Business Lunch (#3 March 2020)

Healthy Competition

The Velvet Revolution took place in Armenia in 2018, which changed the country and society. After a period of calm watching the course of the new political leaders in power, international investors confirm strong interest in the country. The legal market went through a clear out, which is irreversible when healthy, intense competition takes place. Vardan Stepanyan, managing partner of K&P Law Firm, explained the background of ongoing changes in Armenia, which obviously come from a mindset shift rather than purely legislative reforms.

Olga Usenko: How would you describe the legal market in Armenia? How competitive is it?

Vardan Stepanyan: In my opinion, the market has not yet shaped itself to the full extent. I would describe it as one that is still developing: there are quite significant gaps to be filled; and there is a range of services for which there is still no demand. New players rarely appear lately. Earlier, new starlet firms entered the market, which immediately forced intense rivalry on the market.

O.U.: Were they local law firms?

V.S.: Yes, they were local firms and associations. Sometimes they appeared through hidden lobbying on the part of state authorities and by various big companies and corporations.

But the last five years showed greater stabilization. New players rarely appear, while influential law firms demonstrated sustainable growth. If you look at the ratings of leading agencies for the past five years, you will see the same companies getting there, and their places remain virtually unchanged.

Moreover, one of the main characteristic features of our market is the complete absence of international law firms. There are no renowned international brands here that would create a competitive advantage in the eyes of foreign clients merely by their presence. At the same time, the Armenian market is multi-levelled, and competition is carried out within these levels.

It is worth noting that competition has been quite tough lately. However, we do not really feel that other companies are aggressively soliciting our clients, just the other way around. In the context of fair competition, everything is developing quite steadily.

O.U.: Are there Russian law firms on the market?

V.S.: No, there arent. There are local companies which have offices in Moscow, but they operate on the Armenian internal market. Their presence in Moscow is just an additional bonus, as they do not have a recognized brand outside of Armenia.

O.U.: If we talk about the legal departments of audit firms, to what extent is competition observed on their part?

V.S.: The Big Four, Grant Thornton and BDO are represented in Armenia. Some of them, for example, Grant Thornton and EY, have sufficiently professional legal units. Nevertheless, the main direction of their business activities is still audit and accounting services, taxes, consulting, other services in the financial sector. We are aware of their presence, but they do not enter the market of purely legal services. For example, we are currently involved in a large project where we are responsible for the legal part, and one of the international audit firms is responsible for the audit and financial ones. By and large, they provide legal services in unison with their core audit services. A minor exception could be made regarding Grant Thornton, which displays particular activity but it is still quite small compared to purely legal companies.

O.U.: To what changes after the Velvet Revolution of 2018 would you draw attention to?

V.S.: In fact, the revolution changed the country to a great extent, from the political, social, and economic points of view.

Naturally, these changes could not be left unnoticed by the legal market. Before the revolution, the market was mostly free and of little interest to the top state authorities and oligarchs. Therefore, the changes were not so dramatic compared to other fields.

These can roughly be divided into two types. Firstly, after the revolution, the legal market is still in a state of cleanup of all kinds of unscrupulous players. There was a considerable layer of lawyers who participated in corruption transactions, which was within the framework of the then regular rules of the game. Currently, they are simply left without work as the level of corruption has fallen quite drastically. We rarely hear about corruption in courts and the executive authorities. Recently, for example, it took us only five days to carry out basic registration of a property division. This was unthinkable earlier without making arrangements or issuing an appeal to a court.

There was another pool of unscrupulous firms that had strong competitive advantages as a result of protection from top government echelons. But now theyre forced to compete with the others on an equal footing without any special privileges. In my opinion, this shakeout has had an extremely positive effect on the market.

As for the other part of changes that took place, they are due to changes in the economy. Following the revolution, the market became freer. For example, earlier certain privileged businessmen had the right to import certain goods, and the system was built in such a way that if someone dared to import the same goods, such person would have problems, for example, delays at customs. Everything was divvied up. Following the revolution, this issue disappeared itself. Everyone imports whatever they want. The Customs Service works relatively quickly and without any particular issues. This is because Armenia is a tiny country, and it needs no effort to provide impetus from above to allow everyone to work as they should. All monopolists who enjoyed preferences and who, basically, only formally required legal services, turned into ordinary market players without any advantages over other participants. Therefore, if a business operates in a competitive environment the services of lawyers become highly demanded. Consequently, the demand for legal services in the commercial sector has grown. I would even note that not only on the part of large businesses, but also on part of medium and small businesses.

Moreover, I would draw your attention to the great demand for criminal lawyers. Many cases have been initiated, some of which are high-profile ones. For example, related to the former president of Armenia. Our client had an inquiry on a criminal case when, as a result of misappropriation and abuse by employees, company property suffered losses. We tried to find a criminal lawyer, but they were all overloaded with work. Therefore, many colleagues who worked in the civil area went through retraining for criminal cases. We also had to work in the criminal field, although this is not our profile.

O.U.: Do you see increased attention on the part of international investors in the country following all these events?

V.S.: The situation is that they never rush, but calmly observe how the market is developing and what risks they might bear. I remember very well that we had a slack period regarding international projects for half a year after the revolution. Even those projects that were about to be initiated were postponed. It was because they carefully observed the new leadership, where it will go, whether there will be internal disturbances.

But the situation has now stabilized. Our activities in the past 7-8 months support the idea regarding both our current cases and the number and quality of new requests. If nothing supernatural happens to Armenia this progress will continue over the next few years.

O.U.: Do local law firms grow due to such increased demand?

V.S.: Right now, we are ready to hire 3-4 lawyers, but there is simply no supply. We cannot find the lawyers we need. And this is a common problem for our entire market. There is competition for qualified personnel, preferably having a Western education, and these are really rare. Therefore, even if we wanted to expand, it would not be an easy task to accomplish. There are a lot of ordinary mid-level specialists, but we are interested in people who can manage projects independently and can make decisions.

O.U.: If we mention reforms, how do they affect your work? Are law firms involved in the relevant processes? Is there the practice when Armenian firms draw up laws and lobby them in every way?

V.S.: In fact, there have been no significant changes in legislation over the past two years. This is related to the fact that the problems of Armenia were not because of bad legislation, but because the latter was poorly applied and not implemented. The current authorities focused their efforts precisely on solving problems by applying all the good laws we have.

The operational profile of law firms in Armenia is, as elsewhere, such that we have to monitor changes constantly, even some kind of draft changes. But Armenian law firms dont have sufficient resources for active and ongoing participation in the drafting of legislation. For example, if we are asked to draw up a law we like, I cant imagine how we will manage this in terms of time. Ten years ago we had an experience when an international company asked us to come up with a draft law, but back then it was a paid job and we had resources for such legislative activity.

I think that legislative drafting by law firms in Ukraine should be lobbied, and partially paid by market players affected by these changes in one way or another. We, just like other law firms, simply cannot physically allocate any resources just to make the country better.

Just at the beginning of last year, we had a case when the government initiated the introduction of changes to the Tax Code, following which all providers of legal services became subject to VAT. Currently, companies become subject to VAT if their turnover exceeds a certain set sum, while small and private lawyers are exempt from this tax. This discussion caused a tremendous response from the public, organized reaction on the part of lawyers, including companies that work with VAT. However, they should have benefited from these changes as they deprive lawyers that do not pay VAT of a competitive advantage. This advantage is especially noticeable if you work with foreign companies for which intra-Armenian VAT is a complete waste of money. However, colleagues showed solidarity, the response was severe, and the government was forced to repeal this change. It can be said that if the matter concerns the specific interests of lawyers who are attorneys, they become very active. But when it comes to other industries and no payment for legislation drafting services and amendments to it, legislative changes are usually introduced without the participation of law firms.

O.U.: What services are the most sought after? What do you expect in the near future?

V.S.: Currently, the services of legal representation in civil, administrative and, in particular, criminal proceedings, are in special demand. We can say that changes in the judicial system and its increased credibility entail a higher number of appeals to the court. Earlier, especially for large-scale cases, parties tried to persuade each other through the authorities or to solve the issue directly. And now we see a clear tendency to transfer disputes into the legal channel to the courts.

This is because the forecasts for attracting foreign investment are, in general, quite positive. Accordingly, there will be demand for legal advisers in M&A and corporate law areas.

There is also great potential in Armenia for growth in the securities market, and this issue is being discussed in government to create a powerful tool for attracting foreign investment. There are very few highly specialized lawyers in the securities market. The demand for such specialists will sky rocket.

I would like to note that over the past two years, the Armenian real estate market has grown quite dramatically. It is the result of the industrys deregulation. Therefore, along with the markets development, the demand for specialists in real estate transactions will also grow.

O.U.: You mentioned that there are many administrative disputes in the country. How often does the corporate sector go into litigation with the state, and what is the outcome of such cases?

V.S.: Quite serious changes have also taken place in this behalf. We have recently communicated with colleagues. Their client had an audit conducted by the tax inspectorate, following which the client was charged an absolutely fantastic amount of money. They challenged the amount not even in court, but in the tax inspectorate itself, namely, in its appellate instance. The tax inspectorate cancelled its act by 90% of the sum. It was impossible earlier, except by using not entirely legal mechanisms.

I recently found interesting information about the administrative courts workload, and its workload is full till the end of 2021...

Everything is logical: when the judicial systems credibility increases, the number of lawsuits also increases, especially against the state.

O.U.: With which law firms do Armenian lawyers have to work most often: from Russia, CIS countries, USA or the United Kingdom?

V.S.: We cooperate with almost all major markets that is, the EU, USA, China, CIS countries, including Russia.

State corporations and banks represent Russian business in Armenia, and they work with the same persons. Nevertheless, we work more often with branches of international companies located in Russia. For example, there were several projects with Dentons and Herbert Smith Freehills, which are quite active. Since international companies are not represented on our market, if they face Armenian issues, they resolve these through their Russian offices.

Over the last year, the number of requests from China has risen. But I cannot help but note that they look for the cheapest option, and even before they agree on the amount, they already require some preliminary advisory opinions, after which they may not even hire. We had several projects with the Chinese a long time ago, and all of them exceeded the cap initially specified by us.

Companies from the USA are currently quite active. Americans are very comfortable to work with. They are friendly, committed, have a pay on the same day basis, and always follow the arrangements precisely. For example, we have a project with a state corporation as well as several financing programs in Armenia.

Talking of Europe, we work a lot with the United Kingdom and France, which are quite active on the Armenian market. In particular, we currently work with a large French hypermarket and a large Austrian-German investment fund.

O.U.: What about Ukrainian clients? Do you get requests from them?

V.S.: Unfortunately, we do not have much work from Ukraine. Since we, represented by me, are present in Ukraine, we cooperate in the main with Ukrainian companies on projects in Ukraine itself. And I should note that this is very successful experience.

To be honest, the last time we received a work request from Ukraine in relation to projects in Armenia was three years ago.

Armenia and Ukraine are countries that accept investments themselves, but do not invest in other states. Nevertheless, I think we have potential due to historical ties and the considerable turnover in goods. There are many Ukrainian goods in Armenia: Roshen, by the way, is our number one in its sector (ed. laughs), vodka products are also in high demand. And since there is trade, there will be legal cases sooner or later.

O.U.: What was the most interesting project in your practice lately in terms of legal work?

V.S.: Perhaps it would sound standard, but it was a project for the Menu Group company in Ukraine acquisition of a Ukrainian company. It was a very interesting transaction, as it involved lawyers from six countries at the same time Cyprus, Lithuania, Ukraine, Armenia, the United Kingdom, and Latvia. This was due to the fact that both the seller and the buyer had rather complex corporate structures. Although the buyer himself was historically from Armenia, his company was registered in England.

We communicated with all the lawyers at the same time and received various kinds of interesting information on particular aspects. Moreover, any project related to Ukraine is always somehow special for us.

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