In a recent article published in the South China Morning Post, Huen Wong, the recently appointed President of the Law Society of Hong Kong, suggested that Hong Kong law firms should consider Russia as a potential market for their services. This was on the same day that Ikea pulled out of Russia due to problems with corruption. Interesting timing, but the real issue is whether he was correct or not.

Russia has been going through a tough time of it during the credit crisis with a number of law firms laying off people. Real estate was one of Russia’s key sectors but that has been hit hard and JP Morgan is advising clients to stay clear of the market for now. The magic circle firms have a strong presence in the market, although Baker and Mckenzie is the biggest by number of lawyers according to data on the website of the Asian Legal 500. Additionally, that website states that few domestic firms have any international presence, and this puts them at a distinct disadvantage since most transactions are governed by English law. At least Hong Kong firms have the background and experience in this area.

The numbers of foreign firms already well placed in Russia suggest that the market is a somewhat mature and competitive one. Most Russian firms have limited English law skills and as in most emerging markets it can be difficult to assess the actual capabilities of a local firm. This causes problems for clients as well as law firms looking to partner with a local firm through some sort of alliance or referral system. From a competition perspective and generating primary demand for ones services, a mature market means firms have to do less to educate and convince clients of the need for first rate legal services. On the other hand, mature markets are of course highly competitive and if there are a limited number of good Russian law firms, what chances do smaller and mid-sized firms from Hong Kong or elsewhere in Asia have of finding a partner that is either good enough or will be responsive to their needs if it is engaged in other non-exclusive alliances with larger firms? The answer, it seems, is not much. Of course, if these Hong Kong firms are bringing large volumes of work with them from places such as China the story is a different one, but then again one must have some sort of client base as a bargaining chip in the process of creating a presence on the ground. Doing it alone is pointless if you cannot practice local law. Taking a different view, Hong Kong firms may be able to act as a bridge between Russian firms and China (as well as the rest of Asia) in their investment plans should they have the capabilities needed in the mainland. They may provide an important linking service with their international business perspective and English law capabilities.

One thing to bear in mind is the rate of new regulation that hits Russian business on what can seem a daily basis. This is not unusual in such developing markets but it does complicate the legal market significantly and firms with limited resources or specialized expertise may find it hard to keep up. Russian law firms outside of Russia are few and far between, with Egorov Puginsky Afanasiev & Partners LLP being the first to open an office in the UK in 2007.

According to Sergei Tsyplakov, Russia’s trade envoy to China, bilateral trade between China and Russia was down 42% year on year this January, primarily due to the GFC. At what stage this is likely to improve is hard to say. Many of the massively wealthy Russians who were responsible for significant amounts of their countries investments at home and abroad saw their wealth dwindle as the credit crunch hit. Russia is still a complex market in which to do business for foreign organizations, and the same applies to law firms. During times of uncertainty, investing organizations tend to take a conservative view when it comes to expansion and hence transactional work for law firms tends to dry up. Local litigation issues that may arise due to their counter-cyclical nature are probably best handled by local firms as they have both the contacts and know how when it comes to the intricacies of domestic Russian law. It is also interesting to note the lack of trade between Asia and Russia when it comes to energy and gas exports. A report in the Economist states that Russia is the world’s second largest oil exporter and the world’s biggest gas exporter, but only 3% of these energy exports go to Asia. Given the geographic proximity of Russia that is somewhat surprising. An Economist report also notes the small but growing number of public protests. The OECD estimates the Russian economy will shrink by 6.8% this year, returning to growth in 2010 of 3.7%. A report by Deloitte notes that the re-nationalization of the energy sector is also hurting investment and domestic economic activity.

Given the current decline in Russian business sectors for the foreseeable future, the highly competitive nature of the industry, and the fact that few Hong Kong firms would be able to claim a competitive advantage by entering the Russian market, it seems wise for local firms to take a wait and see approach unless they truly have business in the pipeline that will benefit from a Russian connection. If a Hong Kong law firm does decide to invest the resources in seeking out Russian business it would be well advised to have a solid strategy in place first.

Robert Sawhney is the managing director of SRC Associates Ltd and the author of 'Marketing Professional Services in Asia' (LexisNexis, 2009).