In 2015, the revenues in the legal services sector of the Russian economy grew six percent, driven by the increase in merger and acquisition deals from the Asia-Pacific region, the restructuring activity in the banking and oil industries, as well as changes in the law. The year 2015 saw profits in the legal services sector slow down seven percent compared to the average growth seen from 2010 to 2015, as the decline in foreign investment and the weak rouble led to clients’ cutting budgets and becoming more price-sensitive. The revenue share of large legal firms has continued increasing from 2010 to 2015, indicating a growing concentration in the industry. From 2015 to 2020, the revenues of the legal services sector are expected to see a seven-percent compound annual growth rate (CAGR), impacted by continuing sanctions on the Russian economy, an anticipated increase in bankruptcies, and the upcoming FIFA World Cup in 2018.

Trends

In 2015, the legal services industry in Russia recorded a six-percent increase in terms of revenue. Growth was driven by increased restructuring among banks and oil companies, changes in personal data and patent protection laws, and an increase in merger and acquisition (M&A) deals from the Asia-Pacific region. However, a decline in foreign direct investment (FDI) and difficult macroeconomic conditions negatively affected the demand for legal services in the country.

The demand for legal services was impacted by the new Russian personal data law in 2015. The law states that data on Russian citizens must be stored in Russia, thus affecting approximately 2.6 million companies that process the Russian consumers’ personal data. The law has negatively affected foreign investment inflows into Russia, at the same time forcing some major international companies to leave the Russian market. Spotify has cancelled its launch in the Russian market in 2015, and Google closed its software development center after long negotiations with regulators. Other companies, such as eBay, however, have been preparing to comply with the law using legal advisors.

In addition, investments from the Asia-Pacific region fueled increased M&A activity, boosting demand for legal transaction services in the country.

The demand for legal services was also stimulated by ongoing restructuring among banks, which were negatively affected by Western sanctions. In addition, the demand for legal restructuring and bankruptcy services was driven by energy and natural resource companies’ getting hit by the plunge in oil prices.

The demand for the services of patent and copyright agents was high due to the limited nature of intellectual property protection mechanisms that are available in Russia. Although in 2014 some changes were made to the Civil Code regarding patent protection, in 2015 Russia’s intellectual property rights index still declined by 0.3 points to 4.8, bringing Russia to the 69th spot out of 129 countries globally. In 2015, another change came into effect, which allowed patent owners to demand statutory compensation from patent infringers instead of claiming damages. Compensation varies from RUB10,000 to RUB5 million (USD154.45 to USD77,227) or double the cost of the license.

The performance of the legal industry’s players was hit by Western sanctions on Russia in 2014 and 2015. Firms experienced a decline in legal work, especially from foreign customers, as businesses were withdrawing from the Russian market due to economic instability and political uncertainty. While some foreign companies left the Russian market, others decreased their investment in Russia. A 46-percent decline was registered in FDI inflows in Russia in 2015. Major industries hit by sanctions were banking, energy, manufacturing, and construction. However, the imposition of sanctions increased the demand for sanctions-related advisory services in the country.

The legal industry’s profits recorded a seven-percent increase in 2015 compared with a 21-percent CAGR registered from 2010 to 2015. The slowdown in profit growth was impacted by the reduced work volume in commercial, corporate, M&A, and capital markets practice areas. Due to the companies’ contracting their budgets, clients were especially price sensitive, which negatively affected the law firms’ profitability. As a result, law firms, especially foreign law firms based in the U.S. and the U.K., reduced their headcount and optimized operations in Russia. In 2015, due to the unfavorable geopolitical situation in the country, the U.S.-based international law firm K&L Gates terminated its operations in the Russian market by closing its Moscow office.

Competitive landscape

The number of Russian legal firms grew by seven percent in 2015. The greatest increase in the number of firms was observed in the small firms category. However, the industry was becoming more concentrated and dominated by firms with more than 250 employees. Their revenue share grew from 15 percent of the industry’s total turnover in 2010 to 31 percent in 2015.

In 2015, Egorov Puginsky Afanasiev & Partners won two awards in the Lawyer European Awards, including European Managing Partner of the Year and Energy, Infrastructure, and Projects Deal of the Year. In addition, in 2015, the firm’s lawyers participated in a working group held for arbitration law improvement in Russia.

In 2015, Baker & McKenzie advised Orkla SA on its sale of Orkla Brands Russia to Slavyanka-Lyuks JSC. The firm also advised Siemens Aktiengesellschaft on commercial issues of its joint venture with Mitsubishi Heavy Industries.

DLA Piper International LLP is a business law firm operating worldwide. Practice areas consist of antitrust and competition law, commercial contracts, corporate, construction, finance, real estate, restructuring, tax, technology, and the media, as well as international trade.

The Pepeliaev Group employs 160 lawyers in Russia. In 2015, the Pepeliaev Group opened an office in Sakhalin in a strategic move to expand its service in the Far East, where the government is vigorously promoting regional investment. In addition, the firm provided advisory services to Gazprom Export. In 2015, the Pepeliaev Group launched a new, more modern and user-friendly website. In addition, the firm launched its new bankruptcy and anti-crisis business protection practice.

In 2015, Dentons Russia signed a partnership deal with the World Wide Gost certification agency, allowing the firm to improve its expertise in the technical regulation of the Eurasian Economic Union. In addition, Dentons signed a partnership deal with Customs Rus, providing the firm with expertise on customs declaration services for trade in the Eurasian Economic Union. In 2015, Dentons also expanded its tax and customs practice by hiring three new associates from Deloitte, White & Case, and the Pepeliaev Group in Moscow. In 2015, Dentons merged with the Chinese law firm Dacheng. The merger is set to be beneficial for Dentons’ operations in Russia due to a growing interest in the Russian market on the part of Chinese investors.

Prospects

From 2015 to 2020, the revenue of the legal services industry is expected to grow at a seven-percent CAGR in Russia. The main factors behind the sector’s expansion are expected to include the continuing effects of sanctions on the Russian economy, an anticipated increase in bankruptcies, and the upcoming FIFA World Cup 2018. The legal industry is expected to be challenged by a decline in foreign investments over the upcoming years.

The demand for legal services is anticipated to be negatively affected by the unwillingness of Russia companies to reinvest into the domestic market from offshore businesses due to low disposable incomes and the economic uncertainty in the country. In 2016, the Russian M&A market is expected to contract further due to a continuing decline in oil prices, which in turn further slowed down econo-mic growth. However, a strain on the companies’ budgets is expected to increase consolidation in consumer and banking sectors. In addition, Russia is expected to shift its focus to encouraging investment inflow from the Asia-Pacific region, thus fueling demand for legal services catering to that category of investors.

Continuing Western sanctions are projected to further restrict investments from the E.U. and the U.S., negatively affecting the demand for legal services from investors. At the same time, the demand for sanctions-related legal services is expected to be bolstered by the Russian companies’ trying to adjust to restrictions and prevent any liability issues in partnerships with foreign clients. In addition, foreign investors are expected to increase the demand for sanctions-related services, making sure they are following the laws.

Due to the geopolitical situation and continuing sanctions, Russia’s imports have been decreasing. As a result, the government is set to increase its support for domestic production, substituting declining imports in the country and thus fueling demand for legal services. Local production is set to be particularly strong in the pharmaceutical, the petrochemical, and the manufacturing industries.

The demand for legal insolvency services is expected to be supported by a growing number of bankruptcies in Russia. In addition, the demand for legal services is set to be fueled by a new bankruptcy law introduced in October 2015, allowing for an easier filing process to commence bankruptcies in Russia. According to the new law, Russian citizens with debt of RUB500,000 (USD7,723), who have missed payments for three months are allowed to file for bankruptcy.

In 2016, Russia is set to further improve its antitrust legislation by launching the Fourth Antimonopoly Package with amendments to regulations in such areas as market dominance, vertical and horizontal agreements, as well as merger control clearance.

In addition, the industry is expected to be boosted by Russia’s hosting the FIFA World Cup 2018. The preparations for and the finalization of the event are expected to increase the demand for legal services in the country.