Russia Seeks Islamic Finance Umbrella To Offset Sanctions

Russia plans to open its first Islamic bank this year, seeking to attract Islamic finance funds as sanctions push the economy down.

The State Duma, the lower house of parliament, may allow Islamic banking in the next two months through legislation, said Anatoly Aksakov, a deputy in the Duma and president of the Association of Regional Banks of Russia. The major cause is to establish a legislative framework in the other half of the year 2015, he said.

“The amendments are aimed at attracting capital from Islamic countries first of all, the United Arab Emirates, Arab Countries, Indonesia , Malaysia,” Aksakov said by phone from Moscow. Russia aims to attract “tens of billions of dollars,” including Islamic funds, to finance government-owned projects such as railroads and manufacturing, he said.

A combination of changing oil prices and sanctions imposed by the United States and its allies following President Vladimir Putin’s incorporation of Crimea from Ukraine in March have left Russia on the brink of a recession while it was a major energy exporter earlier. Moody’s Investors Service cut the country’s credit rating to minimum last week, citing the Ukraine crisis, exchange rate downfalls, oil prices and the country’s little access to international capital markets due to sanctions.

Russia is not the first Muslim-minority country to take steps in Islamic finance: UK, Luxembourg and South Africa sold debut Sukuk last year, entering a global market that PricewaterhouseCoopers estimates will reach $2.6 trillion by 2017. About 15 per cent of Russia’s 142 million people are Muslims, according to US Official data.

Only amending the law won’t open the floodgates for capital from the Middle East, according to Apostolos Bantis, a Dubai-based analyst, said, “this is just the first step and it will take time.”  “Although Russia is building stronger ties with the region at the political level, the investment side will depend on political governments in the UAE and other Gulf countries to incentivize investments.”

Shrinking Economy

The rating cut by Moody’s on 20th February followed Standard & Poor’s, which lowered the status of the country to junk in January, 2015. Sanctions have left Russian borrowers cut off from international debt markets and increased investor appetite for the RUB, stocks and bonds.

The economy is forecast to shrink four per cent this year, according to the median estimate of 34 analysts compiled by Bloomberg. Growth slowed to 0.6 per cent last year from 1.3 per cent in 2013 as the RUB slumped 46 per cent and oil tumbled almost 50 per cent. Oil and natural gas are major exports being about half of Russia’s income.

“Amid the ruble decreased value in international market, we can supply the domestic market with goods that were imported and have become too expensive,” Aksakov said. “We are hoping Islamic finance resources will help the country with new projects.”