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Russian lenders are stepping up efforts to tap Islamic finance as international sanctions and a slump in oil prices push the world’s biggest energy exporter to the brink of a recession.

Vnesheconombank, Russia’s state development bank, is seeking advice from lenders in the Middle East on how to sell its first Islamic bonds, the RIA Novosti state-news service reported Dec. 16. Banks and companies are seeking Shariah financing after the nation’s currency weakened to an all-time low almost two weeks ago, according to the Russian Business Council in Dubai.

The increased efforts underscore how the highest overnight lending rate since at least 2006 and U.S.-led sanctions linked to the conflict in Ukraine are putting a squeeze on banks including Gazprombank and VTB Bank OJSC. Lawmakers rushed through legislation on Dec. 23 allowing the Deposit Insurance Agency to buy stakes in banks before they face bankruptcy proceedings to keep the system stable.

Banks and corporates «want to know how it works and how they can get into this market”, council Chairman Igor Egorov said in an interview at his Dubai office on Dec. 23. «They see an urgent need within one-to-two years, when the hunger for finance will be very acute because at the moment we still don’t see the full effect of sanctions».

Attitude Shift

Adopting Islamic finance would mark sea change for the predominantly Russian Orthodox nation. Alexei Ulyukayev, who was first deputy chairman of the central bank until last year and is currently economy minister, said in 2011 the industry isn’t of «primary, secondary or even tertiary importance», Gazeta.ru reported.

The central bank is now considering legislature for Islamic finance following requests from lenders, Governor Elvira Nabiullina said on Nov. 26.

Russia’s economy will probably contract next year and won’t see growth for four consecutive quarters, according to a Bloomberg survey of economists. The ruble declined almost 40 percent in 2014 as Brent crude headed for its biggest drop in six years. It’s the worst performance of about 170 currencies tracked by Bloomberg after Ukraine’s hryvnia. Brent rose 0.9 percent to $60.01 a barrel at 12:11 p.m. in Moscow.

The Bank of Russia increased the interest rate 6.5 percentage points to 17 percent on Dec. 16, which means Islamic banks can offer better deals than their conventional counterparts, according to the Association of Russian Banks.

Sensitive Issue

«There’s a strategic opportunity for Islamic finance to develop in Russia because given the 17 percent rate, clients won’t go to regular banks», Sergey Grigoryan, head of analysis division at the association, said by phone from Moscow on Dec. 23. «The market is forcing the central bank to take a closer look at the current situation».

While Muslims make up as much as 15 percent of the nation’s 142 million people, U.S. government data show, a limited understanding of Shariah finance’s principles may delay its development in Russia.

«It’s quite a sensitive area because many people don’t really understand it, or they may see it as a threat, something unknown», Egorov said. «They don’t understand how business is related to religion».

Cash Pool

That hasn’t stopped businessmen from exploring the industry. The heads of Russian banks and companies, including Vnesheconombank and Uralvagonzavod, discussed Islamic finance as part of a two-day meeting in Bahrain with their counterparts from the six-nation Gulf Cooperation Council this month, state-run news agency BNA reported Dec. 14.

«It’s now on the agenda», Egorov said of Shariah-compliant banking. «There’s no reason why Russia should limit itself and not get funds through Islamic finance».

Source: Bloomberg