Russia, the latest entrant into the Islamic finance sector, continues to open new avenues to finance its banks and to provide new instruments for international investors from emerging markets through Islamic finance. In the latest move, representatives of major banks and a high official of the Russian central bank will partake in the 23rd World Islamic Banking Conference scheduled to take place between December 5 and 7, 2016, in Bahrain’s capital Manama, a conference seen as one of the most important and influential Islamic finance gatherings worldwide.
The reason why Moscow is increasingly opening up to Islamic finance – although just 20mn of its roughly 145mn-population are Muslims – lies mainly within its quest to make up for a shortfall in international finance caused by Western sanctions imposed on Russia which hit its financial industry. In this context, the Islamic finance industry seems to be a good playing field for Russia to recoup its previous economic strength.
That said, it has attracted a lot of attention when it became recently known that three state-linked Russian banks are preparing to launch a number of Islamic financial products later this year in an effort to entice investors from the Gulf and Southeast Asia. 
The banks are Vnesheconombank, Sberbank and Tatfondbank which all signed agreements with Saudi Arabia-based Islamic Development Bank (IDB) in order to launch Islamic finance products. For example, Sberbank, the country’s largest bank by assets, seeks to raise between $200mn and $300mn for a client this year via Islamic finance. Vnesheconombank, Russia’s largest development financier, has already funded some halal industry projects in Russia’s Muslim-dominated republic of Ingushetia and aims to raise more funds via Shariah-compliant financing instruments. The bank is also developing initiatives to support projects that promote exports to Muslim countries, according to Vnesheconombank CEO Sergei Gorkov, who noted Russia’s current exports to member states of the Organisation of Islamic Cooperation countries, which have a value of $3bn, could be easily doubled.
“As a developing institution that invests in projects in the real economy, we embrace the philosophy of Islamic finance which is based on asset-backing and refusal of unfounded capital gains. We are working on using Islamic financing instruments to support export-import transactions and fund halal projects,” Gorkov said, adding that Vnesheconombank is considering a pilot deal worth $100mn with IDB.
All three banks will partake in the Islamic banking conference in Bahrain, seeking to build up a network within the international Islamic finance sector and roll out an Islamic finance roadmap in Russia and the Commonwealth of Independent States (CIS), starting with countries in Central Asia. Tatfondbank said it plans to set up correspondent banking links with firms in CIS countries.
“There is now political will for Islamic finance to be developed in Russia. The ice has broken and people now understand that Islamic banking products can be in demand,” Maxim Osintsev, an executive director at Sberbank’s corporate and investment banking division, said.
However, progress of Islamic finance in Russia is highly dependent on the readiness of regulators to pass legislation that would provide a legal framework for Islamic finance, make it cost-effective through tax relief and would facilitate the entire industry. Lawmakers see the main problem in the fact that Russian law prohibits banks from engaging in commercial activities other than banking, such as actively buying and selling certain assets as underlying elements for Shariah-compliant transactions. 
In the beginning, a legal framework for Islamic finance in Russia could probably allow just a limited range of assets, for example precious metals or a small number of basic commodities. To establish a wider regulation that allows the full facilitation of Islamic finance in Russia, let alone a special tax regime for the sector, will still take time and will certainly depend on the outcome of the current initiatives and the overall demand in the sector.