Russian Banks Look to Build Islamic Finance Knowledge in Face of Sanctions
SYDNEY/MOSCOW — Russian banks are developing their expertise in Islamic finance to help broaden funding sources for local firms, though Western sanctions over the Ukraine crisis and the absence of a regulatory framework could hinder those efforts.
Russia's Islamic banking sector is still in its infancy. But an estimated 20 million Muslims living in the country are a potential source of money, as are cash-rich Islamic funds abroad.
Islamic finance has become a mainstream funding source for some other governments and companies over the past several years, with even non-Muslim nations such as Britain and South Africa issuing debut Islamic bonds [sukuk] last year.
However, the European Union and the U.S. are seeking to cut overseas funding to Russian firms over Moscow's support for rebels in eastern Ukraine. Banks in the Middle East and southeast Asia, the major markets for sharia-compliant debt, are wary of becoming tangled in the sanctions.
So some Russian lenders are trying to build their own in-house knowledge of Islamic finance.
State development bank Vnesheconombank (VEB), which has been targeted by the sanctions, is seeking help from Middle East firms to develop its Islamic finance expertise, a spokesperson said, without naming those institutions.
"VEB sets as it goal diversification of project financing instruments, and among those considers Islamic finance tools."
VTB Bank, Russia's second-largest lender and another sanctions target, is exploring sukuk deals for several of its clients, although some questions remain over the accounting treatment of such transactions, the bank said in response to Reuters questions.
"Nonetheless, this remains a current issue, especially given growing interest in Asian markets."
In December, officials from institutions including Moscow Industrial Bank, VEB, SME Bank and the Russian Direct Investment Fund took part in a trade mission to the Gulf region, with Islamic finance featuring in the discussions.
In the same month, Russia's National Rating Agency signed an agreement with the Bahrain-based Islamic International Rating Agency to jointly assign ratings for Islamic financial products.
This will allow sharia-compliance quality ratings to be assigned for sovereign debt and Islamic financial institutions, the Russian agency said in a statement. Firms ranging from an Islamic leasing firm in the Russian republic of Dagestan to a fish skin leather manufacturer in Ingushetia, another Russian republic, have received such ratings in the past.
The lack of a Russian regulatory framework for Islamic finance is an obstacle; both issuers and investors rely on clear regulations to reduce risk and costs.
In October, the Association of Russian Banks asked the Central Bank to help develop Islamic finance, suggesting it adopt a special federal law.
The regulator continues to study the question of introducing Islamic finance regulation but work is at an early stage, a Central Bank spokesperson said last week. It is not yet clear when any new rules would be drafted, he added.
The Central Bank could draw on the experiences of former Soviet republics Azerbaijan, Kyrgyzstan and Kazakhstan, all of which are drafting new laws to regulate Islamic banking.
Even without a regulatory framework, Russia's banking sector has seen some small-scale Islamic finance deals. Kazan-based AK BARS Bank, Russia's 18th largest bank by assets, has raised a combined $160 million via two Islamic syndicated loans since 2011 and is open to tapping the market for a third time.
"We will continue working in this direction, further diversifying our funding," said Elina Khayrullina, an official at AK BARS.
A sukuk issue by a local or regional government would be needed to encourage issuance by Russian companies, she said. "In general, sukuk might be an option for Russian companies given there is a benchmark at state or regional level."
Azerbaijan's largest bank plans to set up a stand-alone Islamic unit which would seek business across the region, including through its Russian subsidiary.
There have been false starts, however. The Russian republic of Tatarstan has planned for a sukuk issue as far back as 2011, but no deal has materialized.
M&A activity shrinks after 2015 high
The value of mergers and acquisitions in the UK has halved year on year in the first quarter of 2016, on a slowdown at the top end of the market, according to analysis from Experian.The volume of M&A deals also fell, with 1,372 deals announced in the first quarter of 2016, a 15% fall from the 1,616 transactions recorded in the same period last year. The volume was also down by around 20% quarter on quarter.
Experian said: ‘After 2015’s highs, this represents the most subdued quarter in almost three years, and mirrors a global trend for declining activity.’
But it said it was not yet clear whether the fall represents a ‘small blip’ or an indication that the volume of deals will be more modest in the year ahead.
In the first quarter of the year, there were just seven mega (£1bn-plus) transactions, down from 15 in the same quarter last year. This caused the value of deals to fall from £82.5bn in 2015 to £41.8bn this year.
The number of large deals (£100m to £1bn) in the quarter fell 40% year on year, while mid-market deals (£10m to 100m) fell 29%, and small deals (£500,000 to £10m) declined by 22%.
Deal volumes in London dropped sharply in the first quarter of the year, marking the slowest start to a year since 2009, when the UK was in the deepest point of its recession.
The number of completed transactions fell to 509, a drop of 26% from the first quarter in 2015.
Meanwhile the total value of London deals hit £17.5bn, down from £46bn in 2015, with high-value corporate deal-making, which was a prominent feature in 2015, largely absent at the start of this year.
National firm Gateley was the busiest legal adviser in the quarter, advising on 31 deals, while international firm Davis Polk & Wardwell topped the table according to deal value, advising on £7.5bn worth of deals.
James Turner, research manager at Experian Market IQ, said: ‘A more cautious approach, particularly evident amongst the large corporates, alongside reduced private equity activity, market volatility and fewer deals involving UK SMEs, has produced a more subdued start to the year than many expected.
‘Still, the UK remains an attractive target for overseas investment, there are pockets of growth and, while deal volumes on last year’s scale look unlikely at this point, the outlook remains broadly positive for deal-makers as we move into the second quarter of the year.’