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Islamic Finance and Banking as a Response to Western Sanctions: Muslim Russia and the GCC States in an Age of Geopolitical Rivalry

From the 19th to the 21st of May, Russia’s Republic of Tatarstan held the 13th International Economic Summit, titled “Russia-Islamic World: Kazan Summit 2022.” This annual summit aims to encourage cooperation between Russia and the member states of the Organization of Islamic Cooperation (OIC) in the fields of economy, trade, science and technology. The Summit included the Russia Halal Expo 2022 exhibition, World Halal Day, and other traditional events, such as the Forum of Young Entrepreneurs of OIC Countries, the Forum of Young Diplomats of OIC Countries, and SberTalk.

This year’s conference was marked by its unique symbolism; the event was dedicated to the 1100th anniversary of the adoption of Islam by the Volga Bulgars (Volga Tatars). The conversion of the Volga Bulgars followed the visit of a Islamic delegation, led by Ahmad Ibn Fadlan and sent by the Abbasid Caliph Jaffar Al-Muqtadir. In addition to marking this transformative moment, the Forum occurred in uniquely challenging geopolitical circumstances. The war in Ukraine has exacerbated tensions between Russia and the West, and the former remains shackled by a raft of severe economic and financial sanctions.

Every new wave of various recent crises has caused Russia to turn further away from the West and toward the East. For example, the idea to introduce Islamic banking in the Russian Federation first arose during the financial crisis in 2008, when banks faced a shortage of liquidity and began to look for alternative sources of cash. After the annexation of Crimea in 2014, Russian banks felt the squeeze of Western sanctions. In response, the Association of Russian Banks proposed allowing Islamic banking in the Russian Federation and establishing a committee within the Central Bank to regulate the activities of Sharia banks.

These activities have remained quite limited until now. But as Russia must adjust to a new, more severe wave of sanctions, Islamic banking and investments from the OIC, which forums such as Kazan Summit seek to attract, may emerge as a palatable alternative to Western investors. Unsurprisingly, the conference drew much attention to the original emissary Ibn Fadlan, connecting his travels nearly a millennium ago to Russia’s contemporary links to the Gulf region. To what extent might this link emerge as crucial for bilateral relations with the Gulf states? In other words, can shared Muslim identities—that may transcend the current raft of sanctions—soothe Russia’s economic worries and enhance Moscow’s diplomatic profile in the Middle East? Arguably, the current geopolitical rivalry may push Russia to look to the Middle East for its economic development, though challenges to this shift remain to be addressed.

Tatarstan’s “Halal Lifestyle” as the Key to Collaboration with the GCC States

The Kazan Summit project is part of the Group of the Strategic Vision “Russia-Islamic world.” Established in 2006, the Group has been coordinated by the Republic of Tatarstan, and the government retains significant control over the organization’s leadership. In 2014, current President Rustam Minnikhanov was appointed as the Group’s chairman. Tatarstan, as an economically developed and predominantly Muslim region of Russia, has been central to the development of Islamic finance infrastructure in the country. In 2020, I interviewed Marat Gatin, the former the head of the Sector for Asian and African Countries of the Department of Foreign Relations of the President of the Republic of Tatarstan (2009 – 2010). He currently serves as the Head of the Representative office of Rossotrudnichestvo in Egypt. He said:

“[…] if before the mid-2000s, a great emphasis on regional interaction was of a religious nature, then in the last 10-15 years it has begun to move into the economic plane. Here, if we take Rustam Minnikhanov, he promotes the importance of drawing on the experience of the Muslim countries of the Arab world in introducing Islamic banking tools into our daily life. Islamic banking is part of what he calls the ‘halal lifestyle’ (in the Arab countries it is called a little differently – it is called ‘Islamic lifestyle’). It is very comprehensive, but with an emphasis on the economy; this includes developments of sectors, such as tourism, Islamic banking, and the production of relevant pharmaceuticals.”

Foreign direct investment (FDI) flows from the Gulf countries to Tatarstan was $68 million by 2019. Investments from Saudi Arabia in Russia amounted to $185 million, and in Tatarstan totalled $3 million. Saudi investments in Tatarstan established the Kingdom as a shareholder in the Tatarstan International Investment Company of Islamic Development Bank. Indeed, both Tatarstan and Saudi Arabia see plenty of opportunities to cooperate on Islamic banking and finance in the future. In particular, this ongoing work is closely associated with the Islamic Development Bank. Taliya Minullina, Chief Executive of the Tatarstan Investment Development Agency and the person responsible for convening the Kazan Summit, spoke to Saudi-Tatar coordination during my interview in 2020:

“We work with those institutions that in Saudi Arabia set the standards for organizing accounting and auditing in Islamic institutions. We have a consultant in Saudi Arabia, specifically on Islamic banking, they help us. We have the Russian Islamic University in Kazan, we have a local bank, Ak Bars Bank, which recently launched a mortgage product in accordance with sharia law. That is, we make Islamic contracts in accordance with these international standards and in order to be consulted, we work a lot with Saudi Arabia in this area.”

Tatarstan also finds the UAE among its key partners for fostering Islamic banking in the Republic. For example, the Dubai Islamic Economy Development Centre signed a memorandum of understanding (MoU) with the Tatarstan Investment Development Agency at Kazan Summit 2018. The MoU enabled the Dubai Islamic Economy Development Centre to host a number of workshops focusing on cooperation with the Strategic Vision “Russia-Islamic World” to share knowledge linked to Islamic banking and finance, identify leading developments and trends in the Islamic economy sector, and transfer the experience of Dubai and the UAE to the creation of an integrated Islamic economic strategy in Tatarstan. This year at Kazan Summit 2022 , UAE Minister of the Economy H.E. Abdulla bin Touq Al-Marri was among the guests of honor, symbolizing mutual interest in deepening connections between Abu Dhabi and Tatarstan in this area, despite the wider geopolitical turbulence that has impacted Russia’s economic situation.

Finally, relations between Bahrain and Tatarstan have been developing for some time on Islamic banking and finance. Shaykh Abdulrahman bin Mohammad bin Rashid Al-Khalifa, Chairman of the Supreme Islamic Affairs Council of Bahrain, attended the 2022 Kazan Summit as a guest of honour. As he commented during my interview with him (in Arabic) in January 2022:

“The main interests of the two sides lie in the presence of many economic and commercial possibilities in the Kingdom of Bahrain and the Republic of Tatarstan…[and] the Kazan Summit…[contributes] to the presentation of economic and commercial possibilities and opportunities available for cooperation, which are currently being studied by the concerned authorities in the two countries.”

Relations between Tatarstan and Qatar have proven active, prior the Ukraine conflict—though Tatar-Qatar ties have not expanded to include the field of Islamic finance. Rustam Minnikhanov visited Qatar on an official visit and met with Shaykh Tamim Al-Thani on 8 December 2015. The two discussed economic projects, including cooperation in the oil and IT fields, along with enhancing trade and economic collaboration. Despite cooperation in other areas and industries, the coordination between Doha and Tatarstan in the Islamic banking sector has yet to develop.

Limitations and Opportunities

Despite numerous discussions with Russian regions, including the aforementioned consultations with Tatarstan, the Gulf states do not invest in Russia and its regions directly, but only through the Russian Direct Investment Fund, the country’s sovereign wealth fund, which manages $10 billion in capital. At the time of writing, both the Qatar Investment Authority and the Emirati Mubadala Investment Company have paused their investments in Russia. Even prior to the Ukraine situation, the raft of post-Crimea sanctions against Russia have remained a significant challenge to Russia’s efforts to acquire FDI.

Domestically, Russia should pass legislation to better support Islamic banking and economic practices. Existing Russian laws do not yet accommodate all the aspects of Islamic economic activity. During my fieldwork in Kazan, Aydar Shagimardanov, the President of the Association of Russian Muslim Entrepreneurs, stressed the importance of the inner legal consciousness of a Muslim businessman:

“We do not have such an understanding of Islamic banking in our legislation, and the Islamic bank in the full format in which it operates in Islamic countries and some foreign countries, cannot exist with us [in Russia]. However, we have some…‘sprouts’ of Islamic finance that have been opening for a long time in Kazan. This is the financial house Amal, a member of our Association. We are friends with them, we have been cooperating for many years, many members of our Association just use the services of the Amal financial house. […]  But the legal consciousness of a Muslim is not yet so developed that they can completely abandon non-halal banks. And when a businessman with such an unstable sense of justice comes to Sberbank, where they can get a loan at 11%, and in the Amal financial house there is no loan, but property or equipment that interests you is bought, an extra charge is made on it and sold and given to you in instalments. That is, roughly speaking, it turns out to be 15% […]. It depends very much on the inner world, the inner level of development of the Muslim himself. [Individuals struggle to] choose between ‘more expensive’ and haram [forbidden].”

From another perspective, Western sanctions may prove to have positive effects for Gulf-Russia relations, which could be leveraged to develop Islamic banking and finance. Displaced by sanctions and unwelcome in the West, Russian oligarchs have reportedly been fleeing sanctions and hunting for houses in Dubai. This diaspora can be seen in the UAE’s “golden visa” program, which provides long-term residency for foreigners if they invest at least 10 million dirhams ($2.7 million) in a local company or investment fund. Such connections may incentivize investments between the UAE and Russia in the future. It is unclear to what extent Muslim ethnic businessmen move in the oligarchic circles of Russia and may establish themselves in the GCC states. What is clear is that such a diaspora could become another link for flourishing relations between Muslim Russia and the Gulf states, based on Islamic economic practices. Existing shared Muslim identities can only complement potential business projects, including further development of the so-called “halal lifestyle.” More generally, the movement of Russian citizens—and potentially representatives of the Russian Muslim republics—from the West to the Gulf offers further opportunities for collaboration.

Islamic banking and finance are seen as a possible vector to evade Western sanctions, or at least cushion the impact of economic restrictions in Russia. Platforms such as the Kazan Summit play a crucial role in promoting this initiative, helped along by Tatarstan’s prominence in the event and its claim to a deep-rooted Muslim identity. The question remains to what extent other factors, including the national interests of the Gulf states and their relations with the United States and other Western partners, could prove to be obstacles to progress. Internally, too, it remains to be seen whether Russia has the will and the resources to make the necessary legislative changes to enable Islamic finance to flourish. Finally, geopolitical rivalries almost certainly impact the prospects of Russia-Gulf cooperation in this area, as Gulf investors choose between sides in the current crisis (or maintain a tenuous neutrality). Assessments of political stability, economic potential, and shared interests may all come into play as today’s geopolitical competition continues to play out.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.

Dr. Diana Galeeva is a Non-Resident Fellow with Gulf International Forum. She previously was an Academic Visitor to St. Antony’s College, University of Oxford (2019-2022). Dr. Galeeva is the author of two books “Qatar: The Practice of Rented Power” (Routledge, 2022) and “Russia and the GCC: The Case of Tatarstan’s Paradiplomacy” (I.B. Tauris/ Bloomsbury, 2022). She is also a co-editor of the collection “Post-Brexit Europe and UK: Policy Challenges Towards Iran and the GCC States” (Palgrave Macmillan, 2021). Dr. Galeeva completed her bachelor at Kazan Federal University (Russia), she holds MA from Exeter University (UK) and Ph.D. from Durham University (UK). Beyond academia, she was an intern at the President of Tatarstan’s Office for the Department of Integration with Religious Associations (2012) and the Cabinet of Ministers of the Republic of Tatarstan (2011) (Russia).

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