Liniya Prava has for a long time been recognized as a firm specialized in corporate law and capital markets. For the last years it has been aiming at providing a full range of legal services, developing alongside corporate law litigation, tax and other practices. Despite changes in the team*, Liniya Prava manages not only to keep its ground but also to grow, attracting new partners and extending its competencies**. What is the secret of its stable performance, how is the current crisis affecting legal services market, what are its prospects? We talked about these issues with Andrey Novakovskiy, Liniya Prava managing partner.
— Could you please tell us when it was decided to become a law form, providing a full range of legal services? Was this a reaction to the last crisis?
— This strategic decision was adopted a long time ago, even before the crisis of 2008. We wanted to switch to a more reliable model - full service firm. Our market is dynamic, demand here changes fast. For instance, before 2008 capital markets, corporate and М&А practices were intensively growing but during the crisis demand for these services dropped dramatically while litigation practice became more demanded.
Nowadays, to bring maximum benefit to its client a lawyer has to provide it a full range of services. For example, if a client comes in with a question on securities, most likely it will also need advice regarding М&.А, tax and litigation.
Since our clients needed to be represented in court, in 2007 we created a separate litigation practice. It took some time for it to develop and gain recognition on the market, that’s why most colleagues did not learn about our initiative right away. In 2008 the crisis broke out, there was an avalanche of lawsuits from market participants, which contributed a lot to the development of our practice. In 2010 we began doing PPP. As we already had expertise in financial planning and attracting third party financing, it was easier for us than for most to enter this market. In 2012 our clients asked for tax advice. That’s how the number of practices grew.
— Please, tell us about Liniya Prava’s team. How many lawyers and partners do you have? Are you planning to hire new staff, to open new practices?
— We currently have 45 lawyers and 6 partners, including me and my closest companion Dmitriy Chepurenko. Dmitriy is in charge of our litigation practice, Vladislav Ganzhala is a litigation partner, Ruslan Nagaybekov is a corporate law partner, Oleg Bychkov is a М&А and securities partner, our new partner Vadim Konyushkevich deals primarily with investments. Tax practice is headed by Lidiya Charikova. My main task as a managing partner is to create conditions to develop the practice for each team member.
We plan to increase the team of lawyers and partners, but law firm growth should be natural. As we get new projects, we will develop more competencies and probably increase the number of practices.
Background
Andrey Novakovskiy, managing partner, head of project finance and PPP practice of Liniya Prava
Andrey Novakovskiy graduated from the faculty of law of Lomonosov Moscow State University in 1994. He then worked as an in-house counsel at a number of companies, in 1998 became head of legal department in the Federal Stock Corporation and in 2000 together with other partners founded Liniya Prava law firm.
Andrey has experience implementing complex projects to raise capital on local and international stock markets, including the first IPOs by Russian companies abroad, drafting new and improving existing legislation regarding securities market, and has provided advice on various PPP projects, foreign and national investment. Andrey Novakovskiy is an expert on privatization, corporatization and corporate consolidation.
— Two years ago Dmitry Glasunov, one of the co-founders, left the firm. How did it reflect on its business?
— Even before Dmitriy’s departure we lost partners who decided to open their own law firms which would then often become Liniya Prava’s direct competitors. It’s always a difficult time when a partner leaves, taking into account personal, often long, relations. However, in this case our situation as to inner climate and management even improved: it became easier to make management decisions. Before we had in fact two management partners and the colleagues were torn between them. I don’t think that model was very efficient. At present I head the firm and coordinate all management issues, other partners, as a rule, respect my opinion.
A third of our lawyers left with Dmitriy but it didn’t have a significant impact on business. We managed to very quickly restore the team. Moreover, the next year our revenues rose 40 per cent. It was in large part connected to Dmitriy’s and his team’s narrow specialization – securitization market was never large. We made a non-competition gentleman’s pact, according to which we should not handle this kind of projects for a certain period of time. This period has lapsed now and thanks to the experience we gained we gradually return to this market, sometimes working on the same deal with “Egorov, Puginskiy, Afanasiev and partners” law firm. We still keep our focus on project bonds and project financing.
— How do you view securities market at present time?
— The most important is that capital market still exists, though in a different form. The Central Bank changing its policy in respect of the key rate had a positive influence on the market: market players got cash, banks even have excessive cash, they are ready not only to give loans but also to buy instruments they are offered.
Of course, international economic and political environment has a major impact. The main feature of our country’s capital market is its isolation from the world financial universe. This negative effect didn’t only affect Russia, but also American and European investors who had here good financial returns.
We are trying to create an international financial center, switching to Asia. However, from the point of legal framework and experience, Asian capital market is approximately at the same stage as the Russian one. Still, they have different turnovers and scope of economy there. We don’t have projects in this direction as of now, but I suppose in a year Chinese companies will look for financing in Russia to fund, for example, М&А deals. There have already been cases of Chinese investment in the economy.
The second feature of Russian capital market is that our market is a fixed income market, not equity which is typical for the crisis. In the last couple of years there were several IPOs but they were technical, for instance, to place pension money. It can be easily explained: pension money is long, it has at least five year planning horizon, it has to work. One of the possible ways to develop our capital market is investing pension funds money in infrastructure. Very recently the Central Bank lowered the requirements in question stating that credit rating may be five points lower than the sovereign one and we organized a working round table on project bonds with participation of the state represented by the regulator.
In general, the market is becoming more reliable, mature, high quality, civilized. Transfer to the Central Bank of the functions to regulate insurance market and capital market and thus creating a mega-regulator contributed to more transparent flow of capital from one market to the other. Closing of questionable banks improves the market.
Another important positive factor is the change in the regulatory requirements making it possible to speed up and simplify placement process, leading to less red tape, on one hand, and more protection of business, on the other hand. Earlier the issuer had to plan its actions three months in advance which was very inconvenient, given the market dynamic character. Today there is a possibility to register a program beforehand and activate it at any moment in a few days. As a result, we see multiple placement of industrial capital and registration of stock exchange programs.
— And how is PPP market developing?
— Increase of demand for PPP is typical for crisis but I would like to draw your attention to a new trend, namely extension of this model usage. It is linked primarily to transportation. A very short time ago we closed a deal to conclude a concession agreement for construction in St. Petersburg of four lines and a train yard for light rail transport.
It is a pilot project; there had never been anything like it in PPP area before. I hope that in the future it will be carried out in other regions as well. Moreover, we have an all-inclusive concession with Moscow air hub Vnukovo. It’s not a secret that all key airports of the capital need to be expanded and maintained. After Turkey and Egypt have been in fact closed for Russian tourists and Transaero air company has gone bankrupt this task became more difficult and the state is looking for new sources of financing. As of now, the agreement is not concluded yet but we have been working on this project for more than two years.
Another interesting direction of our work is connected to housing and utility sector. Our experience in attracting financing through stock market and understanding of world financial system are in demand here, as well. We completed a significant unique project linked to water utilities in Volgograd. I’m sure there will be more projects in this area, particularly in connection with the positive changes in the legislation. For instance, the federal law “On concession agreements” is one of the laws that get changed most often. This area is becoming more civilized. I think foreign parties will soon begin to participate in infrastructure projects. All prerequisites are now in place.
Thanks to two unique competencies – stock exchange securities and project financing – we are dealing with the crisis better than others
— How has demand changed in regard to other practices?
— It’s clear that demand for representation in court increased and dropped in capital markets. However, the deep relapse evident a few years ago transformed into new possibilities. Since we have two unique competencies – stock exchange securities and project financing – we are dealing with the crisis better than others, being able to participate in infrastructure projects. Demand for М&А is still there, though it is mostly medium scale and of local character. Difficult financial situation makes clients to give up their long term assets and to structure their business in a new way. Some time ago we got projects with foreign investors not subjected to sanctions.
— Including with investors from China? Do you have projects like that?
— Yes, Russia looks really interesting for Chinese clients now and Vadim Konyushkevich’s joining the firm permitted us to enhance our work in this direction. The Chinese analyze the assets, buy or set up something, develop existing business, sometimes they already need capitalization. It’s not always easy to work with them, though it’s thrilling. For them it’s important to build a long-term relation, that’s why networking usually takes quite a while.
There is also a negotiation style particularity: the Chinese are very careful, they can prepare for the deal for several years, though when needed, they can make quick decisions. For them it’s always important that the state participates in the deal, that there are intergovernmental agreements, state guarantees, especially when significant currency risks are present, as is the case now.
Vadim Konyushkevich worked with Chinese clients for several years; he already has five active Chinese М&А projects. As of now, we are only approaching joint infrastructure projects but I hope we’ll get there, too. The Chinese are interested in them for both economic and political reasons. We are prepared to work with both Russian and Chinese parties. Our main goal is to optimize negotiation process, so that business would grow and develop.
— Did you participate in the working group on drafting the law on restructuring? What do you expect from its adoption and what is your opinion of this law?
— Liniya Prava directly participated in the development of the draft law on amendments to the federal law “On insolvency (bankruptcy)” [1]. Most lawyers are expecting that the draft law would reboot existent rehabilitation procedures, while I suppose the draft law has to solve more global problems.
The mechanisms provided for in the bankruptcy law do not take into account interests of the national economy and society and in most cases drown, not keep afloat the business. If we turn to foreign experience we will see that liquidation of companies is an extreme measure, since it is much more beneficial for the state to help debtors having problems than to create from scratch a new business and jobs in the future. The draft law on restructuring aims exactly to give the debtors right to survive.
The resulting version of the draft law can be called a compromise, since it takes into equal consideration interests of both debtors and creditors. It goes without saying that the banks got special protection since they are the biggest creditors and overall financial stability in the country is linked to them. However, a long list of mechanisms of protection against bad faith debtors has been provided for other creditors, as well. We should not expect to see a dramatic increase in rehabilitation procedures after the adoption of the draft law, as it is necessary to get used to the new framework. Besides, provisions of the draft law will need to be adjusted taking into account the practice of its application.
— Liniya Prava was established after the crisis of 1998-1999 and after some time it successfully survived the crisis of 2008. What did the crises teach you?
— The crisis of 1998 didn’t teach the business anything, it was the state that learnt a lesson then. It wasn’t even a crisis as such, only first experience of our country to exist under capitalism. Everybody understood that it’s not possible to borrow at 180 per cent a year, to build the economy without long term planning, assume short term obligations. During the last crisis we learnt what reference rate is, how corruption can destroy the economy, how important it is to have transparent financial system, so that we don’t be embarrassed before retirees at X-moment. It may look bizarre but under those circumstances we began to learn to be efficient. What did the crisis teach us? That good times end at a certain point but bad times also come to an end one day.
Legal business in Russia differs from other businesses by its reluctance to consolidate. In our segment there are still no М&А deals which gives away its youth. Nobody is fully aware yet how difficult and risky it is to set up a business. Russian people’s problem is their excessive entrepreneurial spirit. We had long lived with no freedom, owning nothing and now we act very quickly and want everything and right away. That’s why it’s popular among us to set up a business without enough planning. The West has already gone through this stage, made their share of mistakes and now for the same money, probably even less, works daily on its efficiency.
— How has the current crisis influenced competition on legal services market?
— A few years ago many predicted that international law firms would leave Russia, however, it has not happened yet.
Nobody will close the business which had brought in good revenues for 20 years, especially if we are talking about the big and promising Russian market. You need time. I was also among those who were talking about international law firms downsizing the scope of their work in Russia: not about closing the offices but about significant decrease of their influence. And that is truly so.
International law firms prove themselves flexible, adjusting to the realities: they are subsidizing Russian divisions, trying to keep the losses to the minimum. Many have cut down personnel, especially American firms. I know one large international law firm with brilliant lawyers, its Moscow office consists of two partners, two lawyers and secretaries.
State companies started to turn to international law firms less often. They realized that information may leak not only through special agencies but also through auditors, evaluators, lawyers. By the way, the Chinese have always understood that and made a lot of reservations when entering WTO, unlike us.
It became much more difficult for international law firms to stay afloat, since their level of prices and salaries was much higher than in Russian law firms. They are now offering their services at the same rate as their Russian colleagues and don’t use foreign currency for payment. The level of their influence has declined on the market and it became much easier to compete with them. It was exactly the effect I was expecting from the crisis.
— Has the increased competition in crisis led to dumping?
— Yes, unfortunately, at present there is more dumping on the market than in 2008-2009. Legal start-ups faced with the urgent need to pay for incidental expenses make the situation worse. Even the leading players are dumping.
Projects with hourly rates only are exceptions, though i saw tenders like this. everybody is using caps at present, it is more convenient for the client, especially in the state sector.
Why is dumping one of the main problems of Russian legal services market? Because it allows not to pay lawyers a decent salary and provide clients proper quality services. In times of real crisis a client is especially sensitive to price issues.
For instance, a new player can get engaged for a complex project only because of their reasonable pricing. The client would have complications, get experience which wouldn’t always be positive but they would still be regarding the price as a priority.
— Is this connected to the youth of our market?
— Not only. We don’t have a fully developed appreciation of the importance of legal support of business, which indicate that the economy is not mature yet. The situation in Russia is of course much better than the one in the Soviet Union. Nevertheless, high quality legal support of business is not recognized as essential yet.
Large companies can afford to maintain a legal department, though at present we can witness cutting down personnel and budgets even there. Actually, in times of crisis the number of tasks increases significantly and the importance of legal challenges rises and that means that you should on the contrary spend more on lawyers.
— The crisis has had an impact not only on prices but also on price determination. What happens with hourly rates?
— Nothing happens. It’s not existent. Projects with hourly rates only are exceptions, though I saw tenders like this. Everybody is using caps at present, it is more convenient for the client, especially in the state sector. Most clients plan their budgets and cannot finance projects which had not been included in the plan beforehand. Caps is a certain expense planning tool. However, in order to estimate a cap, it is still necessary to get a rough estimate of how many hours the project would need.
After the crisis of 2008-2009 the trend to make economy state dominated became apparent. Private business felt less comfortable, state owned companies received preferences, the rules of the game changed. Foreigners partially left Russia, Russian companies started to gravitate towards stability. At the same time, the state began to develop public buying procedures. In 2010 this trend was reinforced and we started to actively participate in tenders. It brought certain results: when you begin to understand tariff policies and different clients’ priorities, you become flexible.
— Liniya Prava successfully participates in tenders to buy legal services. Monitoring of tenders and filling in the appropriate documentation need significant investment of internal resources. When and why did you decide to do it?
— It is the marketing department that monitors tenders and prepares commercial offers with the help of lawyers and partners. However, it is important to understand that because our brand and our team are well known, we get information about some tenders and invitations to participate directly from clients. So, there is a segment of work that we used to obtain directly and today – only through a formalized procedure. At present, a tender is an additional characteristic of client relations.
— What will Liniya Prava be like in 10 years or how would you like to see the firm in the future?
— I want the firm to keep up to date using its own policy, reputation, brand. My task is to form a self-sufficient team of partners that would understand the current situation in the market, capable of making predictions on what is going to happen in the near future, ready to meet challenges and to profoundly change internal and external environment.
[1] At present the draft law has not been introduced to the State Duma yet.
* In 2012 the firm partners Roman Belenkov, Yuriy Tuktarov and Dmitriy Krupyshev left Liniya Prava and set up their own law firm Lecap. In 2014 the firm co-founder Dmitriy Glasunov and his team of lawyers joined “Egorov, Puginskiy, Afanasiev and partners” law firm, in 2016 partner Sergey Kalinin also joined it.
** In 2015 Liniya Prava welcomed in securities practice partner Oleg Bychkov, previously head of ALTHAUS Legal law firm. In 2016 the corporate law practice was reinforced by Vadim Konyushkevich, adviser and ex-head of China desk of Lidings law firm.