Energy is a significant sector for the leading Russian and CIS law firms, and with a thrust in oil prices and new opportunities for companies here, this is only set to continue.
Russia has seen an increase in activity in the energy sector recently, not least thanks to the advantageous oil prices which have attracted domesticand international players to the market. Despite a drop in M&A across leading markets internationally last year,Russia saw an encouraging increase in deals in the energysector, which is now a dominant force in the market.Transactions totalled USD 4 bn, and included highlightssuch as Gasprom Neft’s acquisition of 50% ofBeltransgas shares and OJSC Lucoil acquisitions ofshares in ConocoPhilips.
Not only has this signalled a new appetite for Russianassets, but it has also spelled good news for the leadinglaw firms with strong energy capability. Firms herehaven’t always been in a position to leverage off ahealthy energy market, however. This, despite Russia’slong standing status as a major oil producer andexporter. Kyle Davis of Goltsblat BLP explains this had alot to do with a stalling deal pipeline. ‘Even thoughRussia has been a major oil producer and exporter fordecades, during a period between the early 2000s and about four years ago many law firms with Moscowoffices, even those with a strong international energypractice, didn’t maintain an on-the-ground capabilitybecause there was not a lot of deal activity’.
However, despite ongoing economic ricochets acrossEurope, the energy sector has been, for many firms, oneof the most important practice areas. ‘In the past fewyears you’ve seen a big increase in activity and Moscowis again teeming with oil & gas lawyers who are beingkept busy representing Rosneft, Gazprom Neft andother Russian oil companies both private and state-controlled, as well as the foreign majors that are partneringup with them. The deal flow has been outbound andinbound, upstream and downstream’ adds Davis.
This thrust in oil prices has not only got deals off theground, but is also a good indication of the popularity ofRussian assets and investment levels. The activity hasnot, however, been astronomical, despite having a considerableeffect on the market. ‘Although there has beenno repetition of the big sovereign wealth fund, IOC or big trading house cooperative ventures as were muchhyped prior to the crisis, an oil price up towards and pastUSD 90-100 is hugely significant in terms of appetite forRussian assets and the willingness of the government totake measures to stimulate investment in production andother infrastructure’ explains Robin Wittering, partner atEgorov Puginsky Afanasiev & Partners.
Nonetheless, there is a question mark over how faroil prices are actually attracting investors. As VladislavZabrodin, managing partner at Capital Legal Servicespoints out, while high oil prices do prompt heightenedactivity levels in investments into oil production andrefining, ‘these investments are considered to be investmentsin strategic industries and require special governmentapproval’. This increase does lead inevitably to adrop in investors’ interest in risk assets, ‘such as sharesand bonds of companies involved in the oil sector, astheir prices may drop after some time. It has to be mentionedthat there is redistribution of oil and naturalresources money in the country and investors are veryinterested in other fields that are significantly growinglast years, like retail, pharmaceuticals automotive, andso on’ Zabrodin adds.
However, with a climate of uncertainty acrossEurope, how far are investors – even in a sector asstrong as energy – affected by the Eurozone downturn? While Russia has increasingly set its stand out globallyoff the back of its roaring energy sector, it is impossibleto ignore the fluctuating levels of M&A and investmentacross Europe. Nonetheless, there has been little noticeably impacton the sector thus far, partly thanks to the growingstrength of domestic investors. The Eurozone crisis hadlittle impact on the deal flow in the oil and gas sector,which never dried up during the crisis’ says MoscowbasedAlexey Frolov, head of Russia’s energy and naturalresources practice group at Baker & McKenzie. ‘Weare now seeing increasing activity of clients in the oiland gas and oil field services sectors. The deal flow inother sectors has been negatively affected’.
‘It would be surprising if it dropped off significantly’says Davis, who notes that this prediction has a lot to dowith the increasingly international nature of the sector.‘Now that Russian state-controlled oil companies aregoing global in an increasingly big way, it seems there’salso an acknowledgment that if Russia is seen as an oilproducingcountry that has opportunities to offer forforeign majors, it will open doors for Russian companies.It seems unlikely that this approach will change ifoil prices fall and make some projects less economical –it’s possible that the Russian policy response will be toopen up foreign investment to some of the lower-hangingfruit’. It is certainly true that major Russian financialinstitutions and leading corporates are increasinglyplaying lead roles in the biggest deals. This is linkedwith the growing profile of Russian state banks as thehike in deals involving domestic investors is more andmore evident. Russian business is increasingly geared towards outboundinvestment and operation on a global scale, withleading firms moving much more towards advisingdomestic clients as the investors on cross-border M&Aand joint ventures. As Akin Gump corporate and energypartner Natalia Baratiants explains, the firm ‘continuesto have a strong deal flow from energy companies thatare currently focusing more on joint ventures with localpartners for their greenfield projects in the frontierregions of Russia capitalizing on the synergies of theircombined efforts’. Partner Alexey Kondratchik agrees;‘This also brings the firm a flow of M&A transactions asRussian oil majors acquire domestic smaller oil and gascompanies to expand their asset base’.
The dominance of the energy sector in Russia continuesto provide a strong deal pipeline for the leadingfirms, and competition is fierce for the biggest deals.‘Law firms are pack animals, and competitive. Whenthey see their peers working on exciting deals in theRussian oil business it doesn’t take long for others totake the leap. So the market is getting more crowdedwith practitioners looking to get a piece of the energybusiness’ notes Davis.
And given that the strength ofthe oil and energy sector does prompt activity frominternational companies involved this industry, angrowing need for broader legal service is the inevitableresult. There are without doubt ‘grounds for optimism’agrees Wittering. ‘And, certainly, in considering a moveback into the market I take the view that investmentthemes featuring a Russian element will be back on theagenda’.
By Anastasia Hancock
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