Islamic financing: new opportunities for Russian business


Financier Worldwide Magazine

July 2013 Issue

July 2013 Issue

The global financial crisis was caused, among other reasons, by the widespread use of derivatives (transactions not secured by assets), and made the business community think twice about the effectiveness of traditional economic institutions. It prompted exploration for alternative financing and demonstrated an old truth – don’t put all eggs into one basket. 

The liquidity crisis affected all secular countries, including the US, member states of the EU and Russia, and to a lesser degree the Islamic world, perhaps due to peculiarities of the Islamic capital market which we will discuss in this article. 

Islamic financing as it exists today is a relatively new industry. Islamic banking is most developed in Malaysia, Indonesia, UAE, Qatar, Brunei and Kuwait. But Islamic financing is dynamically expanding beyond its historic boundaries to new territories where Muslims constitute a minority. This alternative banking, as it is called by experts, has put down its roots in the UK, US, France and other European countries. 

The share of Islamic financing in the world economy is currently rather small. But it is a market that is growing very fast. As of today, almost 300 Islamic banks are operating in 75 countries and further growth is anticipated. Standard & Poor’s assesses that the cost of assets involved in the Islamic financial system exceeds US$1 trillion with a forecasted doubling in size by 2015.

This type of business satisfies the main criteria of the market economy, but is also based on certain ethical grounds intrinsic to the fundamentals of Islamic financing, which originate from Shariah.

Firstly, both parties to a transaction share not only the profit but the losses/risks as well. Therefore, Islamic financing unites the financial institution and its clients in the common values to ensure their loyalty to each other.

Secondly, Islamic financing prohibits making money from money (interest). This prohibition is called riba.

Thirdly, speculation and uncertainty in transactions are prohibited, in particular with respect to the price and payment conditions.

Fourthly, certain types of activities which are deemed by Shariah as ‘not good’ are prohibited. They include such legal activities as production and sale of alcohol and tobacco products, pork, etc.

Fifth, but not the last principle of Islamic financing, is that transactions must be based on or secured (backed) by tangible assets. Therefore, the underlying principle of Islamic financing is not ‘time games’ (interest loans, derivatives, etc.) but an interest in a tangible asset.

Taking into account the abovementioned peculiarities, the Islamic capital market definitely is not ‘free of charge’ as it might appear. It is an integral part of financing sources and operates according to general laws of cost, demand and supply. 

The term ‘Islamic financing’ may also be misleading as regards the participants of these relations. It is true that the main Islamic financial institutions are Islamic banks, insurance companies and investment funds. At the same time, Islamic financing remains neutral and available to anyone without exception, irrespective of beliefs and religion. 

The Russian financial market has recently taken a practical interest in Islamic financing. Development of this industry certainly has a number of advantages for Russia, among which is an opportunity to attract investments from South-East Asia and the Middle East and as a result to expand the investor base and diversify funding sources. It is assumed that the assets used in energy and infrastructure projects, as well as in retail and real estate, are an obvious choice for attracting foreign investments and a good basis for developing Islamic financing in Russia. 

At the same time, one cannot deny that there are factors restraining development of Islamic financing in Russia. Many analysts agree that the main restraining factor is the lack of special legal regulation in this sector and point out that Russian legislation is due for a major reform. It seems that this is not true and that the core problems are not associated with the legislation issues. Most standard transactions involving Islamic financing, provided they are structured correctly, may be implemented in Russia today without any adverse legal or tax consequences due to the ‘freedom of contract’ principle and similarities in legal structures in the Russian legislation.

The principal Islamic financing structures which are widely used in Islamic financing may also be implemented in Russia. They include, in particular, such transactions as Murabahah which is ideal for trade financing and is used by the Islamic financial institute for reselling previously purchased goods at a price agreed in advance;Ijarah under which a lender leases an asset for purposes of generating profit; and Musharakah and Mudarabah under which a lender establishes a joint venture with the borrower and they share profits generated from operations of such joint venture accordingly. At the same time, there are some unresolved issues, for example, paying multiple VAT on each resale under a Murabahah transaction. Special regulation (as in the UK) will undoubtedly increase opportunities for Islamic financial institutions to carry out operations in Russia in full, but as a matter of fact, the absence of it is not critical.

Therefore, we believe that the main restraining factor is not the lack of legal regulation, but the lack of adequate understanding of Islamic financing, as well as a lack of scenarios for integrating Islamic finances into Russian practice and certain suspicion toward new financial products.

It is safe to say that sceptical perception, lack of applicable laws and experts are only temporary obstacles to the development in Russia of Islamic financial products. None of the above is insurmountable and transactions involving Islamic financing are already happening. New projects using Islamic financing in Russia demonstrate that various communities are becoming more and more interested in this matter. They may serve as a good basis for studying market reactions and be treated as pilot projects.

In the last few years the idea of Islamic financing in Russia, combined with setting up close trade and economic relations with the Middle East and Asia, are getting considerable attention from the State and from major players in the Russian financial market. Since 2005, Russia has been an observer at the Organization of the Islamic Conference, which was instrumental in improving the political, economic and cultural setting and in making closer ties with countries of the Islamic world. The Russian government and the governments of Islamic countries have signed several treaties on optimising taxes. The issue of developing Islamic financing has been a topic at roundtables, forums, annual conferences and summits (International Islamic Conference, Kazansummit, etc.).

In the course of creating an Islamic financing infrastructure in Russia, there exist joint ventures between Russia and major Islamic financial institutions, whose goal is to attract Islamic capital into Russia by searching for new partners and conducting investment activity, in particular real estate development. In 2008, under the agreement between the Ministry of Economy of the Republic of Tatarstan and the Turkapital company (a subsidiary of Kuwait Finance House), the company ZAO Kuweiti-Tatarstan Investment Company was created. In 2010, the first joint venture of Russia and the Islamic DevelopmentBank was created – the Tatarstan International Investment company. These projects evidence the fact that Russia is ready and willing to develop financial and economic relations with countries of the Islamic world.

In 2011, the bank OAO AK BARS (Kazan) provided a syndicated financing facility as part of an Islamic Murabaha in the amount of US$60m. This transaction was deemed the ‘Europe deal of the year’ for 2011 by the Islamic Finance News.

These examples highlight the fact that in Russia the Republic of Tatarstan is the centre for business activity in developing Islamic financing. This is largely due to geographical and cultural factors, as well as the active position of the regional authorities. At the same time, these examples show that there are really no objective obstacles to developing Islamic financial institutions and products in Russia in general.

The advantages described above concerning the use of Islamic financing instruments and the successful implementation to date of projects using such instruments attest to the fact that Islamic financing with its accent on real assets, as opposed to speculative activity, has good prospects in the Russian market and can become a worthy alternative to traditional finance. Getting back to old truths – a journey of a thousand miles begins with a single step. By merely starting to use instruments of Islamic financing, Russian business will be able to assess to a fuller extent the strengths and weaknesses of Islamic finance and to use them to its own advantage.


John H. Vogel is a partner at Patton Boggs LLP and Vladislav Zabrodin is a managing partner at Capital Legal Service. Mr Vogel can be contacted on +1 (202) 457 6460 or by email: Mr Zabrodin can be contacted on +7 (812) 346 7990 or by email: 

© Financier Worldwide


John H. Vogel

Patton Boggs LLP


Vladislav Zabrodin

Capital Legal Service

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