Lawyers deal with heightened geopolitical fears among clients

From the shocks of the Covid pandemic and Russia’s invasion of Ukraine to the worsening tensions between the US and China over Taiwan, trade and security, this decade has — so far — been marked by relentless geo­political disturbance.

As a consequence, law practices in Asia have been dealing with heightened fear among many investors and business leaders who were hitherto optimistic about the region.

Previously lucrative work in stock market flotations, takeovers and other cross-border corporate deals has dried up — especially in the once-booming financial hubs of Hong Kong and Shanghai.

And, yet, in the eyes of some, the troubles of this period have presented an opportunity. So-called economic security practices are now in vogue as corporate clients have been forced to respond to newfound risks. 

The problems are as numerous as they are complex.

How should companies in Japan balance their dependency on China for trade, on Taiwan for computer chips, and on Russia and Saudi Arabia for oil and gas? How should US companies prepare their global supply chains to handle a possible Chinese blockade or invasion of Taiwan, or a clash between nations in the disputed South China Sea? For multinationals with operations in China, what are the implications of Beijing’s state surveillance and opaque data sharing and transfer rules?

“You have a board in London reading the headlines about China,” explains Benjamin Kostrzewa, a partner at law firm Hogan Lovells in Hong Kong. “They’re calling China offices and saying: ‘Hey, what are we doing about this?’ My job is to help them maintain operations, be the calm voice in the room.”

Kostrzewa is one of many lawyers to have created an economic security practice. His background makes him particularly well placed in this fledgling area: he was born in Beijing, speaks Mandarin, and worked on Chinese human rights before joining the administration of former US president Barack Obama as a trade litigator on China.

Data security has emerged as a critical area of Kostrzewa’s practice. In recent years, Beijing has introduced a series of new data-privacy and anti-espionage laws that are both opaque and carry serious consequences. For instance, illegally collecting and transmitting data can be considered a threat to national security. Chinese security agents have investigated companies, including US consultancies Bain and Mintz, as well as individuals working in China.

There are not always straightforward solutions to offer clients. One get-around option Kostrzewa says he has “put on the table” for foreign companies with operations in China is to consider “silo-ing”. This would mean a company spinning off its Chinese unit into a standalone entity whose data is handled separately from the parent group. “It’s one option [but] it’s complicated, expensive, [and] has all sorts of downside issues,” he concedes.

You have a board in London reading the headlines about China . . . my job is to help them maintain operations, be the calm voice in the room

In Tokyo, Makoto Ohnuma, a partner at Nagashima Ohno & Tsunematsu, is carving out a similar niche, leading an economic security and sanctions law division within the firm’s M&A practice.

Ohnuma has experience of working in Germany, the Netherlands and Russia. After returning to Japan, in 2010, he set about strengthening the cross-border transactional capabilities at his firm, one of Japan’s “big four”. In recent years, he has been pivotal in helping Japanese companies — which are notoriously risk-averse and struggle with public scrutiny — through the thorny processes of organising their operations in high-risk countries.

Leading up to Russia’s attempted full-scale invasion of Ukraine, Ohnuma introduced a system of client alerts on the risks of the developing situation and, after the conflict began in February 2022, established an emergency hotline for the firm.

But that was the easy part. After the invasion, Ohnuma says he became embroiled in a quagmire: how to handle Sodeco, the special purpose company set up as a joint venture between the Japanese government and several Japanese trading houses to own oil and gas projects in Russia.

In collaboration with our China practice team, we give advice by giving examples of what happened in Russia

On the one hand, although Moscow had “forcefully” taken over ownership rights, Japan did not want to lose access to Russian oil and gas — Tokyo feared greater dependence on the Middle East would create a whole new set of problems. On the other hand, various sanction regimes put in place by the US and allies, including Japan itself, prohibited new investments in Russia.

Some details of the answer engineered by Ohnuma and his team in this instance remain confidential. But the result was a sanctions-compliant structure where funds would stay in Russia, rather than money being sent by the Japanese corporation to Russia, and the oil could keep flowing.

Both Ohnuma and Kostrzewa expect to deal with more clients wanting economic security advice in the region as they consider heightened risks across their businesses.

“Many Japanese companies [are] reconsidering business relationships with China,” Ohnuma says. “In collaboration with our China practice team, we give advice by giving examples of what happened in Russia.”