Moscow gold: For City lawyers, the oligarch era is over

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On 4 March, former Russian spy Sergei Skripal and his daughter Yulia were poisoned in the quiet town of Salisbury.

To say the United Kingdom and Russia weren’t the best of friends before this is close to being the understatement of the year. In the immediate aftermath, relations have got progressively frosty and the last two months have seen some of the most volatile rhetoric between the two since the fall of the Soviet Union.

This is now spreading to the City’s professional class.

This week alone, Linklaters was openly criticised by the Foreign Affairs Select Committee for its role in the IPO of Russia’s second-largest aluminium producer, while world-famous oligarch and owner of Chelsea Football Club Roman Abramovich has reportedly left the UK after facing difficulties in the renewal of his visa.

While domiciled here, Abramovich was the 18th wealthiest person in the United Kingdom. If the government declines his visa extension, that points to a major breakdown in relationships.

The developing narrative could prove seriously problematic for the corporate and litigation practices at some of London’s biggest firms and chambers. Deeply embedded relationships could be torn apart should the UK look to impose sanctions as stringent as the United States. Years of hard work and billings might just end up at zero.

The corporate face of Russia

In April, the US State Department created a list of 97 oligarchs eligible to face US sanctions. That same month, the UK government opened the ‘Russian Corruption and the UK’ inquiry.

What is certain is that the language coming out of the UK’s inquiry is much more challenging than it would have been in recent years.

Oleg Deripaska

This was made abundantly clear with the publication of a Foreign Affairs Select Committee report on Monday (21 May), particularly into Linklaters’ involvement with Oleg Deripaska’s company Rusal.

Deripaska, a $4bn-valued aluminium magnate, was born in the city of Dzerzhinsk which lies about 400km East of Moscow. He founded Rusal – the second-largest aluminium company in Russia – and En+, Rusal’s energy-focused holding company. Last week, the weight of the sanctions placed upon him caused Deripaska to resign from the boards of both companies due to business becoming near-impossible.

When he was looking to float En+, Rusal’s energy-focused holding company, on the UK stock exchange in November 2017, he turned to White & Case for advice, while Linklaters acted for a consortium of international banks. When invited by the committee to explain its role in the initial public offering (IPO), as well as assess the regulatory framework surrounding the deal, the firm refused.

The committee heavily implied its feelings in the matter, saying: “We regret their unwillingness to engage with our inquiry and must leave others to judge whether their work at ‘the forefront of financial, corporate and commercial developments in Russia’ has left them so entwined in the corruption of the Kremlin and its supporters that they are no longer able to meet the standards expected of a UK-regulated law firm.”

The firm replied, expressing its “surprise and concern” and rejected “any suggestion based solely on the fact that we – like dozens of other international firms – operate in a particular market that our services may somehow involve the firm in corruption, state-related or otherwise”.

Given the political context, Linklaters is likely to be first in a string of major global law firms to have their relationships questioned so directly.

Rusal, the Deripaska-founded aluminium business, cemented its links with Jones Day in 2011 with the hire of lawyer Igor Makarov from the firm’s Moscow office. Makarov entered as the company’s chief legal officer, but within a year he was promoted to deputy chief executive officer for legal affairs at Basic Element, the holding company owned by Deripaska.

Three years later, Jones Day hired London-based project finance partner Nick Collins from Latham & Watkins. Among the clients Collins brought were Khakas Aluminium and Rusal, both Russian-headquartered organisations and another route into Deripaska’s pocket for the US firm.

Owing to the sanctions placed upon him, this relationship will now be strained, though the extent to which this tie will be completely severed remains to be seen.

Leonid Mikhelson

Deripaska is a big name, but financially he simply isn’t on the same level as some of Russia’s biggest hitters.

Leonid Mikhelson is reportedly the third-richest man in Russia with a personal fortune in excess of $18bn (£13.4m). The energy market made Mikhelson rich and his Novatek business has become the largest natural gas producer in Russia since launching in 1994. It has been a major benefactor of the Russian state’s alleviation of taxes on liquidised natural gas (LNG) and Putin gave his personal blessing to a Novatek LNG pipeline in December 2017.

Both Baker Botts and Baker McKenzie consider Mikhelson’s energy titan a close client. Baker Botts partner Mark Rowley continues to advise Novatek on matters relating to its LNG lines, while Baker McKenzie partner Sergey Krokhalev advised Novatek shareholders during a 2011 deal which saw Novatek sell 12 per cent of its shares to French oil company Total.

Should Mikhelson find himself in the same situation as Deripaska, Baker Botts and Baker McKenzie could both see a corporate revenue stream disappear similar to Quinn’s loss of Deripaska’s litigation.

Current sanctions issued by the UK government have not targeted individuals, while the US’s sanctions on Deripaska are already influencing his choice in representation. Were Britain to impose sanctions that severe on Abramovich, for example, it could be a significant hit to Skadden Arps Slate Meagher & Flom’s London and Moscow offices as well as to the three-decade relationship between ex-Skadden London managing partner Bruce Buck and the Russian.

The Abramovich connection

Buck’s relationship with Abramovich is likely the most high-profile example of oligarch-lawyer interaction in London now coming under scrutiny. The strength of that tie to the oil magnate inadvertently led to Skadden having one of London’s most active football practices.

Abramovich is arguably the most well-known oligarch in the world and his net worth exceeds $11bn (£8.1bn). He made his billions from a range of sources with steel and oil proving the most profitable. Eventually, Abramovich founded the UK-headquartered Millhouse LLC in 2001 as a personal wealth and asset management company to juggle his immense fortune.

Buck rejects being called Abramovich’s right-hand man, instead referring to himself, jokingly, as the “little-toe-on-the-left-foot man”. Regardless of how he would like to downplay his influence to his firm, Buck’s relationship with the Russian was golden.

Buck ran Skadden’s UK office for 26 years, as well as becoming Chelsea chairman almost the very moment Abramovich’s takeover of the club was confirmed in 2003. The long hours that US lawyers are renowned for working were put to the test – he held both roles until stepping down as the law firm’s London head in 2014.

There was a big reward. Skadden secured the lead role for Abramovich in the $13.1bn sale of Sibneft to Russian-state owned natural gas company Gazprom with Buck and partner Hilary Foulkes leading on the deal. Buck’s relationship with the Russian led to partner Paul Mitchard QC advising the oligarch during his mammoth litigation against Boris Berezovsky.

Allegations are flying while the list of sanctions placed on wealthy Russians, Kazakhstanis and Ukrainians just keeps on growing.

Abramovich’s ties to Skadden in London have been an invaluable source of revenue to the firm, but they aren’t unique. Certain key law firms and chambers hold deeply embedded ties with Russian oligarchs, capitalising on long-standing relationships to gain appearances on the regular High Court battles of Russia’s richest.

Russian oligarchs

Since The Lawyer began tracking oligarch litigation in the London market, a pattern has emerged. The same profile of cases appears time and again.

When this tranche of litigation first arose, it was largely through interpersonal disputes. Deals and partnerships were entered into without binding contracts. Years down the line, these disputes arise devolving into a mire of anecdotal evidence and complexity.

The textbook case of this came with Abramovich v Berezovsky.

Abramovich, oligarchs, Chelsea
Roman Abramovich

The late Boris Berezovsky’s fortune arose out of Russia’s mass privatisation in the 1990s under Boris Yeltsin. In 1995, he Abramovich and Georgian businessman Badri Patarkatsishvili created Sibneft. Berezovsky was a vocal critic of Putin and when he came to power in 2000, the oligarch fled.  Berezovsky alleged that the Chelsea owner had coerced him to sell his shares in Sibneft at a cut price while also breaking promises in relation to the sprawling Abramovich-founded aluminium behemoth Rusal, laying the foundations for one of this century’s most high-profile legal conflicts.

Firms flocked to get a piece of the action. When the dust settled, Skadden partner Mitchard – leading for Abramovich while instructing Brick Court’s Jonathan Sumption QC – and Berezovsky’s lawyers at Addleshaw Goddard led by Mark Hastings – who later left for Quinn Emanuel Urquhart & Sullivan and was recently dismissed for “inappropriate behaviour” – were left standing as the two most prominent representatives from either side.

When Abramovich v Berezovksy culminated in 2012, it was the end of one of the biggest pieces of litigation the country has seen.

Now, the Norilsk Nickel dispute is shaping up to become the biggest oligarch dispute since it all wrapped up with the company being described as “too big to sanction”.

The sanctions heaped upon him from the United States government mean neither he nor his companies can use the US dollar system or conduct business with Americans.

For Deripaska, this is already creating a headache.

Putin Potanin
Vladimir Putin and Vladimir Potanin.

The Norilsk Nickel dispute has seen Abramovich turn once more to Skadden, while Moscow-born oligarch Potanin – who acquired his vast riches through a loans-for-shares programme in the mid-1990s – has called on Debevoise & Plimpton. Deripaska has routinely called on US firms to represent him in the English court with his preferences shifting from legacy Bryan Cave to Quinn. For this, Macfarlanes partner Ian Mackie will be acting as the sole partner from a UK-headquartered firm. It may also be the first time Deripaska has called on non-US representation during litigation.

The State Department’s sanctions have clearly altered Deripaska’s plans. His reliance on US firms has been broken and he must now rely on counsel from outside America.

The dispute between the trio is symptomatic of looser business arrangements during the 1990s in the former Soviet Union which has brought interpersonal disputes to the fore.

CIS oligarchs

Now though, current directors of companies formerly owned by individuals hailing from the former Soviet Union states – also known as the Commonwealth of Independent States (CIS) – are going after those who founded them.

These allegations typically rest on enormous fraud claims where money appears to have fallen through a black hole.

Two prime examples of this are Ukrainian oligarchs Gennadiy Bogolyubov and Igor Kolomoiskyi.

The pair were both born in Dnipropetrovsk, a large industrial city sitting on the banks of the Dnieper river in central Ukraine. The former made his billions in petrochemicals and finance, while Kolomoyskyi’s riches were made founding Ukraine’s largest lender PrivatBank in 1992.

The ongoing PJSC Tatneft v Gennadiy Bogolyubov & Ors sees him and Kolomoiskyi appearing alongside fellow Ukrainians Alexander Yaroslavsky and Pavel Ovcharenko to defend claims from their former oil business that “very substantial sums” were embezzled from company accounts. Skadden, Fieldfisher, Mishcon de Reya and Byrne & Partners are respectively representing the quartet, while Akin Gump Strauss & Hauer is advising the company’s current directors.

This dynamic is being mirrored  in different cases, with oligarch former owners of companies now facing multiple allegations of fraud and embezzlement.

Roughly 500km separate Ukraine and Kazakhstan at their closest points and while the former PJSC Tatneft owners were running their business, Mukhtar Ablyazov was occupying his time running the Almaty-headquartered BTA Bank in Kazakhstan. Today, BTA is the third-largest lender in Kazakhstan. Just shy of a decade ago however, it was revealed to be the victim of one the biggest cases in the history of financial fraud. The bank had lost up to $6bn and allegations were focused firmly on its former chairman.

Ablyazov rose to power leading BTA Bank. At one point, he was among the most powerful men in his home country. Today, he is a fugitive who fled Kazakhstan in 2009 to escape the nation’s governing bodies, though it appears his past is rapidly catching up to him.

Hogan Lovells partners Chris Hardman and Alex Sciannaca acted for the Bank during BTA Bank v Ablyazov, instructing Erskine Chambers’ Stephen Smith QC. The firm has regularly taken charge for banks suing former owners in these disputes and found itself up against Addleshaw Goddard client Ablyazov in the Supreme Court

There’s a realism about lawyers in the London market now concerning these CIS oligarchs, where fraud cases are concerned.

“Some of the defendants are waking up, and I’m talking in cases of big bank fraud here,” says one source. “They understand they can bribe judges in their local courts and they won’t have the same freezing order powers that you can get in London. Those individuals are beginning to wise up.”

A new breed

The first wave of oligarch litigation largely consisting of interpersonal disputes, arising from ill-conceived contracts and oral agreements, is still prominent and continues to be profitable.

Ablyazov’s charges from BTA Bank are indicative of this new wave as are the allegations faced by the four former PJSC Tatneft owners.

The new generation – or “mini oligarchs” as one chambers source describes them – have arrived. They do not have the same economic clout as Abramovich, Berezovsky or aluminium magnate Oleg Deripaska. They are, however, still willing to pay the money to get what they want.

The mega-case of Berezovsky v Abramovich set an incredible precedent of earning one barrister – Jonathan Sumption QC – a whopping £3m for the job. While no individual fee has since come close to that, the litigation is still there and is more lucrative than ever. The ‘Russian premium’ where costs are concerned still exists and it’s unlikely to disappear anytime soon.

Six years ago, The Lawyer reported that the ‘Super Silks’ (Sumption, Mark Howard QC and Mark Hapgood QC) were understood to be billing anywhere up to £1,500 per hour. According to market sources, that figure is now at the bottom end of the ‘Super Silks’ scale with the top reaching as much as £2,500.

The reputation of the Bar allows its top silks to charge those hourly rates. As one barrister says: “The legal system here is well-known for being very fair and is a highly respected system with reliable judgments enforced around the world. It is very expensive but these people don’t care about that because they’re so rich. If you’re not worried about costs, it’s the best advice money can buy.”

The UK’s Magnitsky

The numerous sanctions heaped on Russia for its actions in recent years appear to have done little to stem to the tide of this litigation into London. The UK capital has the benefit of being the primary domicile for many of the major oligarchs – or at least somewhere where they own property.

Sergei Magnitsky

“Is it going to continue? There is a lot of litigation out there and there’s a big pyramid generating huge amounts of work,” says Fountain Court Chambers barrister Alexander Milner. “Will it continue in the current climate with the deterioration of relations with Russia? I think it will. That’s mostly because there’s no real disincentive for Russians or Ukrainians to come here and spend money. If the temperature increases in that sense, people might start questioning living, or keeping their money, in London.”

The worry for London’s lawyers and firms would be if the UK brought in its own version of the US’s Magnitsky Act, which threatens anyone found to have a firm connection to the arrest, death and cover up of Russian lawyer Sergei Magnitsky in 2009 with punishment in the US.

There have been murmurs of the UK creating something similar which would be even more stringent. It would seek to prosecute anyone found having even a slight tie to the Salisbury poisonings.

While there are currently no suspects, allegations have been levelled at members of the Russian government. Those with connections to the government could find themselves at risk in the UK, potentially leading to a mass exodus from the country.

Despite the impact a UK-style Magnitsky Act could have, it is much more likely that the UK’s power to issue an unexplained wealth order could threaten oligarchs’ contribution to London’s legal market.

Where could they go?

The UK’s future as an oligarch centre is at a crossroads. But which cities could rival the UK?

Amsterdam and Paris are two locations that could stand to benefit from a Russian exodus.

Emanuel Macron is working hard to position Paris as London’s successor should Brexit substantially impact business in the UK.

As a hub for super premium real estate, Paris has much more influence than Amsterdam. Its courts have anecdotally been described as taking an opposite stance to its counterparts in the UK where there exists a perception – both in private practice and at The Bar – that English courts are more sympathetic toward claimants than to defendants.

“It probably isn’t a massive secret that some London oligarchs have got tired of being sued and have left,” says Fieldfisher dispute resolution partner Andrew Lafferty, summing up why London’s legal strength can also be a weakness. Roman Abramovich, for instance, filed to be domiciled in Jersey this year instead of the UK.

The key issue facing Russians looking to litigate in Paris or Amsterdam is that any sanctions placed on Russia by the European Union would impact both centres. The UK exits the EU next year and as has frequently been stated, the London economy does benefit from turning a blind eye to questionably sourced Eastern European money.

For the moment, London remains the home of oligarch litigation. It is the most powerful centre on Earth and its lawyers command huge respect and the fees that come with that.  The depth of talent, London as a domicile and the fact that there is nothing to suggest the UK will suddenly turn its back on those with deep pockets ensures a steady flow of this work. Though the nature of the cases may be changing, the business keeps on coming.

The 20 wealthiest oligarchs

NAME Value Industry Nationality Main corporate Main advisors
Alexey Mordashov $19.6bn Steel/Investments Russian Severstal Freshfields Bruckhaus Deringer, Skadden
Vladimir Lisin $19bn Steel/Transport Russian Novolipetsk Debevoise & Plimpton
Leonid Mikhelson $18.1bn Gas/Chemicals Russian Novatek Baker McKenzie
Vladimir Potanin $16.5bn Metals Russian Norilsk Nickel Debevoise & Plimpton, White & Case, Clifford Chance
Andrey Melnichenko $16.4bn Coal/Fertilizers Russian EuroChem Dentons, White & Case
Vagit Alekperov $16.4bn Oil Azerbaijaini/Russian LUKOIL Akin Gump Strauss & Hauer, Clifford Chance
Alisher Usmanov $16bn Steel/Telecomms/Investments Uzbekistani/Russian Metalloinvest Akin Gump Strauss & Hauer, BCLP
Mikhail Fridman $15.7bn Oil/Telecomms/Investments Russian Alfa-Group Baker McKenzie
Gennady Timchenko $15.7bn Oil/Gas Russian Volga Group BCLP
Viktor Vekselberg $14.4bn Metals/Energy Ukrainian/Russian Renova Group White & Case
Roman Abramovich $11.2bn Steel/Investments Russian Millhouse LLC Skadden Arps Slate Meagher & Flom
German Khan $10.2bn Oil/Banking/Telecomm Ukrainian/Russian Alfa Group Baker McKenzie
Viktor Rashnikov $9.8bn Steel Russian Magnitogorsk Iron & Steel Freshfields Bruckhaus Deringer
Mikhail Prokhorov $9.1bn Investments Russian ONEXIM Group Herbert Smith Freehills
Alexei Kuzmichev $7.9bn Oil/Banking/Telecomm Russian LetterOne Eversheds Sutherland, Gibson Dunn
Dmitry Rybolovlev $7.4bn Fertilizer Russian Uralkali CMS, Debevoise & Plimpton
Andrei Skoch $7.2bn Steel Russian Lebedinsky Mining Akin Gump Strauss & Hauer
Iskander Makhmudov $7.2bn Mining/Metals/Machinery Uzbekistani/Russian UGMK Unknown
Leonid Fedun $7.1bn Oil Russian Lukoil (close associate of Alekperov) Clifford Chance
Oleg Deripaska $6.9bn Aluminium/Utilities Russian Basic Element, En+ Group and Rusal (until 2018) Bryan Cave, Ogier, White & Case, Linkaters

The post Moscow gold: For City lawyers, the oligarch era is over appeared first on The Lawyer | Legal insight, benchmarking data and jobs.

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