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The Belarus energy sector is seen by many investors, both domestic and foreign, as a market niche with high potential. The nation of almost 10 million people was arguably the most industrialized region of the former Soviet Union, and the government of independent Belarus deserves some credit for preserving and developing those industrial assets. This is one of the main reasons why today Belarus has a well-developed electric power system, with a total capacity exceeding 9,200 MW, grid length of over 240,000 km, and over 63,000 industry employees.  

To date, the energy sector has remained an almost 100-percent state monopoly. Transmission and distribution of energy are completely controlled by the state entity Belenergo and its regional branches. So far, it is only in generation where the government allows for private investment. This system on one hand guarantees acceptable power tariffs for end customers (especially households, where over 60% of power tariffs are subsidized by the government) and a stable power supply in rural and other less-populated areas. On the other hand, the model kills competition and makes the sector less attractive in the eyes of the foreign investors.

The Belarusian Government did follow and analyze energy sector reforms in other countries of the region, and several reform concepts were elaborated in the early 2000’s. However, none of them was implemented in real life. None of the current sector development strategies adopted by the government nor any of its public statements implies abandonment of the state monopoly in grid operation and power distribution. On the other hand, private investment is welcomed in generation, especially renewable energy.

Belarus seeks to obtain greater independence in the area of electric power supplies. By 2019, the Ostrovets nuclear power plant (initially, two blocs with 1082 MW net output each) should be put in operation.    For about a decade, special emphasis has been put on renewable energy resources and local fuels for the power plants. Belarus is trying to make use of its numerous rivers, and a state program to develop hydroelectric power plants is being implemented, the largest project thus far being the Grodno power station (output 17 MW, operating since September 2012). Other good examples of foreign involvement in the Belarus energy sector are wood chips-fueled CHPs in Pruzhany, Zhlobin, and Shklov, constructed by Finland’s MW Power in 2007 – 2009, several landfill gas facilities constructed and operated by Sweden’s Vireo Energy AB in Eastern Belarus, and a waste-fueled power plant in Brest constructed by Austria’s Strabag.

Market participants, however, seem to be pessimistic about the near future of renewable energy in Belarus, sensing opposition from the state monopoly Belenergy. This opposition has resulted in some adverse steps, such as recent reduction of the feed-in coefficients for hydroelectric power plants 1.3 to 1.1, and solar energy power plants 3 to 2.7. Obviously, the government to a great extent is driven by short-term financial limitations (currently, it is easy to argue that renewable energy appears to be much more expensive than that generated from traditional sources, especially Russian gas), possibly to the detriment of potential strategic gains.

Another factor which is holding back foreign investment in the sector is the immaturity and instability of the legal framework, which makes long-term projects riskier in the eyes of potential investors. A peculiarity of the legal system in Belarus is that decrees issued by the President have superior legal power to laws passed by the Parliament.  These decrees may be dedicated to specific investment projects (for instance, granting special exemptions and privileges or establishing key objectives), or regulate a whole industry or important area of relations between state and business, such as privatization, employment, and stock market operations. They may even sometimes have retroactive effect and thus present unpleasant surprises to both foreign and local businesses. The good news here is that the number of Presidential decrees issued each year is decreasing (e. g., only 6 in 2014 versus 14 in 2004, versus 41 in 1999), and their purpose is often to deregulate business relations. This is in line with a general trend towards increasing the competitiveness of Belarus as an investment destination and further stabilizing the legal system; the quality of the laws has also increased notably during the past decade.

Many investors seek remedy against risks in making an investment agreement with the Republic of Belarus, attempting to receive additional tax and customs privileges, guarantees of fair trial (international arbitration), and protection against nationalization and requisitioning of their investments. In practice, the majority of such agreements merely repeat provisions of investment laws, and thus far none of them has been tested in courts. Inclusion of any extra investment incentives requires approval by the President. At the same time, the state seldom hesitates to resort to penalties established by the agreement or even avoid the agreement in case of breaches by the investor. According to the latest 2015 statistics, there are now 1,182 registered investment agreements, with a total investment volume exceeding USD 22 billion; 331 projects have been implemented successfully. In addition, a total of 555 investment agreements have been terminated for various reasons. No separate figures for the energy sector are published, but in any event the statistics quoted above show that quite often an investment agreement is hard to make use of. Also, some investors in the energy sector complain that they have to hire at least one dedicated employee just to file all the reports related to the implementation of the investment agreement throughout each financial year.

In the light of the foregoing, a summary of recommendations to an investor considering a venture in the Belarus’ energy sector could be as follows: (1) Do a thorough market reconnaissance via existing project owners, local advisors, embassies, the National Agency for Investment and Privatization, etc. (2) To the extent possible, approach top-level authorities with your proposals – the Ministry of Energy, a Vice Prime Minister in charge of the energy sector, Presidential Administration, or at least a local executive committee (Minsk / regional government). At lower levels, you may face a lack of authority and procrastination in decision-making. (3) By all means make an investment agreement with the Republic of Belarus, but do not consider it to provide be a carte blanche or panacea against all risks. (4) Consider a reliable local partner, but be prepared for a lower quality of local management. (5) Do not fully rely on your experience in seemingly very similar markets (Russia, Ukraine, Lithuania, etc). In many ways, things are regulated and done in practice differently here. Recognize the difference.

By Maksim Salahub, Partner, Sorainen

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Romania is among the EU jurisdictions supporting shale gas investments (along with Poland and the UK) in a bid to address the concerns related to its increased dependency on imported natural gas. Several shale gas concessions have been granted so far in the east and southeast parts of the country, with the main investor in the field being the local subsidiary of the US oil & gas giant Chevron.

During the Fall of 2013, however, the Romanian Government’s policy faced strong opposition in certain areas from both local communities and green activists from non-governmental organizations (NGOs) that opposed shale gas investments in the country. Several clashes between the riot police and NGOs occurred in relation to the shale gas explorations.

Despite the riots, the shale exploration process continued while the Romanian Government maintained its commitment to shale investments. The communities opposing shale gas investments moved the clashes to a legal ground and attempted to prevent shale gas explorations by: (i) refusing to issue certain pre-requisites necessary in order to obtain permits; and (ii) adopting local council decisions forbidding the exploration and production of shale gas in their areas. This approach forced the Government’s county representatives to challenge these actions in court.

During the trials, the communities argued that “shale gas resources” was not clearly defined in the current Romanian Petroleum Law 238/2004, and that shale plays (the term “play” is used in the oil and gas industry to refer to a geographic area which has been targeted for exploration due to favourable geo-seismic survey results) were not part of the “natural gas resources,” falling under the authority of the Government – and thus, accordingly, were not of national interest, but local. Following this argument, it was argued, local communities alone were entitled to decide whether any exploration and production activities could be performed, giving them the power to ban the activities should the local public interest require.

So far, a large majority of judgments have been made in favor of the Government, and the counties’ prohibitions of shale gas activities cancelled. The battle in the courts continues, as local authorities and green NGO’s have appealed against these decisions, and a number of cases remain pending before superior Romanian courts.

Public opinion focused again on the shale gas topic in November 2014 when the Prime Minister (running for President) stated during his election campaign that Romania might not have shale gas reserves, meaning that the fights over definition and jurisdiction could have been for nothing. The representatives of the main shale gas concession holder (Chevron) declined to comment on the statement, telling the press that experts were still in the process of assessing the outcome of exploration in the concession areas. As petroleum-related information is confidential by law, the data can only be made available to the National Agency for Mineral Resources.

After the end of the electoral campaign, rumours quickly spread across the Romanian energy sector making some of the investors uncertain about gas opportunities in Romania. Moreover, the international press announced in early February 2015 that Chevron was withdrawing from its shale gas projects in Poland – persuading many in Romania that it is only a matter of time before local shale gas projects face the same fate. This, combined with the significant decrease in oil barrel prices, further increased pessimism. According to the press, however, the major oil companies (ENI, Exxon Mobile, Total, and Chevron) concluded that the Polish subsoil consists of very hard rock (unlike in the US) and were therefore poor in shale gas. 

Thus, Chevron recently announced that its exploration activity in Romania is continuing and that the company is still assessing the data collected so far. Should the outcome be reasonably positive, small and/or medium investors might also become interested in Romanian shale gas projects, which could open the door for smaller-size rather than large-size shale concessions. This would of course imply that the cost of exploration is manageable by small/medium investors. In addition, Romanian petroleum legislation will need to be revised in order to address the specifics of shale gas development and production in Romania.

And the current Romanian Petroleum Law 238/2004 is first in line for reform, as it doesn’t make any explicit distinction between conventional and unconventional resources. At the same time, a long list of legal issues wait to be addressed, including: public property issues (clarifying that shale gas is part of the country’s national gas resources); private property issues (i.e., Not in My Back Yard – NMBY); concession agreement issues (adjusting the concept of commercial discovery, duration of compulsory works programs, optional programs and production period); tax (special constructions tax and royalties), and environmental aspects (environmental impact assessment and water consumption issues).

By Claudiu Munteanu-Jipescu, Partner, Dentons

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

In the Face-to-Face feature, we invite a Partner from a leading law firm to interview a General Counsel from his or market. In this issue, Schoenherr Budapest Managing Partner Kinga Hetenyi speaks with Gergo Budai, the General Counsel of Invitel.

K.H.: What is the biggest challenge for you as GC?

G.B.: It’s hard to say, since “the biggest” challenge changes often for us. Currently, it’s coping with the range of tasks on our plates. This year started early and quickly, and the amount of things on our “to do” list, from legal to regulatory, compliance, and quality control, all skyrocketed. The trick is then how to deal with all these plates up in the air in a balanced manner. 

K.H.: How big is your legal department and how do you structure it?

G.B.: My entire team is approximately 20 people, working across the board: legal, regulatory, quality assurance, compliance.

CEELM: Why did you choose to structure all these functions under one department rather than keep them separate as some other organizations do? 

G.B.: They were separate at one time but when I came to Invitel the CEO preferred them working under the same umbrella since the feeling was that there is a great deal of inter-dependence and they all go hand in hand.

K.H.: In many ways regulatory and legal do overlap and different organizations define them in different ways. For example, within our office “regulatory” means mostly state administrative law matters, but within the AmCham “regulatory” basically means “law-making issues.” What does the distinction between them mean to your organization?

G.B.: The way I would differentiate between them is that “legal” handles all types of work that a law firm would normally cater to: contracting, litigations, etc. Regulatory is the branch that, for example, would be engaged with regulatory bodies and comment on a piece of draft legislation. Often, we’re talking about technical matters and we need to get information from our tech guys, translate their input to legal or regulatory language, and “push it” to the regulatory bodies (and vice-versa). Most of the times these guys (in “regulatory”) have a specialist degree, and there is a lawyer assigned to work with them. Other components that the regulatory team deals with are ongoing procedures from regulatory bodies, such as competition investigations. I am talking here about the initial investigation stage rather than formal GVH proceeding or related litigations, which are handled by either the legal team or external counsel. There is, of course, a lot of synergy between the two functions – hence our decision to have them operate under the same umbrella. 

K.H.: What kinds of legal work do you tend to outsource to law firms? 

G.B.: Our basic aim is to try to do everything in-house. However, we turn to law firms if special or cross border expertise is required or we simply do not have the capacity to deal with a specific matter. 

K.H.: And when you do outsource work, do you tend to use the “good old tested firms” or ask for offers on a case-by-case basis?

G.B.: We do have a number of firms that we usually work with – especially if it involves our shareholders who have their own preferred firms – but, of course, we do work across the board with multiple firms and “try out” new firms on a regular basis. 

K.H.: What is the most important source of information for you in terms of current legal issues?

G.B.: Partly, the informal conversations that we have with authorities, outside counsels, and our regulatory team, whose partial responsibility it is to constantly monitor “what’s on the horizon” in terms of legislative updates. We need to know of such matters well in advance to both engage regulatory bodies through available channels and provide input and shape it (naturally, within the boundaries of regulations), and to prepare for it. Basically, we need to be aware from the moment that the spark of an idea exists – if we learn of it when we see it as a draft piece of legislation on the Parliament’s website, we’re too late. 

K.H.: What about various newsletters and client briefs? 

G.B.: I usually skim through headlines to see if there is anything potentially of interest. If not I tend to just delete them, as unfortunately I have little time to read these kinds of things. Even with colleagues, I prefer a conversation (and my door is always open) than a 2-page e-mail that requires me to write up a 3-page e-mail response. Unfortunately I’ve had to learn to focus on the executive summary as much as possible. Naturally if I need to I will dive into the details but I cannot afford doing that on a regular basis despite my professional interest in the legal details of every matter. 

In fact, I remember working in a law firm as a junior associate and drafting a 5-page memo for a client. The partner looked over it and highlighted 3 lines only and told me to send that to the client only. 

K.H.: What are the main aspects you factor in when choosing a law firm (price, references, directories, international experience…)?

G.B.: Good sound legal advice is our end goal. We’re looking for firms/lawyers that prove a good understanding of the local issues at hand and good business acumen. A reliable and responsive lawyer who understands the business and our needs is simply critical. That is why communication is very important. The outside counsel should have a proper understanding of what she or he will be working on, and what our intent is with the work product. 

CEELM: How do you carry out a post-project assessment of the firm you have worked with? 

G.B.: I wouldn’t say we have a formal procedure in place, nor explicit/formal KPIs. Usually, after the project is done, we sit down and carry out an internal SWOT-type of an assessment of how the project was carried out and of the firm we worked with. We do tend to provide our findings from this exercise to firms as feedback but it is not based on a formal formula per se. 

CEELM: Do you keep a record of these findings and refer to it next time when picking firms?

G.B.: Again, not a formal record of this per se, but what we do keep and use is the documentation of the project itself. This is primarily in case issues related to it come up in the future – and, for example, we are now reviewing documentation we stored from 2008 with a similar purpose. 

K.H.: I imagine the best sign of well-executed project then is if such matters never resurface.

G.B: In most cases I agree but in certain instances they are inevitable. Recently we’ve had to pull up records from a matter that dates back to 2005 (we were joking internally that we should get a 10 year birthday cake for the case).  

K.H.: What is the most common problem you face when working with law firms?

G.B.: After working with external counsel for several years, I have a few good examples. One instance that I can think of is a time when we received quality work – but what followed was a huge over-invoice. Even if you agree on a strong cap, you can’t precisely judge ahead in all instances and a 10-20% flexibility is an acceptable ballpark, but a triple invoice over original projections is always upsetting. Similarly – and this was probably the funniest instance – I remember receiving an invoice in one instance that included a charge for two hours of “preparing the billing.” 

I also tend to be quite disappointed when a certain expertise is presented and you find early on that it is not really there. I appreciate firms that are open and tend to say: “let’s try to cover that learning curve together.” I appreciate the honesty as opposed to learning later that it doesn’t pan out. 

K.H.: I can imagine why invoicing can cause most disappointment towards external counsel. I still remember working as an in-house counsel and challenging one invoice I received from a law firm. What followed was a lengthy explanation accompanied with an invoice for the time spent to justify the original invoice. It had gone as far as to receive the full printed texts of all relevant laws and even being charged with the delivery service to my office.

CEELM: This gives rise to an interesting point. What best practices are there to keep track of billing on both sides and ensure as accurate an estimate as possible?

K.H.: On our end, when I have to provide a fee estimate, I sit down and estimate how much time it will take for my colleagues and me to execute a project. The more of an expert you are, the better the estimate is and the lower the estimated time tends to be. When doing so, various considerations are critical: (1) understanding the issue and the possible impact that it may have on the client’s business, (2) having an accurate feel of both their needs and how long it will take to fully instruct them (e.g., if it is a foreign client, do they already know the basics of Hungarian law?), and (3) assessing your internal capabilities. For example, if you feel a standard associate should be able to deliver on a component within two days but, maybe because of capability or work-load, he or she will need 3, you need to factor that in and make sure both the estimate and the final bill reflect the under-rate. Usually, clients will not tolerate paying for learning curves, unless the matter is something really unique, or for law firms internal issues like, for example, that their expert is unavailable due to capacity problems. 

G.B.: On our end, communication is critical. That’s why we try to talk to our external counsel on a daily basis. It helps us check in on progress and have an overview of the work carried out – and also helps us see how contingencies impact (or should impact) the final bill. 

K.H.: What are the three pieces of advice you would give a law firm in order to improve their services?

G.B.: I wouldn’t dare do that [smiles]. I would say it’s all about communication and managing expectations – making sure both sides get on the same page and there is a clear and full understanding of the need. If that’s ticked together with the right legal knowledge, you can’t go wrong as an external counsel. 

I’d also say that pro-activeness is very important. Tombstones of firms reading that they are #1 on something I tend to shrug off. If they send a newsletter about updates, that’s a good start, but it’s less important than a call along the lines of “look, this development is in the works and you might want to make sure you are aware of.” 

Drawing on the earlier discussion, I’d also suggest making sure an invoice is double checked before it is sent out to a client to make sure you avoid awkward instances. 

K.H.: How does you see the legal market in the last 3 years? What kind of trends do you expect to see (quality, quantity, prices) going forward?

G.B.: It has changed a lot and it is continuously changing. Certainly, the big international firms came in and enjoyed the privatization era, and only a number stayed following the “glory days.” Indeed, many qualified lawyers trained in those environments stayed behind and set up their own practices. That competition combined with the economic situation means that law firms simply cannot charge  the hourly rates of EUR 500-700 they were used to. It is without a doubt a smaller market these days, and marked by uncertainty, but while that is not necessarily ideal for businesses, it does help the legal market since that increased risk creates more of a need for external advice. On the companies’ side, when they first moved in, in-house teams tended to be large. Once they stabilized in the markets there simply was no need for teams of 5 lawyers any more. Now, when things are rocky again, we started rebuilding in-house teams. Really, summing it up, the one word I could use to describe it all is constant change.

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Renewable energy sources are one of the priorities in the EU’s energy policy, which strives to substantially increase the amount of energy obtained from renewable sources in total energy consumption. However, as obtaining energy from renewable sources is more expensive than from traditional sources, the development of the sector requires substantial public support.

On January 16, 2015, after five years of legislative process, the Sejm – the lower house of the Polish Parliament – adopted the long-awaited Act on Renewable Energy Sources (the “RES Act”). The RES Act will now be submitted to the Senate, which may propose amendments to, reject, or accept it. In the event of its amendment or rejection by the Senate, the RES Bill will be returned to the lower house for reconsideration. In any case it is expected that the RES Act will be finalized in February 2015. The RES Act will generally enter into force 30 days after its official publication, although the application of some of its provisions will be postponed until the beginning of 2016.

The Polish RES Act addresses in a complex manner all issues relating to the conduct of business activity in the renewable energy sector. 

One of the fundamental changes pertains to the system of support for the providers of renewable energy. Currently the Polish Energy Law provides for rules applicable specifically to RES, including (i) special rules regarding connection to the power grid as well as transmission of electric energy generated by renewable energy power plants; (ii) sale of electric energy generated by renewable energy power plants; and (iii) the issuance and trade in certificates of origin (so-called green certificates) issued for producers of renewable energy. The RES Act changes this support mechanism. Existing installations – installations that will have started operation before January 1, 2016 – will continue to benefit from the current support system in the form of certificates of origin; however they will be entitled to opt into the new auction system. All new installations in which energy is produced for the first time after the RES Act has entered into force will however be required to participate in the auction system. The Polish government will set the amounts of the renewable energy required to meet climate protection goals (for example), as well as its and the maximum prices for such energy. The quota will be apportioned among different technologies, such as wind, hydro-energy, biomass, etc. The RES Act provides that all renewable energy technologies shall compete together in the auctions, though there will be separate auctions for installations of up to 1 MW and for those of over 1 MW. In these “after the reverse” auctions, the energy will be purchased from the lowest bidder. The operators of the installations with the capacity of up to 1 MW will be obliged to sell all tendered energy to the seller of last resort at the auction price. The support awarded in auctions for projects from 1 MW and above will – on the other hand – be in the form of a feed-in premium for 15 years (i.e., the guaranteed difference between the market price and the guaranteed price awarded in auction), paid by the Renewable Energy Settlement Operator, a special entity established by the State Treasury for the purpose of settling the obligations incurred by the government during the energy auctions. 

The transition to the new support system will likely disrupt ongoing investments in renewable energy sources. The auction system will launch only in 2016, and new investment decisions will be contingent on the award of support required to obtain the financing for the project. Moreover, as a result of the new auction system, new projects will need to be both more cost-effective and able to generate more turbine work time in order to be competitive. It remains also to be seen what the impact on various technologies will be, and in particular whether the auction system will make the more costly renewable energy installations not profitable in Poland. 

The RES Act, as adopted by the Sejm, also introduces new rules to give incentives to households to invest in renewable energy. Installations (in particular solar panels) with the power less than 40kW will not require any public permits. Local energy operators will be obliged to acquire the surplus energy generated by such installations into their network for a guaranteed purchase price in the amount of 100% of the average wholesale price. In return, the support of the renewable energy sources will be borne by the end consumers, who will need to pay the extra fee in order to support the development of the sector together with their energy bill.

Finally, it should be noted that the Polish Parliament is currently considering four different draft bills involving increased zoning requirements for wind farms that increase the zoning requirements for new projects. Their adoption would significantly impair the feasibility of the new wind energy projects; fortunately their adoption before the end of term of the current parliament is highly unlikely.

Lukasz Ziecina, Partner, and Michal Bobrzynski, Senior Associate, Studnicki Pleszka Cwiakalski Gorski

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The Ukrainian gas market suffered significant changes in 2014. Russia’s actions put energy security high on the agenda in the country. Events that were completely unimaginable in 2013 now appear to be the harsh reality: brutal military conflict in the Eastern Ukraine, a halt in continuous gas supplies from Russia for Ukraine’s internal needs, the prospect of a cold winter without sufficient reserves of gas in storage, and finally a last-minute winter deal between Naftogaz and Gazprom, which is to expire on April 1.

2015 may appear to be an even more difficult test for Ukraine’s energy security. Gazprom not only promises to halt gas supplies to Ukraine in case of Naftogaz’s failure to pre-pay for further deliveries but also threatens to re-direct the gas flow to the EU from Ukraine to other routes. Even if not all of that is going to happen, Ukraine must initiate immediate reforms in the energy sector and rethink its gas relationship with Russia. 

Reform of Naftogaz. The endemic problems of the Ukrainian gas sector mostly have to do with Naftogaz, a state-controlled gas giant with a colossal company budget deficit (USD 6.5 billion, against a state budget deficit which is only USD 4.3 billion), and are caused by the price disparity between the prices at which Naftogaz purchases the gas from the EU or Russia and sells it to the population or heating companies with subsidies by the Government. The long-standing practice of setting artificially low natural gas prices for households and heating purposes (much lower than what Naftogaz pays for the imported gas) led to the state company incurring chronic losses of billions of dollars. The Government uses every administrative opportunity to provide funding for imported gas; for example, the National Bank of Ukraine has recently provided Naftogaz with USD 1.7 billion from its reserves in order to finance natural gas imports. 

The Energy Community, the International Monetary Fund, and other international partners have been underlining the need for Naftogaz’s reform and particularly for the unbundling of its gas-transportation and gas-production businesses. Ukraine can choose one of three classical market models: Ownership Unbundling, Independent Transmission Operator, and Independent System Operator. Both the OU and ITO models imply radical changes to Naftogaz’s current structure, but the Government tends to prefer the ISO models. In their view, the gas assets (pipelines and storage facilities) will be owned by two state companies but separate operators (where Ukrtransgaz would have controlling stake) will be in charge of the daily management of the assets. These operators will be responsible for granting and managing third-party access, while the state companies – the owners of the assets – will be responsible only for the technical condition of the networks. Given Naftogaz’s current influence over its 100% subsidiary Ukrtransgaz, it would be extremely important to ensure the legal and functional separation between Ukrtransgaz and Naftogaz. Numerous detailed rules should also apply in order to ensure non-interference in the operators’ businesses. For example, the operators must be fully equipped with their own financial, technical, and human resources, and personnel of the asset-owning companies may not be involved in the decision-making process. Currently Ukraine does not have in place the necessary legislation to effectively implement this model. and this legislation is yet to be carefully drafted and adopted by the regulator. 

Access to the Ukrainian Gas System. Ukraine intends – once Naftogaz’s reform is successfully completed – to offer access to its gas transportation and storage assets to international investors. The Parliament has already adopted a law to allow European and American investors to acquire up to a 49% share in companies that would be operating pipelines and storage. The tender is scheduled for 2015, and if this initiative is implemented, it will be the clearest demonstration of Ukraine’s firm intention to comply with European Union standards for the gas market.  

On the other hand the Government still lacks consistency in liberalization of the oil and gas market in Ukraine and, making one step forward, always makes two steps back. For example, early in 2014 Ukraine raised domestic gas prices by 50 per cent in order to meet IMF demands, resumed import of natural gas from Europe, and voted for a change in the ownership structure of the gas transportation system. However, at the end of the year the Government directed its efforts in the opposite direction by doubling the gas production tax rates and introducing Naftogaz’s monopoly over gas supply to the largest industrial consumers on the market. 

Possible Outcomes. Given this state of affairs, one may expect two possible scenarios for further development of the Ukrainian oil and gas market. The first one assumes that various political forces may want to stall the reform process in the oil and gas sector, as fear of a social outburst due to a potential cancellation of the subsidized tariffs for households is something that politicians are always afraid of. The drop in world oil prices that are leading to adecrease in gas prices may play a secondary role in that as well. 

The second scenario requires the Government and population to be ready to undergo painful reforms under strict supervision of international institutions. The Energy Community could be a big factor in helping Ukraine honor its commitments to implement European energy market rules. Opening of access to Ukraine’s GTS and gas storage, its gas market, and significant gas production potential could be advantages in further Ukraine-EU trading and market integration perspectives. 

By Vitaliy Radchenko, Partner, and Inna Antipova, Associate, CMS Cameron McKenna

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Stories about new firms moving into CEE countries are rare these days – definitely rarer than those about international firms pulling out. Nonetheless, in January 2015, the US law firm Sichenzia Ross Friedman Ference (SRFF) announced its affiliation with the Fabry Law Office in Budapest (which until recently was affiliated with the Czech PRK Partners law firm) – which will operate as SRFF-Fabry going forward. The affiliation, which became official on January 1, 2015, represents the first office outside of the US for SRFF, known for its securities and corporate practices. We reached out to Gregory Sichenzia, Founding Partner of SRFF, to learn more.

Why Budapest As a First European Footprint?

“I found myself in Budapest quite often,” explained Sichenzia. “I had a lot of different connections – both business and personal – with the city and I thought the opportunities for a firm like ours are excellent in the market.” 

According to Sichenzia, the “obvious answer” to questions about the move was that he knew Agnes Fabry and Gyorgy Feher very well and believed they were simply “the perfect guys.” The SRFF Partner added: “over time we’ve built a great deal of respect and familiarity with them. Gyorgy was also educated here in New York so he has a lot of familiarity with the NY/US market.”

“Not a Lot of Competition”

“I agree, Budapest is not the first city most firms think of in terms of a first European expansion, but we have a lot of confidence in the move based both on our experience in the market and the track record built by our local colleagues.” He added that another reason he’s optimistic is the general lack of real competition on the ground. 

Sichenzia concedes that a number of international firms are in the market, but claims that “we have a different model. We do not aim to service primarily established US businesses looking to break into Hungary but the other way around – we’re looking to support more entrepreneurial organizations in Hungary and other CEE markets who are keen to obtain financing from the US market.”

Build Up, Cross the Ocean, Finance

The US firm is looking to leverage its experience in Private Investment in Public Equity (PIPE) issuances in the US in its new affiliation. 

“A great deal of Hungarian companies are quite entrepreneurial in nature and depend on financing to grow. We are well positioned to support them on the ground now until they hit a certain stage where we can bring them across the Atlantic to a market where the valuation of financing available is better,” Sichenzia explained. “We have an excellent farming system for young companies in Hungary which our local colleagues help develop now.” 

And following the move, the local team is looking to further add to its capabilities in this sense. According to Feher, the local team is just adding a new banking partner – Judit Szoradi. “Our office has always been relatively small and we like our rather informal business culture, which fits perfectly with that of our colleagues from across the ocean,” Feher stated.

Commenting on the impact that the new affiliation is having on their business, Feher said: “We’re very happy with the new arrangement and are already seeing it pan out for us. With Gregory’s excellent contacts we’ve already registered 5 times more referral work than from our previous affiliated firm.”

Building Block For The Future

According to Sichenzia, the firm has plans to expand further, both in CEE and other complementary markets, the affiliation with the Fabry Law Office will not only be a critical learning opportunity in that process but, with the expansion, he expects the local office to become all the more critical for the firm as a whole as its first non-US venture.

We only wish their venture the best of luck and hope to see more firms turning their sights on CEE. 

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The relatively low level of health spending in Hungary – 8% of GDP compared with the 9.3% OECD average – means there is a certain latitude for a potential increase in the market as a whole. According to the OECD, despite volatile health-spending trends in Hungary over the past decade, the macroeconomic prudence of recent years and encouraging growth prospects are causes for optimism.

Owing to its geographical location, Hungary provides ideal regional headquarters for life science companies aiming to invest in and/or expand their activities in the SE European region. Investors in the Hungarian life sciences market may find ambitious biotechnology companies, talented research institutions. and renowned R&D capabilities, along with a skilled labor force with relatively low wage requirements. Investors in the Hungarian healthcare sector may also benefit from EU-related or government cash subsidies, tax incentives, and low-interest loans granted by the Hungarian Central Bank.

Nevertheless, investment in the Hungarian healthcare sector has its ups and downs; therefore it is crucial to have an in-depth and up-to-date understanding of the market before making investment decisions. From a regulatory perspective, based on recent legislative trends, the following activities may all provide promising investment opportunities in Hungary.

Health Insurance Sector – Opening Up in the Midterm

According to current government plans, private insurance services will be welcomed within the Hungarian health insurance system in the midterm. As a result of recent regulatory changes, private healthcare services may not be performed in public healthcare institutions. Private healthcare providers are encouraged to create their own infrastructures. To this end, a two-tier health insurance system is envisioned in Hungary, where the first tier would consist of basic healthcare services equally available to everyone on a social solidarity basis, with a supplementary or second tier consisting of private insurance services organized by private capital-based health insurance funds, aiming to provide extra welfare, and additional services on an optional basis. Should the legislative framework be prepared in the coming months in line with this goal, the first strategic investors in the opening private insurance system might well see a return on their investments.

Appetite for Medical Devices

Hungarian healthcare institutions have been traditionally – and deliberately – under-financed, and have therefore generated revolving debts. As a result, the under-financed nature and the obligation for repayment of ever-growing debts have often paralyzed the medical device development programs of hospitals. It seems now that the Government is committed to consolidating major parts of the current debts of hospitals. According to the Y2015 state budget, on top of the normal budget for the healthcare system, an additional EUR 200 million has been allocated to consolidate debts of healthcare institutions owed predominantly to market suppliers. This consolidation may relieve the tight budgetary constraints on hospitals and make way for the strategic acquisition of medical devices and appliances.

Potential Targets for Private Healthcare Service Providers

In parallel with the consolidation of the debts of hospitals, the Government has launched a restructuring plan for healthcare institutions. Although the details of the restructuring program are not yet publicly available, it seems clear that the main goal is to eliminate redundancies in the healthcare system and reduce the number of hospitals providing general inpatient services. It is likely that one priority hospital will be appointed – instead of the current many – with general responsibilities per region supported by specialized hospitals. As a result of the restructuring, several healthcare facilities may become redundant and hence serve as a potential target for brownfield investments.

R&D Incentives in the Pharmaceutical Sector 

Both refundable and non-refundable incentives are available for investors coming to or expanding in the life sciences sector in Hungary. One of the most important of these incentives is that pharmaceutical companies may, in certain circumstances, deduct a high proportion of their R&D expenditures from their tax obligations. An R&D investor may be entitled to further government subsidies if, in relation to its R&D-related investment, it creates new jobs n Hungary. 

By Andras Posztl, Country Managing Partner, and Gabor Papp, Senior Associate, Horvath & Partners DLA Piper

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.