Islamic finance instruments may spur economic and trade opportunities for sanctioned Russia
Trade sanctions often work in mysterious ways. Generally, sanctions are penalties imposed by one country on another, to discourage the latter from acting aggressively or breaking international law. According to the BBC, there are more than 16,500 separate sanctions against the Russian Federation imposed mostly by the US, UK and EU.
The Russian economy seems to be doing okay so far. The IMF confirmed that it grew 3.6% in 2023 and would continue to grow another 2.6% in 2024. Still, some key industries — mostly the ones that export goods that are not widely available in the US — have largely avoided sanctions. Exports of nickel, uranium and titanium continue as before, mostly to the EU countries and the US.
Nevertheless, the Russian economy is experiencing problems. The country’s major export commodities, oil and gas, had to be rerouted to China and India where they are often sold at deeply discounted prices. The major capital markets in the US and in the UK are now literally closed to Russian corporates.
Some creative decisions were undertaken by the Russian government to deal with these new realities. They included subsidizing loans to exporters, developing internal markets for formerly exported goods and encouraging trade settlements in ‘friendly’ currencies such as Chinese yuan, Indian rupee, the UAE dirham … and Islamic finance. In July 2023, a long-awaited Islamic banking law was passed by the Russian parliament.
The passage of the law was met by fanfares and high expectations, despite the absence of Islamic banks, the lack of qualified cadres and insufficient Islamic-specific financial literacy. Still, in introducing Islamic finance in Russia, the government was pursuing the following goals:
I. Mobilization of internal funds
In 2023, Russian residents kept over US$100 billion and RUB12 trillion (US$130.71 billion) in cash in their homes. At least US$70 billion of these funds belonged to Russian Muslims who were forced to ‘hoard’ the cash due to the lack of Islamic banking facilities. The introduction of Islamic banking is expected to bring at least 25–30% of this ‘stashed’ cash into the regulated banking system. This reinstituted cash may become the foundation of a growing Shariah compliant asset management industry.
II. Development of Shariah compliant consumer finance
Over 15 million consumer loans are issued in Russia every year, and the number of Shariah compliant ones among them is still a fraction of a per cent. Mobilization of “stashed funds” as discussed above will create a supply of capital in the market well known for its insatiable demand. There is a significant number of Muslims in Russia that do not use conventional lending services — so, they either miss consumer opportunities or are forced to appeal for loans to friends and family. According to the studies commissioned by FinStar in 2020, only 31% of Russia’s 25 million native born Muslims and 14% of 9 million Muslim migrant workers have applied, or considered applying for conventional consumer loans. The remaining potential borrowers had to resort to saving or trying their luck with expensive (due to limited funding opportunities) oligopolistic providers of Islamic finance, such as FH Amal and LaRiba. The retailers in Russia’s four Islamic finance test regions are now stocking up.
III. Introduction of Islamic export instruments
The very first Islamic instrument that drew the attention of Russian exporters was a swap Salam contract. This is a chain of two back-to-back Salam contracts between a Russian exporter and an importer that may otherwise be wary of anti-Russian sanctions. The Russian exporter of grain or liquefied natural gas (LNG) executes a Salam contract with a company from a ‘friendly’ jurisdiction (eg China or Hong Kong). Then, the latter executes an identical Salam contract with a company in Malaysia or Indonesia. So, the Chinese or Hong Kong-sourced grain or LNG reaches the Islamic finance-friendly jurisdiction.
IV. Development of Islamic capital markets
New Islamic banking law is encouraging Russian companies to address the needs of Shariah compliant investors. At least three to four Sukuk facilities (both sub-sovereign and corporate) are going to be issued this year in the Republics of Tatarstan and Bashkortostan. EF Broker has been registered by the Central Bank of Russia as the provider of ‘partner (Islamic) finance services’ and will offer investors its own Shariah compliant share index.
It is still a bit too early to discuss overseas listings of Russian corporate Sukuk in the UAE, Malaysia and Kazakhstan … but a new coterie of Islamic finance professionals is already taking investment banking courses in Kuala Lumpur.
