Law firms that invested in Central and Eastern Europe soon after the fall of the Iron Curtain are enjoying the region's enduring economic boom and seeking shelter from the London gloom. Dominic Carman speaks to partners across the region, from Vienna to Kiev

You would expect the top man at the world's largest law firm to sound confident, however dark the economic clouds on the horizon. And so it is at Clifford Chance (CC). "Emerging markets are performing very strongly, particularly in Central and Eastern Europe (CEE), China and the Middle East," says David Childs, the magic circle law firm's global managing partner. As the credit crunch bites hard in the West, does Childs therefore draw some comfort from the level of new instructions east of Vienna?

"Yes," he says. "In the next 12 months, we will be moving resource from places where we see a slowdown into those markets."

His confidence is borne out by the latest International Monetary Fund (IMF) predictions – annual growth across the economies of CEE will slow to 4.6% this year, down from 5.5% in 2007, but that still compares very favourably with the IMF's 2008 forecasts for other regions – 1.5% in the US and 1.6% in the Eurozone. Put simply, CEE is hot.

If international law firms are seeking shelter in CEE jurisdictions, what work are they doing and where? And how are the local and regional firms responding? As ever, for the answer to these questions, it depends on who you talk to.

Jayne Townsend, managing partner of Allen & Overy's practice in Central Europe, believes "the credit crunch has not caused greater interest from investors in CEE. That interest was there anyway". At White & Case, arguably the leading US law firm in the region, partner Rob Irving agrees that European deal volumes are down. "But in CEE," he says, "overall deal levels are not off – if anything, we are seeing more deal activity at a local level than ever before."

Richard Thomas of Salans, a firm with a strong regional presence, highlights the reverse flow of work from Poland and the Czech Republic as a trend: "Since joining the European Union (EU) in 2004, local companies have started to acquire and do joint ventures in Western Europe and the US."

Todd Robinson, a partner at CMS Cameron McKenna – a firm which has eight offices in the region – argues that despite their strong growth, the CEE markets are not big enough to act as a shelter for the large international firms. "Region-wide, we are looking at the situation with guarded optimism," he says. "If the US and Western Europe go into a deep recession, I cannot imagine we will be immune from it."

"No-one has a uniformly strong position in the region," says Townsend, pointing to CC, Linklaters and White & Case as her main competitors.

Freshfields Bruckhaus Deringer famously pulled out of the CEE region, closing its Hungary office last year but leaving a very successful Moscow operation. "Not having offices in the region does not mean you do not have an active practice in the region," says partner Stephen Revell. He argues that opening offices everywhere is unrealistic and that it is "much more flexible" to put lawyers on a plane from London or Frankfurt when required – the "bussing-in" approach that so many firms with a presence on the ground rail against.

The White & Case story mirrors the growth of CEE. Its four established offices, in Moscow, Prague, Warsaw and Budapest, were opened in the early 1990s. "We moved in opportunistically," says Irving. "It was territory that few other firms occupied. We saw the long-term opportunities." The offices spent several years doing privatisation and post-privatisation work. The firm opened in Bratislava in 1997 due to clients asking for help with their investments in Slovakia.

This year White & Case opened in Bucharest; the impetus for a new Romanian office was to meet demand from clients such as Deutsche Bank, GE Capital Management and SSL International, manufacturers of Durex and Dr Scholl's sandals.

Romania has become an increasingly favoured destination. Alongside Linklaters and CMS Cameron McKenna, international firms that have offices there include Gide Loyrette Nouel, Noerr Stiefenhofer Lutz, Salans, Schoenherr and Wolf Theiss. Several other international firms are thought to be close to announcing a presence soon.

Robinson, who is based in Bucharest, highlights the country's accession to the EU last year and the enduring optimism, particularly in real estate. As the country started far behind others in the region, suggests Irving, the reforms only began in 2001. "When things opened up," he says, "multinationals poured in and real estate investment poured in. Romania had a very poor real estate base." He points to the desperate need for shopping malls, office buildings and hypermarkets.

Townsend adds that clients like EU membership because of the accountability it brings. And the development of Romania as a legal market is
following the same course as other, more mature markets in the region. Firms are working on more complex structures, with increasing levels of corporate M&A.

Irving points out: "With EU membership, all of a sudden, Romania and other recent EU entrants are now regarded as being of a different asset class by banks. Instead of being emerging markets, they are now Europe. And, with private equity funds, they have access to a greater pot of money."

"Romania is, however, the smallest market in which a magic circle firm would open," suggests Markus Heidinger, senior partner of Wolf Theiss, the largest Austrian firm and, with 11 offices, a strong regional player.

"There is a lot of equity capital markets and real estate work for us there," says CC partner Nick Fletcher, who has been in the region for 14 years. Two years ago, CC opened in Bucharest through an association with Romanian law firm Badea & Asociatii, taking its regional presence to 170 lawyers with the other offices in the 'big four' N Moscow, Warsaw, Prague and Budapest. In September 2008, the firm will open in Kiev.

"Ukraine is the next largest market after Russia,' says Fletcher. "It is the last big emerging European market with a fast-growing economy." He catalogues "interesting" domestic industry, natural resources and long-term, stable economic growth. "We have regional real estate clients who invest there; we get capital markets finance work from there, which is flowing to Frankfurt and London; and we get conventional M&A work from Moscow. There are work-streams from different offices, all based on or sourced from Ukraine."

Until recently, only Baker & McKenzie and Chadbourne & Parke had a presence in Ukraine among major international firms. According to Borys Lobovyk at leading local firm Konnov & Sozanovsky: "In a few years, we will be in the same situation as in Russia, with all the leading players represented."

Following the Orange Revolution of 2004-05, Lobovyk argues that the country might not have stability, but it does have transparency. The Ukrainian legal market, he suggests, lacks competition. "We need more professionals. Fees are very high. Lawyers here are overpriced. It is unsustainable," he says. Ukrainian fees are reported to be highly influenced by international firms.

The prospect of high fees and strong workflows might attract lawyers to Kiev and Bucharest, but rates in the more mature markets are lower. Many see Poland as overrun with foreign law firms, while Hungary is going through an economic dip and competition has driven down rates in the Czech Republic. "The fee level is very good in Kiev," says Heidinger, although he points out that the costs are also steep. "We have been referring work to Ukrainian firms every week, which hurts. The fees are high – like in Romania – because of strong demand in a booming economy: E300-E500 (£240-£400) per hour compared with only E200 (£160) per hour in the Czech Republic."

Michael Mullen at leading Prague independent Havel & Holasek suggests that average fee rates remain too low for most US firms. "It will fit their model in 10-15 years, when the Czech economy grows to meet their charging structure," he says. Robinson points to the London offices of the magic circle firms: "They might have a lot of idle lawyers to be engaged, but I do not think they will get their expected hourly yields here N they become the poor relations of their London operations."

However, London might not be the best benchmark for comparing fees. "It is more accurate to look at Frankfurt. There is a high level of convergence with what we charge there. In most CEE jurisdictions, we are maybe 10%-15% less than Frankfurt," says Townsend.

With White & Case commanding a range of fees in the region from E150 (£120) per hour to E700 (£560) per hour at the high end, the firm is getting about 60% of what it charges in London.

Fletcher is keen to point out that the two offices in the whole of CC, which had the highest rate of growth for 2006-07, were Moscow and Warsaw – both experienced more than 70% increases in income year-on-year. For 2007-08, it will be Moscow and Bucharest, plus Kiev, from a zero base; CC's other CEE offices will grow at a more modest 10%-15%. If the trend is to be mobile and to move to the region, Fletcher predicts that several key finance and M&A lawyers will transfer from London.

The focus on Russia is echoed by Irving: "It is an extremely hot country for law firms," he says. "M&A continues to be very strong. Russian companies and the state are flushed with money and they need to deploy it. They are doing it both within their own jurisdiction and moving abroad."

Moscow, he adds, is the one place where capital markets continue to be very active: "We are deploying London capital markets lawyers to Moscow to help with the workload. Russian companies are seen as very solid with such good prospects in the next four
to five years."

Private equity

Apart from real estate, the other wave of transactions that has spread throughout the CEE region has been private equity. As a result of the slowdown in London, bankers are saying they are less concerned about risk in CEE because the deals are significantly smaller. The largest recent private equity deal in the region was Bridgepoint's E300m (£240m) acquisition of CTL Logistics, a Poland-based private rail logistics company.

"As bankers have become fussier every-
where," says Fletcher, "there are now more private equity funds focusing on CEE, driven by the credit crunch." Six funds have set up in Warsaw, the preferred centre as a regional base. The most prominent of these are Carlyle and 3i. Private equity specialist Irving concurs: "The big deals that large Western European funds were doing 12-18 months ago have dried up," he says. Indeed, in CEE, there are more opportunities for higher growth and price expectations are more realistic.

Austrian firms have long featured as an important part of the legal landscape in CEE. "It is our China – it gives us the opportunity to expand," says Christoph Lindinger, managing partner at Schoenherr, which has eight CEE offices outside Vienna. The theme is developed by Peter Hoffmann, CEE managing partner of Schoenherr rival Cerha Hempel Spiegelfeld Hlawati (CHSH): "We view CEE as our backyard, a natural extension of our domestic market." Outside Vienna, the firm has offices in Belgrade, Bratislava, Budapest, Bucharest, Minsk – CHSH is the only foreign law firm in Belarus – and Sofia. A Canadian who spent 10 years at Linklaters, Hoffmann, like Michael Mullen, is one of several North American lawyers managing local firms in Austria and CEE.

Both CHSH and Schoenherr are competitors of Wolf Theiss, whose head count of 140 CEE lawyers is the largest among Austrian firms. The latest addition to their office network is Sofia, although, as Heidinger says: "It is not yet announced because of objections by the local Bar.

"Everybody speaks of the crisis. My impression is that the crisis is taking place west of Zurich," says Lindinger. "Austrian business and CEE markets are doing very well. The only downturn we have noticed is where we act as local counsel for international syndicated loans. Projects are up, M&A is up."

In common with international firms, he highlights growth in Romania and Ukraine, with large investments from Austrian companies in oil and gas and real estate. Things operate on a smaller scale. 'Big' starts at E500m (£400m), and there are not many projects above that size in the region.

When it comes to use of local or UK/US counsel, it depends on who the lender is, explains Hoffmann. "If a loan transaction or syndication is [done] out of London, then it is usually Loan Market Association. If it is run out of Vienna, local counsel are used. Large numbers of financings are done without reference to UK or US law. We do a lot under German, Austrian and Swiss law."

Lindinger says foreign banks often look for locally-qualified counsel that can team up with a UK or US firm, as required. Schoenherr enjoys close relationships with Wall Street firms, Simpson Thacher & Bartlett and Davis Polk & Wardwell, and is part of the wider European grouping of Slaughter and May's best friends.

In infrastructure projects, sponsors are more keen to go for local law than the lenders. He highlights many deals where Austrian law is used in financing and local law in construction contracts.

When it comes to M&A, Austrian and international firms are rarely in direct competition. "We work predominantly in different segments. For non-project-related finance work, it is London and UK law-driven. Austrian firms dominate in mid-cap corporate M&A, whereas Freshfields and the other magic circle firms do not bother chasing that work – they go for the big-ticket stuff," concludes Heidinger.

International firms must be extremely relieved that a region just a couple of hours on a plane from London is providing such a lucrative and steady stream of instructions. For all the hysteria surrounding the economic downturn in London and New York, the CEE markets seem a world away. And, for the time being, there seems to be work aplenty for the international law firms in the market and the many good, independent law firms operating in the region.