcing an association with Al Enizy & Associates in April. Morris DeFeo Jr, corporate partner and head of the firm’s Middle East and North Africa practice, believes the problems in Dubai are forcing firms to move into Saudi a little faster: ‘Saudi has always been at the centre of everybody’s plan. It’s the big hitter in the region.’

‘Dubai is an easier place to live and work, but people are now being compelled to look beyond Dubai because it’s overblown and hyper-competitive,’ he adds. ‘It’s a harder place to do business, but if you find the right people and resources you should be focusing on Saudi. It’s the centre of where the economic growth is going to come in the next few years.’

The Kingdom of Saudi Arabia is roughly the same size as western Europe, yet has a population of just 28 million and little infrastructure. It also has the big-ticket clients that can make or break a firm, such as chemicals company Saudi Basic Industries Corporation (SABIC) and national oil company Saudi Aramco. Winning work from the oil giant was a clear motive behind Latham & Watkins’ hire of 13 partners from White & Case’s London and Middle East offices in February.

‘Abu Dhabi’s government has been quite restrictive in giving out licences. They don’t want lots of law firms flooding in.’
Crispin Rapinet, Hogan Lovells

The Saudi government is still spending, and, with a growing population and clients that are willing to pay, it’s an obvious growth jurisdiction. ‘This year has been busier than ever,’ says Mohamed Hamra-Krouha, a finance partner at Clifford Chance working in association with Al-Jadaan & Partners in Riyadh. ‘There are huge public-sector budget spends and these projects are all still moving ahead. Projects work hasn’t slowed down, we’ve got big infrastructure, power and water projects.’

Beyond the mega-projects like King Abdullah Economic City, M&A has also been busy. In April, Dewey & LeBoeuf, working with its local ally, and Hogan & Hartson (now Hogan Lovells) bagged key roles advising Kingdom Holding Company on the $370m acquisition of Kingdom Hotel Investments. The all-cash deal will allow Prince Alwaleed Bin Talal Bin Abdulaziz Alsaud’s Saudi investment vehicle to buy the remaining 44% of shares in the hotel group.

The government is pumping billions into massive infrastructure projects, such as high-speed rail and religious tourism projects. ‘We were working on a huge project last year, a $5bn railway, but the banks wouldn’t touch it so the government stepped in to fund it,’ Haberbeck explains. The project, a consortium of ACWA Power, Saudi Binladin Group and Deutsche Bahn, was part of a bid to construct and operate the Landbridge rail link between Jeddah on the Red Sea, Riyadh and Dammam, home to Saudi Aramco’s headquarters on the east coast.

But despite the obvious attractions, Saudi Arabia is a tough market for firms to crack, both in terms of culture and the difficulties of finding a local firm to ally with. Law firms from outside the Gulf countries can only operate in Saudi by associating with a local firm, and the small number of suitable domestic practices have their pick. Freshfields found a novel way of complying with the Saudi Bar rules, flying one of its associates, Fares Al-Hejailan, a dual-qualified Saudi lawyer who joined Freshfields as a trainee, out to Riyadh in 2008. The Magic Circle firm then set up an association with Al-Hejailan’s own local law firm. In 2010, the firm took him back on its payroll and allied with his father’s firm, The Law Firm of Salah Al-Hejailan, but Freshfields is only the latest in a line of overseas firms to ally with the leading local firm. Over the past 20 years, Salah Al-Hejailan has also had an alliance with Clifford Chance and close links to Hogan & Hartson. ‘Strong personalities’ at Salah Al-Hejailan have been blamed for the previous break-ups.

Hamra-Krouha emphasises that long-term alliances take hard work. ‘A lot of the other tie-ups here have been on and off. Beyond the initial announcement you need to have the same culture,’ he says. ‘We’ve had a relationship with Al-Jadaan & Partners for 13 years. That association requires investment and day-to-day management on the ground. You need to build and nurture the relationship.’

The quality of local lawyers at the top firms can also vary widely; many Saudis choose plum civil service jobs over becoming a lawyer. Omar Kabbani, a consultant at Fox Rodney Search in Dubai, says that some firms are adopting a novel approach to improving the quality of their local partners. ‘Some of the larger international firms have put their associates on the payroll of their local Saudi alliance. It’s partly to raise the profile and quality of people within the Saudi network, and partly for economic reasons; local compensation packages are not as high as ex-pat packages.’

There are also the cultural and practical problems of hiring the right lawyers to work in the country. Traditionally, the dry desert state has been a hard sell for young lawyers, but Dubai’s problems have made Saudi a more attractive proposition for up-and-coming lawyers, particularly those focusing on Islamic finance. ‘The downturn gave a lot of lawyers the opportunity to really consider what they want to do,’ Kabbani explains. ‘Working in Riyadh, you are better compensated. The serious players, especially those in Islamic finance, know that entering the Saudi market now will pay dividends in a few years.’

With many firms having little work to do in Dubai, the temptation is to transfer lawyers into the more buoyant Saudi market. But at the Law Firm of Wael A. Alissa in association with Denton Wilde Sapte in Riyadh, local managing partner Amgad Husein is sceptical of this tactic. ‘Some firms are saying: “We have an excess capacity in other offices, so let’s put him in Saudi.” But that doesn’t work. You’ve got to understand the local practice.’

The other emirate

Another alternative to Dubai lies just two hours up the road in the sister emirate of Abu Dhabi. Dubai’s woes have seen an influx of clients and firms into its neighbour.

‘Traffic has really gone up,’ says Charles July, former head of Middle East and North Africa energy and infrastructure at Freshfields, who recently joined Watson, Farley & Williams in London. ‘People have always commuted from Dubai, but it’s really changed in the past few years. The roads are now clogged with Dubai numberplates.’

The shift towards Abu Dhabi is no accident. The government set out a massive development and infrastructure programme in 2008. As part of ‘Plan Abu Dhabi 2030’, the country is building a new residential district on Reem Island, as well as a financial zone on Al Suwwah Island, seen by many as Abu Dhabi’s version of Canary Wharf. Investment banks are now increasingly looking at long-term moves into the emirate. UBS Investment Bank, Credit Suisse, J.P. Morgan and Deutsche Bank have all opened offices in Abu Dhabi. ‘There is pressure for investment banks to move from Dubai to Abu Dhabi. There is going to be far more of a balance between the two,’ July says.

Abu Dhabi has also proven to be a valuable source of outbound work (see box, ‘Major deals: Abu Dhabi’, on page 52), with firms able to leverage off their local offices to gain work from Middle Eastern investors abroad. Shearman & Sterling has had an office in the emirate since 1975 and has been particularly successful at attracting big-ticket outbound M&A work from sovereign wealth funds. The firm has advised several Abu Dhabi funds on recent deals, including Mubadala’s investment in Advanced Micro Devices and the formation of a joint venture with General Electric. In March, Shearman & Sterling advised Aabar Investments, a subsidiary of the government-owned IPIC, on its purchase of a $2.7bn stake in Daimler. The deal gives Aabar a 9.1% stake in the German carmaker, making it the company’s largest shareholder, just ahead of the Kuwaiti government. Skadden, Arps, Slate, Meagher & Flom and Freshfields also advised Daimler on the deal, with Skadden acting as US counsel and Freshfields taking the lead role in Germany.

A major stumbling block for firms wanting to set up in Abu Dhabi is the emirate’s conservative licensing rules for law firms. The local government, keen to control the mix of new firms entering the market, is currently unwilling to issue any new licences.

‘Abu Dhabi’s government has been quite restrictive in giving out new licences. They don’t want lots of law firms flooding in. They’re adopting a different approach than Dubai,’ says Hogan Lovells’ Middle East and Asia managing partner Crispin Rapinet. Lovells had offices in Dubai and Saudi Arabia, and had been looking to open an office in Abu Dhabi for some time. As part of the Hogan Lovells merger, which went live on 1 May 2010, the new firm also comprises Hogan & Hartson’s legacy Abu Dhabi office. ‘Already having Hogan’s office really was a big advantage in terms of implementing our plans for the region,’ Rapinet explains.

Steady course

While Bahrain may not set pulses racing in quite the same way as Saudi Arabia or Abu Dhabi, many firms are seeing the attraction of setting up on the island. Denton Wilde Sapte announced in February 2010 that it will be opening an office in Manama, while Freshfields, Norton Rose and DLA Piper have all established offices in the country. Traditionally a banking hub, Bahrain has lost considerable ground to Dubai. But it refuses to be written off, with J.P. Morgan, Merrill Lynch and Société Générale all opening offices in the past few years.

‘Those international firms with deeper relationships in the UAE are those who have weathered the storm well.’
Niall O’Toole, Clyde & Co

Charles Russell opened its only Middle East office – and just its second overseas outpost – in Manama in 2007, bypassing Dubai altogether. The UK-based firm was then appointed by the Central Bank of Bahrain to wind up Awal Bank, a Bahraini bank with a book value of $5bn when it collapsed. The unusual appointment of a law firm as administrator was seen by the Central Bank as the best way forward given the number of legal cases Awal was involved in.

‘Bahrain works as a good base for the Gulf because it’s an easy place to do business,’ says Clive Hopewell, a corporate partner and head of Charles Russell’s Bahrain office. ‘It’s becoming a hub for other businesses, international companies, telecoms, insurance, banking and financial services. It’s well regulated, and the Central Bank and financial regulation are well regarded.’

Long-term goal

The neighbouring emirate of Qatar has been hit hard by falling property prices, but it still retains its crown as the wealthiest country in the world measured by GDP per capita. It also boasts the third-largest reserves of natural gas in the world. Qatar offers the prospect of more gradual growth than Saudi and Abu Dhabi, but Amjad Ali Khan, managing partner of Dubai-based Afridi & Angell, believes this should not put off international firms. ‘I do think that the excess capacity in the UAE has been moved to Saudi and Qatar,’ he says. ‘Doha is more of a long-term prospect for international firms but there will be a greater demand for legal services there in the next few years.’

Just last month, Herbert Smith and Latham & Watkins took lead roles on the $1.5bn sale of Harrods to Qatari sovereign wealth fund, the Qatari Investment Agency. A number of international firms have joined the established few in recent years, with Allen & Overy launching in Doha in February 2010.

‘Bahrain works as a good base for the Gulf because it’s an easy place to do business. It’s becoming a hub.’
Clive Hopewell, Charles Russell

Though perhaps not the most exciting place in the Middle East to live (one senior associate at a UK firm reports that if he hadn’t taken his PlayStation with him, he would have left in the first week), Qatar has the advantage of being one of the most economically liberal countries in the region, and also has a strong regulatory regime for financial institutions. Georges Racine, a partner at Swiss firm Lalive, which has an office in Qatar, explains: ‘There is a respect for rule of law in Qatar and a genuine intention to do things properly and correctly.’

‘Qataris are good clients,’ he adds. ‘There is money in Qatar, but also lots of others wanting to enter the market. There is a pool of money around it.’

The emirate has set up the Qatar Financial Centre (QFC) to attract international business. A conservative cousin to Dubai’s international financial centre, the QFC has had success in attracting banking and insurance work. Earlier this year, Eversheds advised Qatar General Insurance and Reinsurance on a proposed $675m project to construct four skyscrapers in Qatar. The project is part of a wider series of planned improvements to Doha as the country prepares to bid for the 2022 football World Cup.

Qatar, like all of the Gulf states, is keen to diversify away from its dependence on natural gas, and has been pushing investment in renewable energy projects. Lalive is currently working on a $650m joint venture with Qatar Solar Technologies to build a polysilicon production plant. Polysilicon is a key material used in the manufacture of solar panels. The project is funded by the state-sponsored Qatar Foundation, Qatar Development Bank and SolarWorld, and will be the first silicon production plant on the Arabian Peninsula.

Keeping pace

The remaining Gulf states of Kuwait and Oman offer less obvious opportunities for firms in the wake of Dubai’s fall.

Kuwait was worse hit by the recession than many Gulf states, as several of its companies had large exposures to US and UK equities. It’s a heavily local market and, although firms like Ashurst and Denton Wilde Sapte are operating in the country, only a few international firms, such as DLA Piper (in association with (NEN) Al Wagayan, Al Awadhi & Al Saif) and Middle East regional giant Al Tamimi & Company have invested in a bricks-and-mortar office.

With the Kuwaiti parliament regularly dissolving, many observers blame political instability for the lack of take-off in the economy. Project finance and privatisation instructions were thin on the ground in 2009, although the recent announcement of major infrastructure works by the Gulf Co-operation Council should lead to an improvement. Last year, the Law Office of Dr Ahmad Al-Samdan in association with Denton Wilde Sapte advised NBK Capital in its interest in acquiring Liverpool Football Club.

At Kuwaiti firm ASAR – Al Ruwayen & Partners, Rob Little, a banking and capital markets member, believes the opportunities for international firms are limited: ‘It’s not a regional hub; it’s never going to be like Dubai. It’s a very local market. Any foreign law firm coming in here would really have to focus on servicing local clients to survive.’ He adds: ‘There aren’t enough international clients for many of the big firms.’

That sentiment is echoed at some Oman-based firms, with many unsure that there is enough big-ticket work to warrant the entrance of international firms into the country. ‘The large international firms would consider setting up in Oman if there was enough big-ticket work,’ says Mansoor Jamal Malik, a name partner at full-service firm Al Busaidy, Mansoor Jamal & Co in Muscat. ‘There has been a real focus on developing infrastructure, and diversifying from oil and gas into tourism and industry.’

Most law firms working in Oman report a quiet but steady flow of work. That may pick up in the next few years. Under its 2006 to 2010 development plan, the Omani government has been investing heavily in the country’s infrastructure, including the water sector. On one highlight project, Denton Wilde Sapte in association with S&A Law Firm advised the Oman Power and Water Procurement Company on all aspects of the letting by competitive tender of the Salalah Independent Water and Power Project.

Relative shift

Dubai has been losing out to other Gulf states, but the shift away from the emirate may not be as seismic as first appears. Dubai’s economy was racing ahead of the pack before Lehman Brothers collapsed. Now it’s lost speed, but is still moving at a healthy clip. As Louise Wall, a recruiter at Laurence Simons in Dubai explains: ‘Dubai isn’t as quiet as it was last year – the market is not as dead as everyone thinks it is. There are businesses that are still busy. It’s more of a mature market and far less desperate than it was.’ She adds: ‘Firms now have a preference to hire senior lawyers and partners who have prior Middle Eastern experience and, ideally, their own client following.’

This point is echoed by Niall O’Toole, an Abu Dhabi-based partner at Clyde & Co. He says: ‘The older practices and those international firms with deeper relationships in the UAE are those who have weathered the storm well. It’s never as bleak as it appears.’

‘There is a respect for rule of law in Qatar and a genuine intention to do things properly and correctly.’
Georges Racine, Lalive

Richard Ernest, a finance partner at Clifford Chance in Abu Dhabi, agrees: ‘We’re as busy in Dubai as we were before Lehman.’ With a lead role on the multibillion-dollar restructuring of Dubai World, the UK firm has certainly picked up one of the plum mandates to come out of the crisis.

The Dubai World restructuring – which also handed key roles to Allen & Overy, Ashurst and Latham & Watkins – shows that work levels in Dubai have not collapsed completely. But the nature of the work has changed, with insolvency, restructuring, Islamic finance and dispute resolution growing in importance. Many lawyers in the region expect that Dubai will remain a hub from which to win work throughout the Middle East, but there has been a shift in focus in the region. Dubai has lost its lustre, and the appeal of Saudi Arabia and Abu Dhabi continues to grow. The Middle East has always been more than a one-port region. LB