November 2013

The global liquidity crisis aff ected almost all developed countries, including Russia, but Islamic financial markets appeared to escape relatively unscathed – perhaps due in part to the specific nature of the Islamic capital market. Despite its small beginnings Islamic finance is one of the fastest-growing sectors in the world, and this increasing interest has not gone unnoticed in Russia. Vladislav Zabrodin and Anna Leksashova explore new developments.

The development of this industry has without doubt certain advantages for Russia. One of the most important advantages would be the opportunity to att ract investments from Southeast Asia and the Middle East, which may in the future help to increase the investor base and diversify funding sources. The assets used in energy and infrastructure, retail and real estate industries are a likely area for att racting foreign investments and would be a good basis for developing Islamic financing in Russia.

In our view, one of the most pointed examples demonstrating Russia’s interest in Islamic financing instruments is the proposed placement of Sukuk of US$100-200 million planned by an SPV created for the project Smart City Kazan. The Tatarstan Investment Development Agency (the coordinator of Kazan Smart City) has recognized the diff erences between placing eurobonds and Sukuk and expressed its interest in using this instrument.

One more factor contributing to strengthening the position of financial instruments based on Shariah norms in the Russian market is the state and big players of the Russian financial market who are paying great att ention to developing Islamic fi nance in Russia and establishing close trade and economic ties with the Middle East and Asia.

Russia has been an Observer State in the OIC for about nine years. This fact has made it possible to achieve substantial improvements in political, economic and cultural areas, first of all, as relates to Islamic countries. A number of treaties on tax optimization have been executed
between the Russian government and Islamic governments. This certainly creates a field for international cooperation using Islamic fi nancial
instruments.

In the course of creating an Islamic financing infrastructure in Russia, joint ventures between Russia and large Islamic financial institutions have been created, aimed at att racting Arab capital to Russia by seeking new business partners and making investments, in particular into real estate development.

An example would be the ZAO Kuwait-Tatarstan Investment Company founded in 2008 under an agreement between the Ministry of Economy of the Republic of Tatarstan and Turkapital, a subsidiary of Kuwait Finance House. The first joint venture of Russia and the IDB, the Tatarstan International Investment Company, was founded in 2010. These projects testify to Russia’s willingness to develop financial and economic relations with Islamic countries. In our opinion, the positive contributions to developing institutes of Islamic financing in Russia include the business seminar devoted to att raction of Islamic finance to Russia, which was held in the main branch offi ce of Sberbank in Tatarstan in Kazan in late July 2013, as well as the Memorandum of Strategic Cooperation in investments in the markets of Russia and the Middle East signed between Sberbank and Abu Dhabi investment company Invest AD in December 2012. Pursuant to this document, Sberbank and Invest AD
will provide clients access to fi nancial markets, private capital and trade financing.

The above examples show that currently the business activities aimed at developing Islamic finance in Russia are concentrated in the Republic of Tatarstan. This is largely due to geographical and cultural factors, as well as the active position of the regional authorities.

For example, the Kazan Halal Hub operating since 2011 is the first transportation and storage hub in Russia and CIS countries for Halal goods. All operations correspond to international standards of Halal logistics. The Halal Industrial Park Baltach also acts as a platform for efficient development of the Halal industry.

A certain development and movement toward strengthening positions of Islamic financial instruments is obviously happening, if not in all of Russia, then at least in some parts of the country. The widespread use of Islamic financial instruments in Tatarstan and successful implementation of projects using such instruments are clear evidence that Islamic financing, which focuses on real economic activity instead of speculative activity, has a promising outlook in the Russian market and can be a good alternative to traditional finances, as well as off ering the potential to facilitate its more common application in the context of the Russian economy.