After Iran, the next big game changer for the Islamic finance industry in terms of new assets inflows into the sector is likely to be Russia. The country’s sluggish economy, Western sanctions that literally blocked most of Russia’s access to the European and US capital markets and caused serious currency devaluation, as well as its bid to attract more business and capital from Arab countries has led to the preparation of regulations that would allow Islamic finance deals on a grand scale in the near future.
As a first step, draft legislation was submitted to the State Duma, or Lower House of Parliament, this January to help separate Islamic money flows from non-Islamic funds, which is essential to bring the Islamic finance business into gear. If approved, the new regulation would allow opening special bank accounts in accordance with Shariah law and eventually the establishment of Islamic banking institutions in Russia or at least Islamic windows at conventional banks.
This is exactly what at least three banks have been waiting for in the past months. One is Sberbank, one of Russia’s largest financial institutions, which has already announced that it will roll out Islamic finance service as soon as the new regulations come into effect, namely in territories in Russia where Islam is prevalent, for example in the Russian republic of Tatarstan.
The other bank is Russia’s troubled state development bank Vnesheconombank, or VEB, whose chairman Vladimir Dmitriev in early February said that it was interested in Islamic finance and that he urges the government to go ahead with the respective legislation. VTB Bank, another large lender, said last year it is considering issuance of sukuk, something that the republic of Tatarstan has already announced as early as 2011. Tatarstan is also a candidate for “pilot zones” to introduce Islamic banking in Russia, officials say.
“I think the most acceptable option for Russia at the current point of time is not to set up independent Islamic banks but rather dedicated ‘windows’ in large banks that would provide Islamic financial services,” says Linar Yakupov, president of Russia’s Islamic Business and Finance Development Fund and former CEO of the Tatarstan Investment Development Agency, adding that Tatarstan would be the best region to make the first steps.
In a separate development, Abu Dhabi-based development and investment company Mazcorp will assist Chechnya to open the first Islamic bank in this Russian republic, according to an announcement by Chechen Republic leader Ramzan Kadyrov on January 28. Such a bank is mainly meant to facilitate investment from the UAE and other Gulf states into Chechnya, which is in dire need for infrastructure and industrial development.
Russia has about 21mn Muslims, around 15% of the population, who are mainly living in the Central Asian parts of the country, as well as in the Volga Basin and the Northern Caucasus, and around 1mn in Moscow. According to Russian banking analysts, if Islamic banking gets rolled out in those regions, assets could reach $24bn within just three years.
While Islam is the second most widely professed religion in Russia behind the Russian Orthodox Church, there has always been a cordial relation between the two as both where victims of anti-religious campaigns in the era of the Soviet Union in the wake of the Communist state’s prosecution of faith of any sort. Thus it comes not so much as a surprise that the Orthodox Church is in fact supporting the establishment of an Islamic finance system in Russia, for one part because it feels the ethical characteristics of Islamic finance are appealing, for a second part because Islamic finance is seen as one way out of the financial woes the country is currently struggling with.
The Orthodox Church is even working with the Duma on the new Islamic finance legislation as part of the committee that negotiated legal changes, and it is also consulting with Shariah experts to develop a sustainable framework for Islamic finance in Russia.

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