Heather O'Brian reports on the likely effect of Croatia's impending membership of the EU on the country's legal sector

Croatia's economy has not been immune from the global financial crisis, with business slowing down from the boom period seen a year ago. All the same, Croatia finds itself in a rather enviable position compared to its European Union (EU) neighbours.

The European Commission has predicted that Croatia's economic growth will fall from its 2007 level of 5.6% to 3.5% this year, before bottoming out at 3% in 2009.

By contrast, several EU countries are expected to fall into recession during this time. Croatia's gross domestic product is expected to recommence its upward climb in 2010, when a 4% growth rate is foreseen.

"There is a financial crisis, but we're busy as hell," says Boris Savoric of Zagreb-based Savoric & Partners.

"It is true that some deals were suspended, but we just hired two associates and have lots of M&A, capital markets and property work."

"The economic situation isn't as good as it used to be, but it's not dramatic, and Croatia is still a good place to invest," agrees Boric Babic of Babic & Partners.

The firm currently boasts 11 lawyers and plans to grow further, although Babic notes that you "don't need a tremendous amount of people" in a relatively small jurisdiction like Croatia.

With a population of roughly 4.5 million, many Croatian law firms are one-man shows, with the largest outfits employing just over 20 professionals.

Like other leading Croatian firms, Babic & Partners regularly collaborates with international law firms. It has also recently expanded its own international horizons with the formation in November of a regional alliance of leading law firms from countries that were once part of Yugoslavia.

Along with Babic & Partners, the new network is composed of Cukic & Markov in Skopje, Jadek & Pensa in Ljubljana and Prica & Partners in -Belgrade.

"The bottom line is that the countries of the former Yugoslavia are different, but there are many things in common, starting with the language," explains Babic.

"Many of the laws are also similar and Slovenia is already part of the EU, while the other countries are looking forward to joining the EU."

Babic says the members of the non-exclusive alliance could pool their expertise on deals that might require a larger group of legal professionals, noting that none of these countries in itself justifies the presence of a large firm.

On the EU front, Croatia got some good news in early November when it was confirmed that the country was on track for EU accession by the end of 2010, although the Commission has asked for more work in the areas of economic reform and the fight against organised crime.

In the meantime, foreign law firms continue to be prohibited from directly setting up a branch to practice local law in the country, although several international players have formed associations with local law firms.

Austrian firms such as Wolf Theissen are leading the way in this area, along with City giant Lovells, which enjoys a long-running collaboration with Bogdanovic, Dolicki & Partners.

One foreign firm that is present in the country is Italy's Studio Legale Sutti, which got around restrictions when it set up its Zagreb office in 2005 as a unit of its London team.

Restrictions on establishing a Croatian operation should be lifted once the country joins the EU, although no one is expecting a flood of new players. "I think there will be some interest from other countries, although keep in mind that Croatia is fairly small," says Irina Jelcic, a partner with Hanzekovic Radakovic & Partners.

Neighbouring Austria, the largest foreign investor in the country, is expected to top the list, while the Italians will probably also beef up their presence.

Some UK law firms might also be interested in a Zagreb office, as major transactions tend to have a UK connection for financing reasons.

In the shorter term, Jelcic points to an expected loosening of the Croatian Bar Association's current ban on the use of websites by local lawyers and law firms, a prohibition which has made it rather difficult to spread the word to potential clients.

"Advertising will still not be allowed, but firms will be permitted to provide basic information about themselves and their lawyers – that is a big step forward," says Jelcic.