Discussions concerning the introduction of Islamic Banking in Russia were kick-started by two recent developments: There was an agreement on collaboration between the Tatarstan Republic and the largest Russian bank – Sberbank. At the same time the Russian Direct Investment Fund and the Saudi Sovereign Public Investment Fund have formed a partnership. The fund was set up by the Saudi partner who is ready to invest USD 10 billion in the Russian projects in agriculture, real estate, medicine, retail and logistics industry sectors within 4-5 years.
These developments have prompted the examination of the practicality of the development of the Islamic financing in Russia. This process is now well underway.
The mechanisms of the Islamic banking implementation in Russia are now discussed at the legislative level: members of the working team by the State Duma’s Committee on financial markets featuring representatives of the Central Bank of Russia, Ministry of Finance, Ministry of Economic Development have been discussing changes in the law “About banks and banking activities”, particularly the offer to approve the banks to carry out trade activity.
- Ban on the interest based transactions and transactions under conditions of uncertainty;
- Ban to finance the separate business activities as defined by the Sharia law, for example gaming and entertainment business, production of pork, alcoholic drinks and tobacco etc.;
- Sharing of profit/loss risk in transactions between bank and client;
- Executing of financial transactions and operations with real assets and their compulsory identification.
On the one hand, such characteristics might work towards investments growth, minimize risks reduction and enhance the responsibility of investors and resources consumers. On the other hand, it might lower the range of services offered on the credit market.
Nevertheless, the issue of implementation of the Islamic banking in Russia remains to a large extent controversial because of a multi-confessional population structure in the country and risks to place new banking services in the already mature credit market.
Background: The Islamic financial system started its development in 1960s by opening of the small Egyptian saving bank “Mit Ghamr”. The system has grown by now to a world-class standard one having the total assets of over USD 250 billion, with a growth of over 15% annually and the well-developed infrastructure of banks, insurance companies, mutual investment funds and international financial institutions in 75 countries.
Economic efficiency of the richest countries such as Saudi Arabia, Qatar, Bahrein etc., speaks for the high effectiveness of the Islamic banking and encourages its implementation in Russia particularly in the current investment slump.
There is already a positive experience of the Islamic banking in the neighbor country Kazakhstan – member of the EAEU Customs Union (Russia, Kazakhstan, Belarus, Armenia, Kyrgyzstan): the Islamic Bank “Al Hilal Bank Kazakhstan JSC” (with the head office in Almaty, 2 branches in Astana and Shymkent) successfully operates based on the Agreement “On the opening of the Islamic bank in the Republic of Kazakhstan” signed between the governments of Kazakhstan and the United Arab Emirates.
According to the Central Bank of Russia data as of August, 2015, there are 1035 active banking and non-banking credit institutions in Russia.
More information about the Russian credit entities is to be obtained on-line from the Information and Analytical System Globas-i® developed by Credinform (Russia).
Predictive component is always used in the basis of State budget. Thus, The Ministry of economic development offers two forecast scenarios of Russia’s economic development: basic and optimistic. Besides, under the circumstances the Ministry prepared the updated forecast of Russia's social and economic development, it also includes the conservative scenario. As it is the most likely, let’s consider this version. The Ministry of economic development on the base of market expectations regarding energy market offers 2015 annual average oil price at the level of 50 USD per barrel, 2016 price is 40 USD per barrel (table 1).
When the average oil price is lower than 50 USD per barrel, the ruble rate is within the limits of 65-70 rubles per USD. According to early estimates of the Ministry of economic development, with the growth in annual average oil price, the strengthening of ruble to 53 RUB per USD is possible, but only by 2018. However currently, the dollar value, suggested by the Ministry in the conservative scenario, is above 75 rubles. Although in 2016 the exchange rate will slightly strengthen and be lower than 61 RUB per USD.
In 2015 inflation rate within the basic scenario of economic development will amount to 11,4%, within the conservative scenario to 11,7%. In 2016 inflation situation should improve, nevertheless within the basic scenario will amount to 6,7%, within the conservative scenario to 8,8%.
By the end of 2015 under the influence of negative trends the decline in GDP or, under some improvements, a small increase will continue. According to the updated forecast within the conservative scenario the Ministry defines the decline in 2015 GDP to 3.7%. However in 2016 the Ministry expects the growth to 1% -2%, within conservative scenario there has to be a decrease by 0.9%.
|The Ministry of economic development (basic version / conservative scenario)||Central Bank of the Russian Federation (the worst version (IIIb) / stress scenario)||The Ministry of Finance (assessment)||The Ministry of economic development (basic version / conservative / conservative scenario)||Central Bank of the Russian Federation (the worst version (IIIb) / stress scenario)||The Ministry of Finance (assessment)|
|Annual average Urals oil price (global), USD/barrel||52 / 50||84 / 60||50||55 / 40||70 / 60||60|
|GDP, the rate of growth (decrease) %||(-3,3) / (-3,7)||(-0,7) / (-3,2)||(-2,8)||1,8 / (-0,9)||0,7 /(-1,2)||2,3|
|Inflation||11,4 / 11,7||6,7-6,9 / 10,8||11,9||6,7% / 8,8||5,1-5,5 / 7,0||7,0|
The Central Bank of the Russian Federation is still more optimistic in its forecasts even within the stress scenario of Russia’s economic development. The 2015 annual average oil price is expected to be at the level of 60 USD per barrel; in 2016 it should be restored to 80. By 2015 results, the GDP will decrease by 3,2%, in 2016 the growth will be 0,7% with 70 USD per barrel rate; with the rate at the level of 60 USD per barrel the decrease by 1,2% is expected. Perhaps, inflation in 2015 will amount to 10,8%, in 2016 it should stay at the level of 7%.
As the Ministry of economic development is conservative in its forecasts, it always makes the assessment and income planning within the most severe development conditions. The forecast analysis of the Ministry was used in the recently represented to Russian government draft called «Draft of Main Directions of the budget policy and innovations in budget legislation for 2016-2018».
According to the Ministry, by 2015 results the annual average oil price should be 50 USD per barrel, in 2016 it should increase to 60. In 2015 the GDP will decrease by 2,8%, in 2016 there will be the growth by 2,3%. In 2015 inflation rate will amount to 11,9%, in 2016 it should not exceed 7,0%.
The analysis of the Russian economists’ assessments shows, that the annual average oil price will be within the limits of 45-65 USD/barrel. Under such oil prices the ruble rate will vary within 75 – 55 RUB per USD. With the existing low oil price parities we should expect the spike in inflation to 12%, with higher price the reduction to 6% is possible. By 2015 results, with low oil price there will be a fall in GDP to 4%. Nevertheless, it is expected, that under the circumstances the economic development will stabilize and, perhaps, by the end of 2016, a little growth will be marked.
- industry: in 2015 in comparison with previous year the decrease by 3,1% is expected and by 0,4% in 2016;
- investment in fixed assets: in 2015 it will decrease by 11,3% and by 6,3% in 2016;
- turnover of retail trade: in 2015 it will decrease by 8,2% and by 2,1% in 2016;
- capital outflow: in 2015 it will amount to 93 bln. USD and to 75 bln. USD in 2016;
- actual wage: in 2015 it will decrease by 8% and by 2,2% in 2016;
- unemployment: in 2015 it will be at the level of 5,8%; in 2016 at the level of 6,3%;
Factors, which directly or indirectly will influence on decrease of annual average oil price, budget revenues, and, accordingly, economic development of Russia:
- the slowdown in global economic growth;
- the slowdown in China’s economic growth;
- within existing USA and EU sanctions, the limiting access of Russian companies to global capital market;
- increase of oil production against the reduction of its consumption and access of new players, such as Iran, to the global oil market;
- long-term trend of low oil price;
- cost reduction on shale oil production;
- the strengthening of USD against other world currencies;
- Russian export growth against the significant decrease of import volume;
- sharp decrease in investment, absence of growth sources, outflow of net capital from private sector;
- reduction of income and expenditure of the households;
- sales resistance in the terms of reduction of income.
Thus, according to Information Agency Credinform experts, at this stage as a whole, the certain models of Russia’s economic development appear. If the annual average oil price is close to 60 USD per barrel, we should expect the zero growth of the Russian economy. This situation is called stagnation. Decrease in oil price to 30 USD per barrel will lead to decline in production, revenues and economic recession as a whole. Thus it should be expected, that the GDP will fall by 4-5%.