The FINANCIAL — In this exclusive interview with The FINANCIAL Mr. Ted Jonas, DLA, says – “the political relationship between the U.S. and Georgia is so strong that American investors should feel an added layer of confidence for that reason” in investing in this country.
Ted Jonas, Tbilisi Managing Partner of DLA Piper, the leading international law firm, believes that American investors have an added reason to invest in Georgia. The first reason Americans should invest in Georgia is the same set of economic considerations that would attract any other investor. The other factor is the strategic political relationship between the United States and Georgia. “The political relationship is strong and the USA is an important political ally of Georgia, so American investors can feel an added layer of confidence that their investments will be safe here,” Mr. Jonas says.
Mr. Jonas believes that certain investment risks have actually decreased in Georgia since last year’s Russian invasion. “In some ways, the reality is less risky than before. There was always instability in terms of risk of war over Abkhazia and South Ossetia. That risk is actually less now. Because unfortunately we have now been through it and experienced the worst. So I think that currently there is a lot of attention being put on the situation, not only by Georgia and Russia but even more by the USA and EU, focused on preventing any further hostility.” Mr. Jonas says.
Mr. Jonas agrees that many corporate and debt restructurings have taken place during the recession, which have supplied work for law firms. That is true not only in Georgia, but globally as well. Despite an overall decrease in the revenue of all law firms, including DLA Piper worldwide, it became the largest law firm in the world by revenue as of July this year because of its ability to maintain a diverse geographical and sectoral client base during the recession.
In his interview with The FINANCIAL, Mr. Jonas summed up the work of the DLA Piper Tbilisi office and talked about the main challenges for Georgia in 2010.
Q. In December 2008, you said DLA Piper had seen a decrease in business after September and that your company would be more conservative about all kinds of spending in 2009. What has changed since then?
A. That prediction was correct. 2009 has been a slow year for business. We did decrease our costs in various ways. We reduced some of our advertising and marketing costs. We maintained charitable giving and CSR [Corporate Social Responsibility] type activities at previous years’ levels though. We kept our prior commitments and donated the same amount of money this year as we did in the past. We also managed to reduce our facility costs, our lease costs. For example, we sublet some of our office space to the Amcham. We have not had to reduce our workforce. We have not lain off anybody. So that has been very good. Some people left to go study in the USA. A couple of others left to go work in business. But we did not have to discharge any of our people. In prior years we were constantly trying to recruit more people, and if anyone left, it was a big problem and the vacancy had to be filled immediately. That’s not the case now. We have gone from a high of 19 fulltime lawyers in mid 2008 to 15 now. We have seen some decline in our business and we will see how things go by the end of the year, but I expect we will probably have a 15% reduction in our top line revenue level compared to 2008. This is not good but compared to how other businesses have suffered in this recession, and how other law firms have done generally in Georgia and elsewhere, I think it’s not bad. In previous years, we had tremendous growth – we doubled in size from 2006 to 2007. If we have a 15% decrease in revenue this year we have managed to reduce our costs in a way that it has kept pace with that, so basically we are doing okay, considering it’s a recession.
Q. You said Georgia remains as attractive for investments today as it was before the war, perhaps even more so. What are the main risks investors face in Georgia right now?
A. Well, what I mean is that I do not think that the reality is any riskier than it was before, even if the perception is different. In some ways, the reality is less risky than before. There was always instability in terms of risk of war over Abkhazia and South Ossetia. I think that that risk is actually less now. Because unfortunately we have now been through it and experienced the worst. So I think that currently there is a lot attention being put on the situation, not only by Georgia and Russia but even more by the USA and EU, focused on preventing any further hostility. So I think there is less chance of it now than before the war. People did not even realize how high the risk was before the war. As for political instability, there is also a risk that demonstrated itself in November 2007 and demonstrated itself again in spring of this year. The Government has learned some lessons from how they handled the situation in 2007 and did a better job this time of staying calm and accepting the protests peacefully. The opposition’s tactics were very counter-productive and most of the public saw that. So I think that the Government is stronger today than it was before the Russian invasion.
Q. There are clear signs that leading countries are overcoming the recession. Do you think that the economic downturn, which was regarded as one of the main reasons for a lack of investment in Georgia from Europe and the US, is still hampering investments?
A. The major thing that is still preventing investment in Georgia is the international economic situation. After the world economy begins to pick up again, and I think that is going to happen soon, nobody knows for sure, certainly not me, but I think the general opinion is that things are getting better and probably within the next few months, we will really see an improvement in the international economy. Foreign investment capital is going to begin moving around again to the places it is interested to go. Georgia will probably begin to benefit along with other targets of foreign investment. But Georgia is going to have perception problems to overcome. There have been political crises and a Russian invasion. The international economic crisis has left investors with less money than they had before, so even without the political problems and the war foreign investors will be more cautious simply because they recently went through an economic crisis. For all these reasons, investors will be a lot more careful about Georgia in 2010 than they were in 2007. So the big challenge for the Georgian Government is to create a positive image and a positive reality for foreign investment when it is ready to come back here. They are trying to do that with ads being aired on BBC and CNN. But they need to match the image with substance. They need to be sure that this continues to be in substance an attractive place for foreign investors. That means fair and equal application of the law and the tax law. As long as the Government continues to do what it generally had been doing to maintain a positive investment environment from 2004 through the first half of 2009, Georgia should be in as good a position six months from now to attract foreign investments as it has ever been.
Q. Every year we are questioning global companies operating in Georgia about the advantages of working in this tiny country. Why should Americans invest in Georgia?
A. Americans should invest in Georgia for the same reasons anybody should invest in Georgia. Georgia is a natural transit corridor; it is a natural physical reason to invest in any kind of warehousing, terminaling, product assembly — anything that takes advantage of and uses the country’s position as a transit bottleneck and corridor between Europe and Central Asia. Georgia is a beautiful country where tourism remains a pomising sector for future development. Every year Georgia, despite the fact that its tourist infrastructure is underdeveloped, and there are perception problems about safety and stability, sees more tourists coming here. Imagine how great this country could be in terms of tourism and tourism revenue if they would do more to develop tourist infrastructure — hotels, restaurants, public bathrooms, and everything you need in Kakheti, in Imereti, Svaneti. They are working on this actually. In Svaneti for example there have been some really great improvements in tourism infrastructure.
Real estate assets were underpriced in Georgia even in 2007 and now the prices have deflated. In the banking sector all the things that were attractive before will still be attractive. I do not think that there is anything uniquely attractive for Americans, or for Europeans or anybody else by nationality. But one thing that can be more attractive for Americans is the political relationship between the USA and Georgia. The political relationship is so strong and the USA is so important as a political ally for Georgia that American investors can feel an added layer of confidence that their investments will be safe in Georgia. So perhaps there is a political reason why American investors should feel even more secure than others investing here, but economically the reasons are the same for everybody.
Q. What were the main challenges in 2009?
A. The main challenge in 2009 was that the international economy was slower. The Georgian economy was also slower. There was very low private business activity, whether in the form of incoming foreign investments or in the form of transactions by Georgian businesses. This is not unique to Georgia — this is the same thing that everybody in the world is dealing with. What has boosted economic activity by some amount has been government economic activity. There has been more Georgian Government spending on infrastructure projects, putting money into the economy and into workers’ pockets, which is fine and exactly what they should do in my opinion, as long as they don’t stretch deficits too far. There was more money coming into Georgia from international financial institutions for loans and investments in the private sector, and that has helped to compensate at least a bit for the reduction in private sector financing and M&A. Foreign governments and international financial institutions like the IMF have also supported the Georgian government budget, which has been important too.
Q. Last year was a “scary time” in the banking industry, said Stephen Bottley, DLA, UK Banking Lawyer of the Year. Involving “Lots of restructurings – rescheduling of debt, debt for equity swaps and re-pricings…”, but that was keeping law firms like DLA Piper busy he said. What about you? What kinds of services have become more in demand since the August war?
A. We had two major restructuring transactions in late 2008 and in 2009. They involved exactly what you mention — restructuring debt, rescheduling debt, debt for equity swaps, restructuring of shareholdings. It’s a common joke that lawyers make money coming and going. It is true that there is business for lawyers that is actually generated by the bad economy. Not only restructurings but litigation can increase in a bad economy. And both the restructuring work and the increase in business litigation have benefitted our business this year. But it doesn’t come close to replacing the business that we have in a booming economy. Like I said, we are going to have a drop in our overall revenue this year. A managageable one, but a drop nonetheless, And that is not nearly as good as the double and triple digit growth we had in previous years. I’d rather be making money off of real estate deals, M&A, banking, corporate finance work, capital markets – the kind of work we doing well into 2008 — than restructurings.
Q. From its recent survey of 1,000 general counsel from the world's largest organizations, leading researcher Acritas has shared interim findings that include DLA Piper among “the top five firms being used and considered for multi-jurisdictional deals covering three or more countries.” Acritas goes on to comment that “…firms stand out for a good pitch when they demonstrate a good understanding of the client’s business and have a detailed knowledge of their industry sector…”.
Please tell us about the industries of your clients: Banking, Construction, Oil etc. And what are the main challenges for each sector?
A. Well, first I want to say something about DLA Piper’s global rankings that you mentioned. This year we were rated the largest law firm in the world by revenue, passing the traditional giants like Clifford Chance and Baker McKenzie. This actually ties into your question. We have the highest revenue in the world, but we aren’t even close to the top in profit. Why is that? What does it mean? It means we are growing our business, which is why we have a lot of revenue, but we don’t have the highest billing rates. We also spend a lot of money on costs to have good people, to grow, and to be in the places where our clients are. So that achievement in DLA Piper’s global ranking reflects the fact that this firm stays close to its clients – with lower billing rates, service orientation — and that’s what your question is about.
We want to stay very close to our clients in the business sense. We do not see our clients as cows to be milked for fees. We see our clients as businesses, we try to understand their business goals, and we try to be their partners in their business goals. I think that our clients appreciate that about us, that we are not just trying to make transactions difficult, acting like lawyers, only finding problems. It is our job to identify the problems – that’s one reason why people hire lawyers – but it’s also our job to try to help solve problems.
We have a very wide range of clients. Georgian industrial companies — JSC Madneuli — Georgian real estate developers – GRDC, Silk Road Group — Georgian banks like TBC, Bank of Georgia, Bank Republic. Our international clients include BP, Ferrerro, Privat Bank, VTB. Some of these clients have huge challenges to overcome right now. We are doing less work for some of these clients this year because they have less business — there is not enough money and not enough things happening. Our transactional business has continued well this year only because of international financial institutions like IFC, OPIC, EBRD and ADB. On the one hand, we are acting for Georgian companies like TBC Bank, GRDC, and Caucasus Online who have transactions with IFC or EBRD. And on the other we are acting for the international financial institutions in different deals that don’t pose conflicts of interest – we’ve had deals this year for IFC and OPIC and other international financial institutions where the deals are still confidential. That is the transactional business we still have. We have litigation and regulatory work, which is fairly unrelated to economic trends. We have litigation work for major energy clients, maritime litigation work related to the ports and we have corporate and asset based litigation in the office.
Q. Georgian banks are still limiting the amount of lending, offering loans with high interest rates. Recently Nigel Knowles, managing partner of DLA Piper said the higher interest rates would mean a higher risk for financial institutions and for savings, because they could lead to even more non-performing credits, and, in a chain, to bankruptcies and unemployment. What is the situation in Georgia? Please give us the outlook.
A. Georgian banks are very conservative about lending right now but I cannot blame them. They are trying to keep strong balance sheets. It is obvious that they have had many borrowers’ defaults – consumers and businesses who cannot repay their loans. The banks need to be conservative, to conserve cash resources, to deal with the risk of more defaults. That is why we need credit to be infused into this economy. The private international banks are doing the same things as Georgian banks are doing. JP Morgan and Citibank are not lending into Georgia today like they were 2 years ago. So that’s why public international financial institutions like IFC, EBRD, Asian Development Bank, OPIC are stepping into this market and providing some liquidity and some loans which are helping both Georgian banks as well as Georgian businesses. When private international banks, private equity funds, real estate funds, have started to feel better and more secure and can start looking for investments again, that is going to start bringing money into the Georgian economy. The Georgian economy needs liquidity like this coming in from outside. Hopefully in the next year we will start to see more capital coming in.
Q. Knowles believes that investors prefer a secure political climate. “If the uncertainty is for a longer term, it will no doubt have an effect,” he said. How often are safety issues and the political situation on top of the agenda while negotiating with investors?
A. Foreign investors are going to place a very high emphasis on domestic political stability and domestic legal certainty. I think that the current situation in Georgia overall is pretty good. I just want to encourage the Government to keep up a reality that is as impressive as the image.
Q. You said warehousing, transportation and logistics services are attractive for investments, and that Americans are good at this business. However, we see that there is still very weak interest towards these sectors.
A. The reason is that the international economy is still weak. Those businesses — ports, shipping, cargo handling — all of them lost a lot because there has been a drastic reduciton in the international shipment of goods due to the recession. Mainly due to the decline of consumer demand in the US and Europe, but elsewhere too. The shipping business will pick up when the general economy picks up. I think right now the only people who are going to invest in transportation infrastructure are people with deep pockets or good credit, which is the same thing, who are looking at the long term opportunity and not depending on short term cash flow. Most businesses need to know that their projects will have immediate cash prospects and so will not invest right now because things are too slow. But fundamentally you cannot change facts of nature and geography, and that’s why it makes sense to invest in transportation infrastructure in this country, because its advantages are simply a product of its location and topography. The Georgian Government has done a lot to encourage incoming investment in Georgia as a transit corridor, such as the Free Industrial Zone legislation and infrastructure privatization initiatives. Once the international economy gets better things in Georgia will get better too.
Q. IFC, EBRD and OPIC are present in almost all big business in Georgia. How do you evaluate their activities and how does it influence the general investment climate in the country?
A. I evaluate them very highly. These organizations have stepped up lending money to Georgian businesses and investing in them, putting money in Georgia and investing money here. No private international financial institutions or private equity funds are doing that right now. Their work has been critically important to the Georgian economy. It was incredibly important to the banks and has helped to stabilize at least the major projects in the real estate sector. I believe a positive investment climate in certain sectors has been absolutely sustained by the IFIs.
Q. DLA Piper's commitment to environmental responsibility in the Middle East was recognized at the 6th CSR Summit Awards this week where the leading international law firm was jointly awarded the 'Best Environmental Excellence Award' together with Tecom Investments. What kind of CSR activities does DLA follow here in Georgia?
A. Basically CSR has two forms. One is spending money on charity and the other is doing things. As for spending money, we donated money both as a law firm and as individuals, for example to the fund TBC Bank set up to help people displaced by the Russian invasion. We financially support the charity First Step, which helps disabled orphans. We support American Friends of Georgia, which mostly helps street children. We give financial support to the two student moot court programmes at TSU law school. We like to support law student and legal education activities, along with the kinds of poverty programs I mentioned. Historically we have been supporting cultural causes as well — concerts at the Conservatory and events at the Rustaveli theatre and the like. I would say we have been more conservative on the cultural front this year. Unfortunately it is our donations to the cultural sphere that have probably been hurt the most due to the economic crisis, because I felt it was even more important for us to continue supporting poverty causes and to do this we had to hold back on any new cultural support. As far as giving our time – doing things and not just giving money – we have done legal work for the TBC Fund, for AmCham — I am on the Board and we have done some legal work for it too. We have done legal work at greatly reduced fees or completely free, for AFG, and for some micro credit organizations. We also have an individual case I’d like to mention.
We’ve been giving legal help to the son of the famous Georgian Theatre Producer Sandro Akhmeteli, who as you know was killed horribly in the Stalinist purges in 1937. His son, James, was in the Red Army in WW II and was taken prisoner by the Nazis. After the war he escaped to Western Europe, then went to the US, and became a citizen of the States. He came back to Georgia in 1991, was married and intended to live the rest of his life in his homeland. Unfortunately, he experienced some economic and legal problems starting a couple of years ago. He’s about 92 years old now and receives a pension from the US Social Security Administration. He had problems with his pension – bureacratic tangles and misunderstandings that we helped sort out for him. And he had some more serious local legal problems that weren’t his fault at all and we helped him through. This kind of individual pro bono case is the sort of “CSR” I was educated to do as an American lawyer. When I graduated from law school the term “CSR” didn’t exist, but the term “pro bono case” certainly did, and I still consider it to be very important work.
Q. What is the strategy of the DLA Piper Tbilisi office for 2010?
A. Our strategy for 2010 is “continued conservatism.” We are not hiring new people for the moment because we are satisfied that we have a good level of staffing for the current situation. We are not looking to take on additional fixed costs in terms of office facilities or number of lawyers. We are in the right place for the current level of business, although certainly that could change and we have a good pool of candidates to draw on for new hires if we need them.
We’re more active than we used to be in writing articles on legal subjects and getting them published, putting out brochures with information about Georgian law. We want to be out there publicly and show people what we can do.
And I want to mention we have not cut back on training our people. We’ve had trainers here in Tbilisi from DLA Piper in the UK working with our lawyers on legal writing, negotiating skills and other subjects. There have been administrative trainings for our staff. And we have continued to send our people to the UK on trainings as in prior years. Globally it is very much a part of DLA Piper’s philosophy not to cut back on training and education. That says a lot about this law firm and what I like about it. They keep their eye on the long term.
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