Ukrainian Round Table: Senior Partners Review the State of the Market

The Bottom Line

The conversation started with a simple question: How’s business?

Despite the widely-publicized economic slowdown in the country, some firms are doing better than might be expected. Igor Kalitventsev of KPD Consulting said it was a "very good time for law business," pointing both to the quality of lawyering in the country and to the predictions of growth for the country emanating from institutions like the World Bank, indicating that "a lot of big companies can be expected to go into Ukraine."

Mykola Stetsenko from Avellum Partners was also upbeat, reporting that his firm was "surprisingly busy." Anna Babych, a Partner at Aequo, was also positive, describing her firm as "among the few law firms that have hired people."

Serhii Sviriba of Egorov Puginsky & Afanasiev & Partners was less enthusiastic. He proposed what he called "an alternate version," noting that his firm has seen a 30-40% drop compared to previous years. Despite expressing gratitude to the firm’s "anchor clients" – key clients with long-term commitments and significant amounts of regular work – Sviriba was candid about his office’s expectation for the rest of this year, saying "we don’t expect any new developments before the end of the year, so no new hires are expected, and we expect to see some redundancies by the middle of this year." He concluded: "In 2014, the average workload was 7 thousand hours a month. Now it’s in the range of 4 or 5 thousand hours."

Andriy Stelmashchuk, a Partner with Vasil Kisil & Partners, suggested that the time had come to look beyond the traditional sources of law firm work. "We believe that in times of general economic recession, when lawyers are not overloaded with work as before, we have to focus on finding ‘blue oceans.’ It’s the right time to rethink the model of your legal business and to find some non-standard solutions." Stelmashchuk said that VKP had expanded its criminal practice, for instance, and said, "I think this is only the beginning, and we will see more changes in Ukrainian legal practices soon. I believe we will not do the work of street lawyers, but I believe we will do kinds of work we didn’t do before." In addition, according to Stelmaschchuk, "we have a lot of private clients, a relatively new practice for Ukrainian legal business. These are wealthy clients and politicians who need strictly confidential comprehensive legal support in wealth management, corporate and assets structuring issues, as well as in family law, among other things."

Armen Khachaturyan, a Senior Partner at Asters, agreed that some practices are down, but made the point that some forms of transactional work are actually quite busy. "For example, in energy law," he explained, "you have to be lazy not to pick up some momentum in this independence from Russia – there was the reverse supply of gas last year, which some firms negotiated on … and now, after the prime minister [said] that some joint activity agreements within the industry need to be reverted to public sharing agreements, [that’s another] big chunk for lawyers to assist on. So there are some areas that lawyers will be needed on, even this year."

Bertrand Barrier, Partner at Gide Loyrette Nouel, said that, in perspective, the current crisis is nothing new. "If I look at our position here in Kyiv in comparison to our five other offices in the region, I see that Ukraine has always been the most challenging office since the crisis of 2008." Last year, according to Barrier, clients were taking a "wait and see" attitude, believing that the crisis would pass and that better times were ahead. This year, by contrast, "times are getting harder economically, thus there is naturally more pressure of clients on costs, and thus on our fees. So yes, the situation is harder currently."

Maksym Lavrynovych of Lavrynovych & Partners said that his firm was also expanding into criminal law work, "but as a separate entity, under another name, not associated with Lavrynovych & Partners." He also believes that some investors are starting to see the conditions on the ground as an opportunity, and said he’s seen some clients starting to return to Ukraine. He explained that "currently we are negotiating for one of them to buy one of the biggest business centers, because now is a high time to buy. Prices are probably on the bottom." He conceded that not everyone agreed, "but those who are located in these business centers, some of them are still paying rents, and it’s still a profitable business." Finally, he reported, "and of course the best clients, today, for all of us, are in the agricultural sector. They’re paying hard currency, and they’re in surplus."

How Do Firms Keep Their Teams Motivated and Busy?

Despite Sviriba’s prediction of redundancies later in the year, it appears nobody is jumping the gun on cutting staff yet. Babych of Aequo reported that "people are holding on generally." Stetsenko of Avellum Partners agreed that "we are on the brink," and that "many firms are considering laying off people ... but in general the trend of laying off people in big numbers has not started – and hopefully it will not."

And the reason may not be simply financial. Armen Khachaturyan referred to something more. "Everybody tries to keep people on," he said. "It’s our social responsibility, in these difficult times, not to put people at risk …. Everybody tries to protect people to the extent possible."

So how are firms keeping their teams busy, if client work is limited? Hennadiy Voytsitskyi, Partner at Baker & McKenzie in Kyiv, suggested the substantial output of the new Ukranian government is keeping many of his lawyers busy. "For example," he said, "in transfer pricing and the tax area, there are so many legislative changes that you are bound to invest a lot of time to stay apprised of changes."

In addition, a large number of law firms in Ukraine are making their lawyers available to help with legislative drafting, lobbying, and otherwise assisting the new government. Peter Teluk, the Managing Partner of Squire Patton Boggs, referred to the pro bono activity of his firm in that direction, particular towards combating corruption. "Firms are committing during the downtime for the betterment of the country," Teluk explained, "with the view that things have to and will get better."

Armen Khachaturyan agreed, again referring to a sense of civil responsibility. "Many firms try to support the governmental efforts. In our firm (and I know in others as well), we seconded people – not just junior people but senior people, and partners – to some of the key elements of the government, some ministries where major work needs to be done, like corporate restructurings, for example, in the railroad service of Ukraine, where we placed one of our partners to help from the inside. And this is a sacrifice, because these people are also needed within the firms. But given the moment, this is also a combination of patriotism and citizenship."

Serhii Sviriba took a slightly more cynical view of the practice, saying "apart from patriotism ... my interpretation is that those people simply do not have enough work." He also drew knowing laughter from around the table when he commented on the increasing number of business development events lawyers in Kyiv have been attending, both in an attempt to generate new business and simply to keep them busy. Sviriba claimed that the week of the Round Table had seen "two, three events every day," and rolled his eyes at the "lawyers and partners attending events on a daily basis."

Are Firms Making New Partners?

Asked whether firms were making new partners, the room was divided. Khachaturyan of Asters reported that his firm had just recently announced the promotion of two young partners and had made four more last year. He explained his firm’s rationale: "I think this is the time that you have to encourage people, that the partnership you promised them earlier in their career is still in the game, and this is an institutionalized activity that you can not ignore." He pointed out that the new partners had immediately brought in more clients, both because of their increased confidence, but also because, in his words, "when you give a potential client a business card that says ‘partner,’ it changes a lot. It changes the chemistry you can establish."

Mykola Stetsenko, of Avellum Partners, suggested that the practice of making partners in order to increase business constituted a step in the wrong direction. "We as a market are moving in a slightly dangerous direction of starting to dilute the notion of a partner," he said. "I may be in the minority, but I personally made partner when I was 31, and it was considered very early. Now I know of cases in the market when people are made partner before 30. We’re diluting the notion of what a partner is." He said, "I would urge my colleagues on the market when we make new partners, to think what we actually mean by naming someone a partner. Some firms differentiate between local partners and equity partners, but that’s just for international firms. We have to think more carefully about this."

Dentons Partner Volodymyr Monastyrskyy pointed out that local offices of international firms have less flexibility to use partnership as a business development or incentivizing tool for lawyers who couldn’t meet the firm’s global requirements. He explained that for international firms, "if you don’t have a business case that is confirmed with specific figures, then there is no way."

What’s the Effect of the Devaluation of the Local Currency on Fees?

Monastyrskyy of Dentons drew the table’s attention to the effects of the devaluation of the Ukrainian currency: "If you charge 100 Eur/hour, that’s 3000 Hryvnia. That’s three times the minimum salary. So who will buy the services? So yes, there’s a lot of work, but if we’re talking about fees, that’s a different story. You can be extremely busy, but at the end you have almost nothing, especially if you’d like to compare your revenue to what you had in 2007 and 2008." He concluded: "My observation is that if you have an international client and are billing it offshore, this is a very good story. But once the billing is switched to local, then the story is not that good. Because you have local currency, local currency has additional zeroes, and people say ‘wow, we’re not going to pay that.’"

Khachaturyan noted that, traditionally, firms and their clients simply agreed in advance that the fees would be calculated on an hourly rate set in euros or dollars, payable in the local currency on the date of the invoice. "But now more and more clients try to persuade the law firms to fix the hourly rates in local currency," he said, "and then of course this is a direct way to nowhere for the law firms – or they sacrifice to do it." Khachaturyan described this pressure as "one of the utmost challenges that law firm management faces these days."

Sviriba of EPAP agreed, noting that the two latest companies his firm had pitched to had "both requested proposals in local currency. Not euros, and not dollars. Their preference was clear that fees should be in Ukrainian currency local rates – something that was not usual before."

Anna Babych of Aequo said she didn’t believe this phenomenon yet constituted a real trend – though she conceded that if it were to become common, "the floodgates will open, and then we will have new rules in the game to play."

Competitive Advantages Between International and Local Firms

At this point the conversation turned to a spirited discussion of whether international firms have an unfair advantage over local counterparts in these problematic economic times. Monastyrskyy of Dentons launched the first salvo by responding to the suggestion that clients were putting pressure on firms to charge their fees in the local currency. He explained that, whereas partners at local firms could agree to charge their fees in this way to accommodate client demands, international firms had no such flexibility. In his words, any attempt to persuade global boards to allow billing in local currency is "a non-starter."

Then it got good.

Khachaturyan: If we can step back for a second, I want to comment on the relationship in the market between local firms and international firms. There was always a tension – I mean, let’s be frank about that. The international firms present in Ukraine, as they have been since the early 90s – though not as numerous as now – allowed the local firms to strengthen themselves and form the market as such. But some tactics – and I’m not criticizing that, everybody has the right to do that – with the budgeting from New York or London, allows them to do a little bit more than local firms, especially in difficult times. I know that some of the firms, without names, form some financial pools, because they are a member of a network where there are four or five offices, join their firms, watch their markets, and see who is in need of support at certain times. And then they have stronger muscle than local firms sitting just in Kyiv, with limited resources, both human and financial. Recently we also watched an activity where the management of some international firms present in Ukraine formed their budgets for taking on board some of the best brains from the local firms. And this activity of head-hunters grew, and it’s very difficult. You struggle with clients on fees, you struggle with your associates on salaries, and you struggle with competitors, who may be stronger than you in terms of available resources at certain times. So we’re vulnerable, and we may be more vulnerable than the international firms.

Olexander Martinenko of CMS: I would like to disagree a bit with what Armen said. Yes, there are local firms on the market and there are international firms on the market. And we view the situation slightly differently. I am perhaps in the best position here, because we are the CEE law firm. We are not part of CIS, we are not a stand-alone office. We are part of the CEE practice of CMS, which consists of Kyiv, Warsaw, Prague, Budapest, Bucharest, Sofia, and Istanbul – and Moscow is not part of it. So I have the benefit of seeing how it goes from inside Kyiv, and I have the benefit of also comparing what’s going on in other CEE jurisdictions, and I look regularly through the statistics of our other offices, and how we perform against them, and what I can say in that respect is, I strongly disagree with the idea that essentially all other offices of an international law firm will be doing pro bono investments into another office just to maintain life at a time of pressure. It’s a wrong idea. It’s like playing soccer. You have 11 players in the field, and everybody should be playing. If you have one player who’s not performing in the field, you do not have a team.

Khachaturyan: But subsidies are a fact. You have to recognize that.

Martinenko: [Shaking his head] No subsidies. You can get a loan at commercial rates – those will be London rates, not Kyiv rates. But we have CMS, we have Baker, we have Dentons, we have Gide, Squires, and so on. Let those guys voice their views. In my experience, and that’s from over two decades, you have two sources of jobs coming into your office. You have your own stand-alone clients, and you have referrals. And let’s face reality. Most of our work that we keep our associates busy with comes from referrals. And in this particular situation, in international firms, it is much more disadvantageous compared to the local firms, because we cannot compete with local players for these jobs. They [international firms without offices in Kyiv] will never send us their clients. They would rather work with Asters, with other reputable local law firms, [and] you can establish mutually beneficial relationships with those law firms. You [indicating Khachaturyan] can work on this basis with a number of big-shot international law firms. They will not see you as potential competitors, when they have to work with somebody here. They will send us the business as a very last resort, when they are unable to find a specialist with a major local law firm.

Khachaturyan: But Sasha, the big names – including CMS Cameron McKenna – have the privilege of having clients from an international network of offices, in London, Hong Kong, or whatever. And this is an advantage. It’s a disadvantage that you do not have many outside referrals from international law firms, and I agree with that. But, again, without naming a particular office, we have a Magic Circle office in Kyiv, and we do know that most of their work as of today is coming from their international offices, not business developing from within Ukraine, but elsewhere, and that’s how they survive. And many offices are subsidized. Let’s be frank. And some of the firms present today know, in history – I’m not speaking about today, maybe policies have changed, difficult times for all – but in history, yes, they will support each other, and you know that.

Martinenko: Armen, ask the lawyers from international firms here, what’s the percentage, what’s coming from the network. It’s not big. It’s not significant. Actually, the major, the lion’s share of the work, which you’re struggling to find on the ground, you have to pick up yourself.

Stetsenko: I totally agree with you, but that’s the disadvantage of times of crisis, when we see the international investors leave Ukraine rather than coming into Ukraine. In good times, before 1998, Baker & McKenzie, as we all know, serviced 90% of all the investors that were in the country. We just all have to cross our fingers that things will improve in the next two years, and we will all see the investors come back.

Teluk: I just want to add that, I understand what you’re saying, Armen, but there are times as an international law firm when I am envious of the top Ukrainian law firms, because we need to take things from our network, and, OK, there is one Magic Circle firm here, but there are five here that aren’t, and most of the big New York firms aren’t, and most of the ones that will touch on the big Capital Markets work over here are not present in Ukraine, and when they look for local counsel, they’re going to look for quality Ukrainian local counsel, they’re not going to go to the Dentons network, or the CMS network, or turn to Squire, because they’re going to see a potential competitor, whether right or wrong, in New York or London, for that kind of work. So I’m envious of your models, that you can quickly adjust, work with different firms, whether it’s Weil Gotshal, or White & Case, or Linklaters, that aren’t here. In a way you have a bigger feeder network.

Taras Dumych (the Managing Partner of Wolf Theiss in Kyiv): I think that we would agree that, in principle, your management in London, New York, or wherever understands what’s happening in Kyiv. Same in Vienna. People aren’t blind. And what we see in our relations with our partners in other offices is, people are watching at what we’re doing. They understand that the economy is not great, and that the economy of the office will not be that great but they’re looking at what we’re actually doing, at our efforts. What we’re doing locally, and what we’re doing internationally, or what we’re doing to develop our clients, or when we have referrals, how we handle those referrals. I can tell you that when Wolf Theiss started in in Kyiv 2009, it was in the middle of the crisis then – and this is kind of a second crisis, for the firm here, so we got used to it, and we know how to handle things, and how to handle the costs, and our management is looking at that and evaluating.

And it has been working out reasonably well in the present situation.

Conclusion

Following Dumych’s upbeat conclusion, and after a few additional comments, the Round Table drew to a close. We thank the participants for taking time to share their thoughts and perspectives with us and with our readers.