The Ukrainian legal market faces another long winter of discontent

By Timur Bondaryev, Managing Partner, Arzinger

The Ukrainian legal market has been very turbulent in recent years. The pre-crisis Eldorado and real estate transaction boom resulted in a devastating crisis, which dramatically changed the local legal landscape and led to a reshaping and repositioning of most of the market players.

Unlike the Russian legal market, in which over 100 international law firms are strong competitors, the domestic legal services market has traditionally been dominated by strong local firms. International law firms have traditionally overseen work done by local firms on international transactions with Ukrainian elements and focused on increasing their market share in nearby territories like Russia and Poland.

Shortly before the crisis, however, big international and regional firms entered the Ukrainian market. The newcomers had huge expansion budgets and bought in local expertise at high wages to obtain market share. As a result, wages in the market rose dramatically and, in most cases, it looked unrealistic for domestic firms to break even, taking into account the amount of investment in talent required.

Previously very loyal partners and senior associates at ‘old generation’ international and domestic firms joined the newcomer firms to obtain better positions and compensation. The remaining senior associates and local partners were immediately promoted to partner to fill the gaps and to retain firms’ structures. But then the show started.

Market slowdown

In the summer of 2008, transactions slowed down and investors, buyers and banks became very nervous when talking about payment terms. Banks start to withdraw financing for Ukrainian transactions which had been sealed down just a few months previously and did their best to withdraw from the Ukrainian market, selling their portfolios.

In the autumn, the first wave of lawyers at the big local and international firms were made redundant. The local big-four firms fired dozens of people, including partners. The international and local firms specialising in banking and finance and transactions found themselves without work and having to cut costs. The first major debt recovery litigations were predicted and launched.

2009 to 2010 became a good time for litigation lawyers. Crisis-related banking, fraud, insurance and insolvency litigation cases piled up. Many international firms were not able to effectively assist clients, since they had never dealt with big-scale litigation cases due to compliance issues.

At the same time, the banks found themselves in the middle of non-payment problems, having to write off huge debts and sell their credit retail portfolios. Local firms with strong litigation departments hit the ground running and participated in tremendous litigations.

However, the litigation firms were charging huge fees and the banks began to understand that, due to local peculiarities, major litigations may never be successful for them, as the assets of debtors were stripped and it was impossible to chase beneficial owners because of their political involvement. The banks started to put pressure on law firms to agree to alternative fee arrangements, and most of them became bound to successful final fees on cases.

Between 2010 and 2011, the political and economic situation in the country became much worse. The state budget lacked the funds to finance imminent infrastructure projects, including those required for the Euro 2012 football championships, which Ukraine is co-hosting.

Law firms turned into investors, investing their own funds and resources into litigation projects, which seems to be attractive. However, it could take years before they get to the assets.

Pressure on fees

The M&A and financing work which was visible at the beginning of 2011 has since declined and there are no new significant investments on the horizon.

Meanwhile, existing investors are expanding their internal legal departments to cut costs on legal advisers.

There is little new business in the market and consequently the amount of legal fees in the market is plummeting and law firms are fighting hard to win clients. The fee dumping is getting worse and law firms are ready to work almost for nothing to keep their people busy. The legal profession is still not regulated and there are no effective means to chase violators of the market rules.

Undervalued opportunities

That said, there are unique opportunities in almost all areas of business in Ukraine. The real estate market is undersupplied in all segments and huge investments are expected in this sector as well as in the infrastructure and energy areas.

However, the economic outlook '¨for 2012 is not very optimistic and '¨the market is unlikely to see huge investments projects, despite the '¨unique shape and incredible potential of the Ukrainian market. As the largest territory in Europe, it cannot be '¨overlooked in the mid to long term.

timur.bondaryev@arzinger.ua