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The Belarusian Dilemma: Running a Private Practice in a Public Economy

The Belarusian Dilemma: Running a Private Practice in a Public Economy

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Times are tough for leading law firms in Belarus right now, struggling as they are against a faltering economy, a state-controlled market, and mixed regard for lawyers. Nonetheless, many of the country’s senior private practitioners insist they are optimistic. The future is, as always, right around the corner.

A Faltering Economy is Bad for Business 

Still, nobody’s counting their chickens just yet. “The economy as a whole, and law firms too, are facing one of the hardest times in the decade,” says the managing partner of one Belarusian law firm, noting that the country continues to suffer from the effects of the massive devaluation of the Belarusian ruble earlier this decade, combined with a significantly weakened economy in Russia, Belarus’s primary trade partner. “We are trying to explore other markets as alternatives, but 75-80% of our net exports were towards Russia, and it is now difficult to pivot to other markets when Belarusian products such as milk, meat, and textiles produced here are not an automatic brand, as they were in Russia.” 

But there may be some basis for hope. Vassili Salei, Senior Partner of Borovtsov & Salei, points out that, since 2014, the Belarusian ruble has stabilized and no longer shows high growth rates. Sergei Makarchuk, Managing Partner of CHSH, concedes that “since a number of factors affecting the currency market are beyond the National Bank’s control, the stability on the currency market is fragile,” but he believes that the current stability, fragile as it is, is of great benefit to both business and the population as a whole. 

Konstantin Mikhel, Managing Partner of VMP Vlasova Mikhel & Partners, is even more optimistic. He claims that systematic reform in the country – he says his own team is actively involved in drafting laws to improve business conditions and create a more favorable business environment – is helping to nudge the economy forward as well. As proof, he points to statistics showing the beginnings of recovery in the country, and he insists that he “feels positive changes [and] a growing demand for new projects,” reporting that “our clients have become more optimistic about the future; [they are] more active and enthusiastic, launching startups, getting more involved in social projects.” All of which, he says, is “an indication of the stabilization of the overall economy.”

Salei agrees that the steps taken by the Belarusian state have had a salutary effect. “Many acts were adopted by the government which have simplified the procedure of registration for businesses that now allow for registration and cooperation with various authorities online,” he says, citing as an example changes allowing more variation in the choice of corporate/organizational form. “Now LLC’s can have one shareholder, instead of the minimum two before,” he says, adding: “such actions create a base for attracting money to the country and increase competition between business entities. All this confirms that government has taken policy steps aimed at the development of entrepreneurship.”

“Unfortunately,” Salei concedes, “not all changes are implemented so quickly.” 

And others are more critical. Makarchuk says, “I do not share optimism about the Belarusian economy in general. There is a lot of informational noise about the measures undertaken by the government and legislative changes aimed at improving the situation in the economy. However, most of them are cosmetic in substance and do not solve the backlog of fundamental problems. In a nutshell, the income level of the population has dramatically fallen over the last two-three years. Besides the official statistics regarding the average salary in the country, this is perfectly evidenced by the real estate prices, which dropped around 40% since 2014 and continue falling. There is no doubt that the decreasing purchasing capacity of the population is detrimental for business oriented on the domestic market. Unfortunately, there are no reasonable grounds to believe that this trend will reverse, at least in the short-term.”

A State-Dominated Market Doesn’t Help

Of course, attempting to gauge the amount of law firm business by looking at a country’s overall economic health is, perhaps, a more reasonable exercise in a typical European jurisdiction – which Belarus, with its heavy state presence (depending on sources and methods of calculation, between 55% and 75% of the economy remains state-owned), is most emphatically not. “We’ve not yet had a full wave of privatizations like other countries in the region,” admits one managing partner, who requested anonymity. 

Despite the significant government role in the economy, most commercial law firms in the country focus on the private sector, either because the public sector rarely outsources legal work or because it is work that is considered undesirable. Either way, CHSH’s Makarchuk says, “for a number of reasons state-owned companies are difficult to work with. In our portfolio, privately-owned companies amount to 99%, among which 90% are international companies.” 

Salei, at Borovtsov & Salei, who insists that his firm is “open for assistance to any clients, including in the public sector,” agrees that “many law firms focus on private companies, because the public sector seeks legal assistance in very rare and specific situations, where the knowledge and skills of their employees are not enough to resolve issues. In addition, state authorities do not so often seek assistance, because they have a limited, planned budget and they prefer resolving problems with their own internal resources.” 

Where the state sector does outsource, Mikhel says, it does so primarily in cases where there is a project with foreign partners. Consequentially, he says, “as a potential client, the public sector shows a very weak but growing trend.”

With so much of the economy essentially inaccessible to leading commercial law firms, they depend heavily on the limited pallet of private clients that remains. That’s not always so easy. Roman Shpakovsky, the Managing Partner of Vilgerts in Belarus, explains that, “outsourcing legal work is a rare situation for most companies.” 

Indeed, many Partners spoke of a general tendency of Belarusian clients to perceive external lawyers as someone to whom they can outsource administrative/secretarial work more than perceiving them as business advisors. Vassili Salei says, “there are not many large local private companies for which business advisers is a necessity, and one of the main reasons for this tendency is there are not many Belarusian companies with private capital.” Those that do have sufficient capital can be reluctant to outsource work anyway, he says. “As a rule, clients already have a staff of in-house experts and in their opinion that is enough for a successful business activity in Belarus.” Finally, he points to a cultural factor: “In many ways, this tendency is produced from an established mentality and mistrust of lawyers (and other consultants in general) as business advisors.” 

Interestingly, not all agree. Makarchuk, for one, says the real skepticism in the country is directed at the in-house lawyers, not at private practitioners. “In my view, the above-mentioned perception of lawyers by the Belarusian clients is predominantly applicable to in-house counsels. I might be wrong; however, I have never faced such approach with respect to lawyers practicing in law firms.” 

And Mikhel insists that “our clients consider us as their business advisors and partners. Perhaps thanks to our extensive consulting experience and professional expertise. Each of our partners has 15-25 years’ work experience in his practice. They are real legal professionals, part of the ‘elite division’ of the Belarusian legal services market, and they are all recommended as the leading lawyers in Belarus. So they would be very expensive secretaries.”

Bright Spots and Hope for the Future

And yet, despite concerns about the limited amount of work, some mistrust of the legal profession, and the faltering economy, two subjects in particular are cited as sources of optimism: The China-Belarus Industrial Park, and the state’s support of the IT sector. 

Mikhel reports that the government decided earlier this year to expand the benefits for residents of the China-Belarus Industrial Park, located about 25 kilometers from the Minsk city center, near the city’s airport. “The May presidential decree now exempts companies from taxes on land, property, and profits,” he reports. “Land plots can be used by an investor for up to 99 years.” He reports that four more Chinese enterprises became residents of the industrial park in May 2017, bringing the total to 15. 

As in almost all things, however, opinion on the park is mixed. Salei concedes that the project is one of the “most promising ones” in Belarus, but says that “it is difficult to call its first few years of activity as a success.” Still, Salei agrees that the adoption of the President of Belarus’s Edict No. 166 in the spring of this year was a positive sign. “As a consequence of the adoption of the Edict,” he says, “the number of members of the Park increased two times over a short period of time.” As a result, he says, “yes, the Park has some problems and the Edict did not eliminate all of them. However, such changes made the Park more attractive for investors and also, it is important to take into account that the Park represents in some aspects an unprecedented economic zone in history.” 

Not everyone is sold. Makarchuk, for one, believes that the economy has more to lose than gain from the project. He notes that the country “spent a lot of funds on creating an excellent infrastructure for select companies” – companies which employ primarily Chinese workers and pay almost zero taxes in Belarus – and points out that “the companies-residents of the Park operate businesses identical to the businesses of other regular Belarusian companies, including those with foreign investment (for example, in the logistics area). Such a selective approach applied by the state to granting tax and customs benefits (in particular, to the residents of the Park) undermines the basic principles of competition. This is one of the reasons why foreign investors are very cautious with respect to investing in Belarus.”

There’s little disagreement about the state of the IT sector in Belarus, however. Makarchuk says, “the Belarusian IT sector as a whole is a completely different story.” Shpakovsky puts it simply: “The IT sector is booming.” And Mikhel reports out that “exports nearly quadrupled over the last five years to almost USD 900 million.” 

Both Shpakovsky and Makarchuk speak of the talent pool as a significant contributor to the boom, with Shpakovsky talking about a “strong technological base left from Soviet times.” Both also point to the tax benefits provided to residents of the Belarus High Technologies Park, a special economic zone with a special tax and legal regime, often described as a Belarusian analog of Silicon Valley in the USA. Makarchuk explains that “the sustainable growth of the Belarusian IT sector is to a significant extent attributable to the special tax regime provided to the residents of the High Tech Park. However, compared to the other preferential regimes, practically any IT company in Belarus may become a resident of the HTP and obtain the respective benefits. Therefore, in practice it does not result in unfair competition in the domestic market. Instead, the benefits for residents of the HTP make Belarusian IT companies competitive on a global level and prevent brain drain from Belarus.”

And the future of the sector is bright in Belarus, Mikhel believes. “Now we are advising on the drafting of one of the most ambitious legislative acts, which should turn Belarus into a large Silicon Valley and allow it to become one of the world’s centers in IT. The IT experts suggest that adoption of this legislative act and further positive changes in investment environment will lead in a few years to the opening of the offices of Microsoft, Oracle, Facebook, and other corporations, and the total revenue from the export of IT services will reach tens of billions of dollars.” 

Shpakovsky as well says the end of 2017 will see regulations introducing English law concepts, cryptocurrency regulation, and extended benefits for product companies (as opposed to the current focus on outsourcing companies), and asserts that “such a regime will increase the attractiveness of the sector even more.” 

Needless to say, not all positivity comes from national pride. Indeed, because much of the IT sector is privately-owned and faces an ever-increasing complexity of legal matters, many private practitioners are optimistic that the sector will provide not only a reliable source of business, but in fact a source of development for the legal profession in general. “While it is less so the case now,” one partner wishing anonymity comments, “firms will have to become more business-focused to keep up with this new wave of high-tech clients and their demands.”

Law firms in Belarus, like many of their counterparts in Russia are focusing on riding out the storm, waiting for the economy to recover, the market to become more sophisticated, and better times to return. In the meantime, they keep on keeping on, looking forward to better times.

This Article was originally published in Issue 4.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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