Foreign law

Nine out of each ten transactions entered into by large Russian companies are done under foreign (usually English) law. Import and export transactions, M&A, purchase of realty and even marital agreements are under foreign jurisdictions. Why are Russian law and judicial system so inconvenient for Russian business and in what ways does this affect the Russian market of legal services? <…>

The case of the lawsuit by the late Boris Berezovsky against Roman Abramovich is a good example. Paradoxically, the judgment on assets of strategic importance for Russia was passed by a British court.

Thus, even if Russian businessmen and their assets are de facto registered in Russia, they have already de jure gone West. For what reason? This happened primarily because the covenants of the parties cannot be fully carried out with the use of Russian legal institutions, for example – step-by-step sale under conditions, which are dependent on the results of the asset’s activity, and because certain covenants, guarantees and warranties of the seller regarding the asset on sale cannot be fixed, etc.

The absence of norms for efficient holding strictures is also significant. Tax consolidation in our country is currently very much limited. Gazprom appears the only company, which is able to afford it. That is why the business, until recently, preferred Cyprus, BVI and other off-shores. Now that the banking system of Cyprus has crashed, the business will likely shift to non-offshore jurisdictions like the Netherlands, Luxembourg or Hong Kong. But it will hardly return to Russia.

Russian justice is certainly the second cause. Currently, it sometimes demonstrates judgments, which are quite dubious from the legal point of view. That’s why the business does not trust the possibility of judicial protection of covenants, even regarding those provisions of the transaction, which are directly regulated by the Civil Code of the Russian Federation, for example – regarding shareholder agreements.

This situation undoubtedly affects the companies themselves. First, structuring of a transaction governed by a foreign law involves additional expenses on foreign lawyers. Second, attorney-client privilege of English law, for instance, is not valid for Russian investigators, which may create even more risks for business <…>

And what about the lawyers?

Since large Russian clients resort to foreign applicable law, actively conduct transactions through off-shores, go to foreign courts and international arbitration, the firms that operate at the Russian market of legal services are forced to adapt to the situation.

Yury Pilipenko, Managing Partner of the Law Firm "YUST", believes: “It is obvious that Russian repoffices of international law firms, especially those of Anglo-Saxon origin, are in the best position”. Such firms may quickly bring in colleagues from British or American offices, and as they count with Russian-speaking lawyers, they may offer “foreign law in Russian” to their clients. Y.Pilipe nko sums up: “However, taking into account the high rates of the lawyers of foreign offices, the higher probability of service trips and long times of internal corporate communication, the billing of foreign law firms may be twice or thrice that of a Russian firm on a comparable set of tasks under a client’s project”.

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