With 20 million Muslims by some estimates, Russia has by far the largest Muslim population in Europe. In fact, Russia’s Muslim population is larger than the combined entire populations of Albania, Bosnia-Herzegovina and Kosovo, Europe’s three Muslim-majority countries. In early 2019, the chairman of Russia’s Council of Muftis predicted that Russia’s Muslim population would increase to 30% by the year 2035. KYLE DAVIS writes.

Russia is also the world’s second-largest destination for migrant workers (after the US), and the overwhelming majority of Russia’s labor migrants come from Uzbekistan, Tajikistan and the Kyrgyz Republic, all Muslim-majority former Soviet republics.

Particularly in the last five years, Russia has also seen increased geopolitical and economic exchanges with the Muslim world. Of course, there is Russia’s involvement in Syria and its budding relationship with Saudi Arabia and oil market cooperation with OPEC in the ‘OPEC-Plus’ format, but Russia is also a major economic partner of Iran and, in the case of Turkey, the relationship goes beyond economics and has even involved controversial sales of Russian arms to NATO’s largest Muslim-majority member. Russia’s sovereign infrastructure fund, the Russian Direct Investment Fund, has co-invested in projects worth billions of dollars together with Mubadala Investment Company, the sovereign wealth fund of Abu Dhabi.

Russia has also made serious inroads in improving relations with the Muslim-majority nations of Southeast Asia. Last year, Malaysia’s prime minister attended for the first time the Russia-hosted Eastern Economic Forum in the Russian Far East city of Vladivostok. Russia and Indonesia have a long-standing history of cooperation, with Indonesia last month canceling a deal to buy US$1.1 billion-worth of Russian military jet aircraft only after intense pressure was brought to bear by the US.

Russia and China have recently pledged to expand trade and economic ties with Thailand, a country with a significant Muslim minority and a fast-growing Islamic banking sector. The Philippines, another country with a large Muslim minority that recently prioritized the development of Islamic finance, has also lately been seeking Russian cooperation in its defense and energy sectors.

All of the aforementioned factors, showing a clear trend of economic integration of Russia with the Islamic world and a clear demand for Halal banking services inside of Russia, have not gone unnoticed by Russian financial authorities, and 2020–21 promise to be landmark years for Islamic banking in Russia based on the number of exciting new initiatives publicized over the past several months.

For example, state-owned retail banking champion Sberbank announced last November that it would pursue four priorities in developing its Islamic banking business:
(1) Halal commercial banking products to be offered in four pilot regions (Moscow, St Petersburg, Volga River basin, the Caucasus)
(2) servicing investors from the Islamic world
(3) opening an office in the Persian Gulf, and
(4) using Shariah compliant instruments to facilitate Russian exports — particularly agricultural produce — to Muslim countries.

That same month, Russia sent for the first time an official delegation to the annual conference of AAOIFI in Bahrain, where the Russians presented a plan to issue wheat-backed Sukuk in export finance.

At about the same time, the president of the Republic of Tatarstan, Russia’s most populous Muslim-majority region, proposed at an Islamic economic forum in neighboring Bashkortostan that Russia should have a nationwide Islamic bank with federal government support. These initiatives (among others) have been in the pipeline for some time. The aforementioned Sberbank hired KPMG a few years ago to develop a strategy for Shariah compliant banking. The originally announced vision involved naming Tatarstan, Chechnya and Bashkortostan as pilot regions for ‘Islamic windows’ for servicing Muslim clients.

There are several reasons why Islamic banking has not taken off as quickly in Russia as might be expected by the high-profile attention described previously. One is that while Russia’s Muslim population is very large, one of the legacies of Soviet official atheism is that Russian Muslims are, on the whole, not particularly observant compared with their counterparts in the Middle East and Asia.

KPMG, in researching the Russian market for Halal banking services, found that only 12% of Russian Muslims were ready to use Shariah compliant banking instruments. Pilot programs in the late 2000s and early 2010s involving Shariah compliant investment funds and other products were not met by high demand.

Therefore, much of the market potential is represented by inbound investments from, and export transactions with, Muslim countries — in other words, international banking, where an Islamic finance ecosystem has already developed. This is a quick-growing segment, but in an uncertain world Russian banks have so far been hesitant to expand on the scale required to compete with more established international players.

Another challenge is presented by cautious Russian regulators. Russian banks are forbidden to engage in most of the trades and investments for their own account as required for most Shariah compliant ‘partner’ banking. So far, the Central Bank of Russia(Russia’s banking regulator) has been unsympathetic to requests to sponsor changes in legislation and regulations, and has even refused to create a ‘regulatory sandbox’ or allow exceptions on an experimental basis. The paradox is that the same geopolitical and economic pressures that are pushing Russia and the Muslim world together also make Russia’s notoriously conservative banking regulators highly cautious about making any changes that might weaken Russia’s financial system.

So far, the reality of Islamic finance in Russia has been a mixed bag: on the one hand, Russian politicians and financial institutions can clearly see the potential, and in an environment of sanctions and renewed great-power competition, Russia sees the Muslim world as an important source of investment and as an export market for Russia’s booming agricultural sector. Russian leaders also see Russia’s large Muslim population as a natural attractor in this regard. On the other hand, it takes time to build business relationships, and Russia’s ambitions in developing economic relations with Muslim-majority countries have consistently gone more slowly than Russia would have liked.

The future, however, looks brighter than ever for cooperation between Russia and the Muslim world (in terms of both its domestic Muslim population and the international Islamic community). In a world of pandemics, de-globalization, de-financialization, market uncertainty and fast-evolving geopolitics, relationships driven by fundamental commonalities and shared interests will be more important, and stronger, than ever.