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Islamic Finance Opportunities within the Russian Tax and Legal Regime


On 24 December 2010 the Association of Russian Regional Banks conducted a meeting to discuss Islamic finance opportunities. The Association unites over 450 members, including banks, non-banking financial institutions and organisations related to the financial industry. Taxand Russia highlights the topic of discussion on delivering proposals for the Strategy of Development of the Banking Industry in Russia until the year 2015. The Strategy is being prepared by Central Bank of Russia.

It was concluded that in general there are no obstacles for executing transactions in accordance with Sharia principles even under the current tax and legal environment. However, in the regulated banking sector there may be restrictions for Islamic finance transactions based on the regulations and bylaws. The major obstacle is that russian banks in general may not be involved in buy-sell transactions with commodities, what is required for some Islamic finance transactions, e.g.Murabaha (sale on credit). It must be noted that the russian banks are explicitly allowed to participate in lease transactions, often used in Islamic lease securitisation (Sukuk-al-ijara).

The general conclusion was that the restrictions are not prohibitive and still allow open "Islamic windows", i.e. units of the banks operating under Sharia-compliant procedures, even under the current environment. One of the large russian regional banks announced the opening of such an Islamic window in the first quarter of 2011.

It must be noted that 2010 saw the announcement of a few major Islamic finance deals in Russia, in particular the initiating of the process of issuing Islamic bonds (Sukuk) by the Russian government region Tatarstan with the assistance of Malaysian financial group Amanah Raya valuing more than US $200 million and the closing of Barwa Gazprombank Russia Real Estate Fund, valued to US $150 million established by Qatar's Barwa Real Estate and Gazprombank.

The participants also noted the opportunity to run Sharia compliant transactions under regulations available for non-banking financial institutions, e.g. micro-credit financial institutions and mutual credit unions.

It was decided to ask the Central Bank to include in the Strategy of Development of the Banking Industry in Russia, provisions to facilitate the further development of the Islamic finance industry that will help Moscow to become a regional financial center, as envisaged by the government and financial authorities.

Taxand's Take

Despite the widespread misperception on the need for comprehensive reform of tax legislation of a country to accommodate the Islamic finance industry, many opportunities including most common and successful Sukuk (securitisation) structures are possible under the current Russian tax and legal environment. Moreover, steps are being made to make the environment friendlier for the Islamic finance industry.

Where an investor intends to run a project in Russia in accordance with Sharia principles, in most cases appropriate solutions should be available.

Your Taxand contacts for further queries are:
Andrey Tereschenko
T. +7 495 967 00 07

Roustam Vakhitov
T. +7 495 967 00 07

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