With the upheaval in the global financial system, the legal market in Ukraine has already showed signs of contraction, but not yet to the same extent as in London.
Like most businesses, law firms in Kyiv seem to be adopting a wait-and-see strategy. London firms can already see that, while the financial industry restructures, there will not be the same demand for legal services.
However, the legal market here is subject to further vicissitudes, the full extent of which will probably only become obvious over the next year or so. It is not yet apparent how severely the crisis will hit and when we will reach bottom.
In October, the International Monetary Fund estimated Ukraine’s contraction in gross domestic product for 2009 would be 3 percent, but has recently revised this to 6 percent, while press reports citing the central bank suggest that 9 percent is more realistic.
The country has recently been downgraded in its Standard & Poor’s rating from B- to CCC+, which puts it as a higher credit risk than Iceland, which is BBB-. This hardly seems fair, but Ukraine bears further risks.
There are positives in such factors as the limited recovery of the steel industry and interest from international companies in entering the market through acquisitions and other means. But the big unanswered question is what form the financial sector will take during its recovery.
This is essential, as finance drives the rest of the economy. This, in turn, will influence the legal sector. If, as predicted for Western European economies, the crisis results in banks playing a narrower role in the financial sector, will Ukraine’s financial services sector replicate these changes?
In Western Europe, one of the expected results will be that certain banking industry sectors will end up under the aegis of specialist companies better placed to extract full value. A good example of this would be asset management of real property. In an era of declining values, banks will either have to develop such expertise to optimize value or, more likely, sell off portfolios and concentrate on their core sectors.
If Ukraine does not have, or cannot attract, the know-how to alter industry in such a way, it will damage the profitability of the banking industry. Also, the extent to which foreign investment will forsake Ukraine remains to be seen. There are a lot of foreign vested interests in the country. The fortunes of key players in the Austrian banking industry are, for example, tied to those of the Ukrainian economy. There has been widespread European support for keeping Ukraine afloat.
Another issue is how the crisis will end in Ukraine. As with any cycle, the nadir has usually been passed when the cash-rich begin exploiting bargain investment opportunities.
The problem is that so many major global players have had their fingers burnt and so many rich pickings will be available elsewhere. The fear is that opportunities in the Ukrainian market will be overlooked. This would be a big barrier to recovery.
Many Ukrainian companies are looking to the late summer and autumn for signals of such bargain hunting. But, even with a summer increase in such new deals, it is unlikely that this will translate into growth for the legal sector. Consolidation is a probability. This will be catalyzed by the shift in the focus of legal work from traditional banking and corporate work, towards such areas as restructuring and litigation. There will be, however, significant work generated by large-scale, government-funded development, including the infrastructure for Euro 2012.
Ukraine’s political lack of direction is a further deterrent to international companies, particularly the uncertainty provided by the looming presidential election in January. Essential to the development of the legal services industry will be the development of Ukraine’s legal system. The passing of the law to protect investors’ rights represented progress. However, such steps must be shown to be a trend, not the exception
The unpredictability and inefficiency caused by corruption and bureaucracy must be addressed by the whole nation. Litigation must be conducted with confidence in the court system’s impartiality. Until this happens, it will be hard for law firms to convince the world that crony capitalism is being phased out. The extent to which progress is made to end all these uncertainties will determine the extent to which the legal market expands or contracts. The outcome will be a good barometer of Ukraine’s development.
Warwick McDonald is an associate at the Kyiv law practice of Salans, part of the international Salans law group. Warwick graduated from Christ Church, Oxford, and later completed his CPE and LPC at Oxford Brookes University and the College of Law, London respectively.
