Russia enters world of Islamic finance

Hoping to attract Arab capital, Russia will take its first step into the world of Islamic finance in June by issuing sukuk,

'Russia will show that it can be interesting for Muslim countries'

Russia to issue bonds that comply with sharia law for first time to develop country's financial sector.

By Nicolas Miletitch - KAZAN

Islamic bonds which comply with Muslim religious rules.

The bonds are to be issued by the majority Muslim Russian republic of Tatarstan in the Volga region, which has embarked on an ambitious drive to attract foreign investment.

"Russia will show that it can be interesting for Muslim countries," one of the project's backers, Linar Yakupov said.

"Right now Islamic banks cannot work in Russia, because our legislation does not take into account the Koran's restrictions."

Islam forbids borrowing or paying with interest, and sukuk (the plural of the Arabic word for a financial deed) are not based on debt like traditional bonds.

Instead, buying the bonds secures partial ownership in a concrete asset like land or a building, and investors are guaranteed a part of the profits generated by this asset.

The first sukuk to be issued in Tatarstan's capital Kazan on June 20 will be going toward financing a major business centre in the city whose construction will cost $200 million.

"Sukuk are guaranteed by the Tatarstan government, the operator will be based in Luxembourg, and we know that the international market is ready to buy," Yakupov said.

Among the interested investors are the Jeddah-based Islamic Development Bank, and various banks in the Middle East, Malaysia, and Russia, he said.

Russia's finance ministry said that it "supports Russia's first emission of Islamic bonds in Tatarstan" but pointed out that "Arab capital is already present in Russia."

Elnour Gurbanov, an analyst at Deloitte, said the initiative "can contribute to attracting Arab capital in Russia, but only in the long-term" since incorporating Islamic finance into Russia's legislation will take time.

Tatarstan has maintained privileged relations with countries in the Middle East and Southeast Asia. It prides itself on maintaining a distinct identity within Russia although talk of secession that followed the collapse of the USSR has now died down.

For years it has urged Russia to adopt a legal framework to permit the work of Islamic banks in the manner of Britain, France, or Luxembourg.

Bringing Islamic banks to Russia is "possible and even necessary", Tatarstan's leader Rustam Minnikhanov told investors in Dubai in early May, according to the RIA Novosti agency.

In Moscow, however, federal authorities are showing greater caution.

"There is no existing law nor a draft law regulating Islamic finance. Given the lack of eagerness from the federal authorities to study this issue, we should not expect it for another two or three years," said Oleg Ivanov, vice-president of the Regional Banks Association of Russia.

Ivanov's association has tried without success to include Islamic finance into Russia's strategy for developing its banking system to 2015, which was adopted by the government two months ago.

"The government and the Central Bank did not support us," Ivanov said.

Ivanov added however that the emergence of Islamic finance in the country "will definitely be positive for the development of the financial sector in Russia", noting that the assets of Islamic banks are estimated at a trillion dollars.

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