In Meeting Point
2014 was a real challenge for the regional legal services markets: reduction in clients’ requests, if not refusal from services, pressure from regulatory agencies, and migration from the ATO zone to other regions. These things force law firms to adapt to new conditions and prevent the making of forecasts about the future
The legal services market largely indicates the business climate in the country, which enables forecasting “the weather for tomorrow”. However, the present-day situation in the regions could be hardly imagined even a year ago: events in the country that have changed political and economic realities played a key role in the activities of local law firms. Although the regions respond differently to the course of events, in general terms all market participants felt negative trends.
“The past and ongoing events in Ukraine affected the entire business, including jurisprudence”, notes Oleksandr Kifak, Managing Partner of Odessa ANC Law Firm. “While recently the company focused mainly on developing the business of clients, increase of their revenue, now we help clients not to lose business in general, just to survive at this difficult time”.
In turn, Markian Malskyy, Partner, Chief Executive of the Western Ukrainian branch of Arzinger JSC (Lviv), notes that factors such as the rise in the dollar exchange rate, bankruptcy of banks, foreign capital outflow, resulted in a reduction of demand for high-paying legal services related to real estate, investments, obtaining concentration permits and other permitting procedures. Another negative feature of the market, in the expert’s opinion, is demand for legal support during the withdrawal of foreign investors from Ukraine.
“Most business entities are now going through hard times”, says Yevgeniy Shkrebets, Managing Partner at Shkrebets & Partners Kharkiv Law Company, “which has resulted in refusal of services not directly related to the production process, including legal support of business”. Nevertheless, the expert notes that the continuing relevance of litigation and tax practices, which are the key focus areas of the company, bring in maximum income. “It allows us, unlike some of our colleagues, not to feel negative developments in the market so acutely”, says Mr. Shkrebets.
At the same time, among the positive changes of the last year Markian Malskyy calls the demand for legal advice in connection with the signing of the Association Agreement with the European Union. “In future such services may be qualified as a separate practice due to the complexity of relations governed by the Agreement”, said Mr. Malskyy.
The least affected activity of law firms is work with clients. “What changes the least is our clients, their pattern of behavior and relationship with them”, says Denys Mirgorodskyy, the President of Dynasty Law Firm based in Dnipropetrovsk. “Savings on legal services is a matter of corporate culture, rather than an indicator of a client’s declining revenues”.
A separate focus of attention is the situation in the Crimean peninsula and Donbas. While in the first case law firms are trying to adapt to new conditions in the peninsula after its occupation by the Russian Federation, in the latter the legal business has almost ceased its activities due to hostilities in the ATO zone. “Back in May, our company moved its headquarters to Kyiv, while the employees, who became the backbone of the Donetsk branch, remained in Donetsk”, says German Taslytskyy, Managing Partner at Pravozakhyst Ukraine Legal Company. “Due to an absolute decrease in the number of requests for legal assistance from companies and residents remaining in the ATO zone we launched long-term trips of our lawyers to Donetsk”. Thus, Pravozakhyst Ukraine Legal Company is trying to maintain its presence on the region’s legal services market.
The same approach was applied by Kashporov & Partners Law Firm, which actually closed down its activities in the ATO zone. “The absence of the legal system in Donetsk made legal practice in the city inappropriate”, states Vladimir Kashporov, Senior Partner at Kashporov & Partners Law Firm. “The Donetsk office was moved to Krasnoarmeysk and continues to serve our clients in the eastern region. A significant proportion of clients migrated from the ATO zone, mostly to Kyiv”.
Just like during the previous financial downturn, arbitration, dispute resolution, criminal law and business integration in other jurisdictions are in high demand in the western region. “The interesting feature of the present-day market is actually the creation of new practices in connection with the annexation of Crimea, namely doing business with the peninsula, protection of investments and property, sale of Crimean assets, etc., and the conducting of the ATO, namely in terms of labor law and mobilization law, protection of people’s property and interests”, notes Markian Malskyy.
In his opinion, a new segment of work in the field of labor law may be representing dismissed officials in connection with lustration, and the practice of white collar crimes will have new interesting projects related to implementation of anti-corruption laws.
As for approaches to organization and structuring of companies, changes in the market dynamic could not but affect the law firm management system. This mainly refers to optimization and decrease in expenses, allocation of revenues and human resources management. Mr. Malskyy notes that many companies reduced work time or salaries and some, including large law firms, even had to reduce staff. Although such optimization is quite painful, it helps the companies to stay afloat. “We are glad that Arzinger managed to preserve its team and cut expenses through other less dramatic measures”, says Mr. Malskyy. “It was partly due to the previous experience, correct planning, financial policy, but mainly – a client-oriented approach and qualification, which, in turn, enabled preserving demand for services even in such hard times”.
However, no significant changes in the western region’s legal market development were observed in the last year. “Lviv has always had strong competition among lawyers that is conditioned by the many universities that train specialists of this profession, and the regional importance of the city, which is the cultural and economic center of Western Ukraine”, emphasizes Mr. Malskyy. “The legal market in Lviv is very different from that of Kyiv in terms of size of law firms and demand for certain practices, which of course affects the payment for the work of lawyers”. The expert calls an exception those law companies serving foreign investors and having an English-speaking team with learning, internships or work experience abroad, as well as knowledge and experience in the field of international law. “We expect increased demand for the work of such lawyers in the region, especially in connection with signing of the Association Agreement with the EU and expected flow of investment to the region”, adds Mr. Malskyy.
Dnipropetrovsk, which is located in the center of Ukraine, has always had a strategic importance for our country. This year, its role has, without exaggeration, increased many times.
“Today, Ukraine is going through the hardest times in all its years of independence, and it certainly had an impact on regional law firms”, says Andriy Tolstykh, Partner atLegart Dnipropetrovsk Law Firm. “Dnipropetrovsk Region has become rearward area and stronghold of the Ukrainian army and Special Forces of the Ministry of Internal Affairs involved in the ATO in the east. Such status of our region does not attract investors and does not allow long-term plans and development forecasts”.
At the same time, the special status of Dnipropetrovsk Region with regard to participation in the ATO set another very important task before citizens and business in these difficult conditions, namely to assist the Ukrainian army. And Dnipropetrovsk Region is coping with this task.
The expert also noted the ongoing pressure from regulatory agencies on business in such a difficult period. “When the so-called ‘Family’ held power, the vast majority of enterprises had to work with ‘official sites’, which were often imposed by the tax authorities, and currently during the fight against this phenomenon in Ukraine they reap the benefits of such work with all its consequences”, says Mr. Tolstykh. In addition, the continued devaluation of the national currency, the decrease in consumer purchasing power and rapid and drastic deterioration of stable trade relations with Russia have a negative impact on business activity.
Mr. Tolstykh believes that the most demanded practicesin 2014for the regionallawfirms were so-called forced business projectswhenlegal servicesare used by necessity: criminal practice, tax disputes andconsulting,bad debt recovery, liquidation and bankruptcy. Along withthe specified fields theexpert notesthe increase in requests regarding migration legislation, the emergence of a special category ofcases involvingprotection of propertyinCrimea and theoccupied territories of Donbas.
“The lawyers of our city, who organized and took part in providing both legal and financial support to ATO participants and displaced residents deserve special gratitude”, says Mr. Tolstykh.
Denys Myrgorodsky points out the significant number of tax disputes between taxpayers and tax authorities: lawyers often have to deal with bankruptcy cases and disputes related to the servicing of bank loans. “The work of our firm was influenced tremendously by the policy of the National Bank of Ukraine regarding imposition of sanctions on small and medium-sized banks, their recognition as problem and insolvent banks”, states Mr. Myrgorodsky. “Each operating bank, which is affected by the crisis, copes with thousands of situations requiring the active work of a lawyer. We also had to render legal assistance to both the owners of troubled bank and its clients. Legislation on the deposit guarantee system and procedure for withdrawal of bank from the market is not new (the profile law became effective in 2012), but its large-scale application began only in the spring of 2014, and the practice is forming only now”. The expert considers claims on recovery of losses filed by the Deposit Guarantee Fund against the owners of Forum Bank very indicative in this regard. Many disputes also arise due to recognition as void the transactions of troubled banks under Article 38 of the Law of Ukraine “On the System of Guaranteeing Deposits of Individuals” by the authorized managers of the Fund.
The scope of work related to the application of the Law “On Prevention and Counteraction to Legalization (Laundering) of Criminal Proceeds from Terrorism Financing” has increased. Denys Myrgorodsky notes the nation’s first dispute between a commercial bank and the National Bank of Ukraine on the correct application of sanctions under the above said law, in which the company represented the plaintiff.
Furthermore, banks increasingly refuse to carry out financial transactions to clients. “Frightened by sanctions from the National Bank for violating this law with regard to other banking institutions, many bankers begin to ‘lick their wounds’ and restrict their clients in conducting cash transactions”, says Mr. Myrgorodsky. The expert asserts that the greatest profit was derived from lawsuits: commercial, tax, civil disputes and protection in criminal proceedings. The company earned a significant increase in revenues from participation in trade investigations of the Interdepartmental Commission.
Andriy Tolstykh noted the lack of significant changes in approaches to structuring regional law firms. However, a noticeable trend in the regional market is changing preferences in the organizational and legal form of legal business from limited liability companies to bar associations. “Amid instability, regional law companies retain priority in cost optimization and expenses control, holding onto valuable personnel. Looking at events and forums held in Kyiv, we observe a tendency towards a reduction in the number of participants from the region, which is conditioned by the decrease in demand for services in the region and forced cost optimization by law firms”, Mr. Tolstykh says, sharing his observations.
The expert mentions the readiness of clients to change legal advisers in order to cut the cost of legal services as one of the features of 2014. Today, clients prefer fixed budgets for individual projects with limited duration rather than a full package of services. However, in the present circumstances regional law firms still rely on long-term relationships with clients, albeit at the expense of their profit. Andriy Tolstykh defines the main priority of the company as retaining the client, assisting him in the preservation and prospective development of business amid instability and in the face of future changes.
“Separately, as a trend I would note a greater willingness of clients as compared to previous years to protect their violated rights in relations with public authorities in courts”, states Mr. Tolstykh. “Unfortunately, meanwhile, it is objectively impossible to satisfy the increasing demands of tax authorities to fill the budget by any means, and not by sudden confidence in the judicial system”.
Denys Myrgorodsky calls 2014 the year of global changes in the structure and organization of the company’s work: “On July 1, we introduced a new work regulation, which had been developed for more than a year on the basis of the experience of the best Ukrainian and international law firms. On the basis of this regulation, we clearly worked out the mechanism for collecting, processing and using marketing information at all stages of work with the client”.
Another innovation for Dynasty was differentiation of bonuses depending on the personal performance of a lawyer. A lawyer’s bonuses now depend on his involvement in marketing work, advanced training, sales and other factors. It significantly resolved a typical problem of involvement of lawyers in marketing work, advanced training and other activities not directly related to the performance of the client’s instructions.
In 2014, Dynasty Law Firm opened a Kyiv office, which performs client’s assignments in the metropolitan area.
Furthermore, it should be noted that specialists from the Donetsk and Lugansk Regions migrated to Dnipropetrovsk Region. “Unfortunately, there are much fewer available vacancies than jobseekers, which increased competition on the regional labor market”, stated Mr. Tolstykh. “This is certainly forced competition, which is in no way connected with the expansion of Donetsk and Lugansk specialists due to the increased demand for legal services in Dnipropetrovsk Region”. He also notes the tendency towards mutually beneficial cooperation in relations with Kyiv law firms. This year has not brought mass expansion to the regional market and escalating competition between Kyiv and regional companies. It will be possible when the regional firms “grow up” in their competence and experience, and Kyiv firms will be ready to significantly reduce the cost of their services to the regional level. Thus, when interests overlap, cooperation rather than competition is more effective in a region.
Denys Myrgorodsky noted that Kyiv law firms are unable to withstand competition with local players in the local markets, although expansion attempts are undertaken repeatedly. “The large law firms from Kyiv enlist us as a contractor in the region and prefer to perform local tasks with our hands. At the same time, they often ask to keep our relations confidential, because they do not want to disclose information on subcontractors to the client. At least one third of the first 20 companies among Top 50 are our regular clients”, Mr. Myrgorodsky sums up.
The legal business of the eastern region is traditionally concentrated in Kharkiv. As in other regions of Ukraine, experts describe bankruptcy support priority services. As noted by Yevgeniy Shkrebets, due to the current economic situation in the country, many companies have reached the critical insolvency threshold. In these cases, there is a need to liquidate such companies using the bankruptcy procedure. Further, in the forefront of liquidation or interim administration in the financial institutions of Ukraine depositors need legal consultations and support in matters of return or protection of deposits. “Due to more active attempts on the part of bodies of local self-government to fill budgets, in particular, to collect rent for land, representation in land matters remains in demand”, says Mr. Shkrebets. “I would note the increasing demand for legal support to clients in matters related to performance of obligations by real estate developers before investors”.
Reducing interest in legal services in the region is observed on the part of foreign legal entities and individuals, which is caused by the effects of economic instability. Legal support to foreign investment and M&A transactions remain almost uncalled for.
At the same time, the leading firms expand the geography of clients. “Over the past year, our client base was replenished by representatives of Poltava Region, as well as Donetsk and Lugansk Regions, which was obviously conditioned by the expansion of territorial jurisdiction of the Kharkiv Commercial Court of Appeal and the Kharkiv Administrative Court of Appeal”, states Yevgeniy Shkrebets.
Criminal law practice has not remained unnoticed though with some specific features. “Recently highly demanded are services on protection of interests of individuals in criminal proceedings on charges of crimes such as acts directed at violent change or overthrow of the constitutional order or seizure of state power; encroachment on the territorial integrity and inviolability Ukraine; illegal handling of weapons, ammunition or explosives; financing acts aimed at violent change or overthrow of constitutional order or seizure of state power, changing the borders of the territory or the state border of Ukraine; seizure of government or public buildings and constructions”, the Kharkiv expert says, sharing his experience. There have also been requests for legal support of functioning of subjects of the electoral process – candidates for the post of people’s deputies, political parties that took part in the early elections of people’s deputies of Ukraine.
The Director of Shkrebets & Partnerscalls the firm an exception to the general trend of the relationships within the company as its structure has not changed. “The existing company team and structure have been forming for years”, says Mr. Shkrebets, “so in the current situation it is not entirely forward-looking to initiate any changes since the economy is cyclical, and recession is followed by recovery, consequently at this stage the priority is maintaining the integrity of the legal business structure”. Moreover, over the past six months the company has recruited five new employees, including those who were forced to cease the practice of law in the temporarily occupied territories of Donbas. The company opened vacancies both in judicial and consulting practices.
Mr. Shkrebets also notes that representatives ofthe legal market turned out to be the mostvulnerable andmuchless competitivein conditions of an unstable economic situation inside the country. This partly explainsthe demand forlocalspecialistsfromKyiv law companiesin matters of representing clients in the territory of Kharkiv and the region.
“Our example shows just the opposite situation. In 2014, we opened an office in Kyiv, which was due to the need to optimize the operation and the emergence of new areas of activity”, the expert concludes.
Trends that adversely affected development of the legal services market are common to all regions, including Odessa, with all its specific features.
“In today's situation it is impossible to forecast the return on investment projects as there are simply no appropriate methods”, says Oleksandr Kifak. “A small-scale or maybe medium-scale entrepreneur may dare to go for broke. Such a pattern of behavior is uncommon for a large investor, so investment projects that more or less successfully pursued their goal have now been frozen”.On the other hand, the expert noted that the more problems that clients have, the greater the workload for lawyers. This trend ensures the legal services market stays afloat in any economic environment. However, it should be stated that a significant reduction in clients’ income inevitably results in a decrease in income of the law firm itself. The Managing Partner of ANK Law Firm calls litigation the most profitable in terms of legal support.
“Taking into account the specifics of our seaside region, in 2014 the implementation of some port infrastructure development projects began”, says Volodymyr Zubar, Managing Partner at Yurline Law Firm. The expert considers the projects in this field as the most successful in the current year.
Mr. Zubar also notes another trend: almost all majorclients have alreadyformed theirin-houselegal servicesand law companiesare increasingly acting as bidders in tendersfor the provision of any services. As a rule, this refers to handling separate trialsor legal support to major projects.
No significant changes in the organizational structure of law firms in the south are observed either. Oleksandr Kifak explains this by saying that after the crisis of 2008, which made everyone tighten their belts, law firms, as well as today’s business as a whole, do not plunge themselves into excesses. Companies are oriented at minimizing production costs, in particular by constantly improving labor organization and technological processes. “We have not dismissed any employee, have not cut the payroll”, says the expert. “The team at the law firm, especially the employees, who have worked in the company for a considerable time, is the main potential of the company, its most effective weapons. Its loss cannot be justified by a difficult economic situation, unstable political time or currency fluctuations”.
The specifics of the Odessa legal market, where law of the sea and maritime complex are the key practices, largely explains the lack of proper attention to the region by metropolitan law firms, which cannot be said about internal competition, which is quite strong. “This is conditioned by a good law school in the region as a whole, and a variety of services provided by our colleagues in particular”, Mr. Kifak says, sharing his opinion.
Volodymyr Zubar also notes strong competition in Odessa Region. “Some young interesting companies with ambitious plans have appeared. However, the already existing Odessa firms (e.g. Yurline celebrated its 20th anniversary this year) remain major players on the legal market”, concludes the expert, noting that Kyiv companies that opened their offices in Odessa, as before, are based on some Odessa firms or lawyers with their set of clients.
The relocation of Donetsk and Lugansk offices to other regions of the country became a natural response to the unfolding hostilities in the ATO zone. However, local companies continue their operations even in such difficult conditions.
“Due to the situation in Eastern Ukraine, in demand are services in labor law; disputes relating to protection of property rights and interests of individuals; conflict resolution with banks regarding debt collection under loan agreements and, vice versa, return of funds to individuals and legal entities”, notes German Taslitskiy, Managing Partner at the Pravozakhyst Ukraine Law Firm. Disputes relating to the untimely performance of commercial contracts and confirmation of force majeure circumstances are also relevant.
The structure of practices of local law firms has not undergone significant changes, but as noted by Volodymyr Kashporov, Senior Partner at Kashporov & Partners Law Firm, at the company’s Donetsk office litigation remained the prevailing field of practice, while the Kyiv office focused mostly on the legal service of regular clients and transaction support. “The share of foreign clientele has increased significantly due to the activities of foreign missions. It can be stated: the demand of foreign clients has become a compensatory mechanism in the fall of the internal market. The most profitable were debt collection projects by corporate collection methods and, traditionally, financial practice”, says Mr. Kashporov.
Taking into account events in Eastern Ukraine clients’ requests have also changed. Mr. Kashporov observed an increase in requests for the transfer of business from the ATO zone. “However, outsourcing remains in demand. The work of in-house lawyers is often reduced to supporting current operating activities”, the expert notes. “With such significant changes many regional clients felt the need to enter new markets, which requires non-diversified consulting, due diligence skills, etc. In addition, outsourcing is increasing constantly due to our being engaged by colleagues and partners from other countries and regions of Ukraine, who trust us because of local knowledge and the nuances of doing business”.
The opinion of the colleague is shared by German Taslitskiy, who explains increased attention to outsourcing by the fact that those enterprises still working in the Donbas reduce staff, including lawyers, mostly because of insufficient workload.
There is no need to talk about any competition in the region. “Not that events in the Donbas failed to influence competition, rather we can say that lawyers in the ATO zone became uncalled for”, Mr. Taslitskiy underlines. “It is difficult to practice law in a warring region. The fact that law firms and offices that left the region have increased competition in the rest of Ukraine is important”.
Today, the Crimean peninsula is not just an object of close attention of Ukraine, the Russian Federation and the international community. Its de facto dual status gives reason to say that Crimea is primarily a risk zone for all market players, including the legal market.
“Obviously, the change of living conditions in the annexed territory was followed by change in the rules of life”, says Yan Akhramovich, Deputy Head of the Simferopol office of Ilyashev & Partners Law Firm. “These changes generate more and more new questions every single day: how to protect property, how to carry out business activities, which government bodies to address to handle certain issues?”.
The expert notes the creation of new government agencies with new powers in Crimea and the restructuring of existing ones, change in the procedure for doing business, creation of new registers of legal entities and individuals, registers of ownership rights, cadastral registration... The increased popularity of Crimea in the international community, especially in the post-Soviet area, has attracted the attention of private entities.
The expert draws attention to the fact that active work by Crimea on the international arena made local lawyers recall international rules that have not been applied by them for a long time and actually could not be applied while Crimea was an autonomous republic within Ukraine, which did not come across double citizenship, double registration of rights, and double taxation.
“Moreover, while the Crimean legal services market is being filled more and more by law firms often with highfalutin names and loud slogans, the quality of legal services in the ‘New Republic’ has on average dropped significantly”, states Mr. Akhramovich. He observes that it is increasingly possible to witness the emergence of a new law firm in Crimea and its instant disappearance.
The most pressing issues for the inhabitants of the peninsula and enterprises operating on its territory are protection of property rights to real estate and property of special categories, such as transport vehicles, ships, agricultural machinery; ensuring the rights of creditors; registration of entrepreneurs.
“Today, we as representatives of the legal profession more and more often hear this question: have we adapted to the legislation of Russia in Crimea?” says Yan Akhramovich. In his opinion, such question is erroneous as now the rules that do not coincide with the rules of Russian legislation are applied in Crimea. The Crimean legal environment does not require that lawyers adapt to the rules of Russian law, but that they work with rapidly changing law. The expert believes this to be the reason why many Russian giants are, when addressing some issues, inferior to young law companies established in the Crimean peninsula. The legal order in Crimea leaves no opportunity for template thinking and demands its participants constantly stay on the crest of a wave, updating information on the practical solution of various issues.
However, as Mr. Akhramovich himself acknowledged, each new day in Crimea is another reason for inventing a new solution for a new challenging issue.