Russian republic Tatarstan's ambition to develop a Sharia-compliant market received a boost this week when the Kazan-based AK Bars Bank became the first Tatar credit to secure a murabaha loan.
It was also the first international loan facility compliant with Sharia canons for a Russian bank.
Earlier this year Tatarstan announced an Islamic finance initiative to promote the sector, and the Ba1/NR/BBB- rated Muslim-majority republic backed this up with plans to tap the Sharia-compliant market with sukuk paper.
The Tatar President, Rustam Minnikhanov, is pushing for amendments to Russian Federal legislation that will enable the US$1trn asset class to flourish in the country and in January signed an Islamic finance accord with Amanah Raya, Kuwait Finance House and Linova during a visit to Malaysia.
Kuwait Finance House is seen as a likely lead manager for any Tatar sukuk deal, which would act as a test run for future issuance in the region.
"The government of Tatarstan actively promotes and supports the idea of Sharia-compliant financing and the republic is indeed the best candidate among the Russian regions for sukuk issuance. However, regulatory restrictions on external borrowings for regions, set by the Federal Budget Code, need to be taken into account," said Stepan Amosov, director of emerging markets structuring and credit trading at ING in Moscow.
On the flip side, Russian municipals will be able to borrow abroad from next year and their securities will not be liable to VAT tax.
Resource-rich Bashkortostan, rated Ba1/BB+, is seen as another republic in Russia where Islamic finance could find a home. One-seventh of Russia's population is Muslim, making it the largest religious minority, with most of them residing in the middle of the Volga Basin and North Caucasus.
Companies from the VTB Group , Gazprombank Invest (MENA) and the City of Moscow, among others, have already expressed an interest in tapping the sukuk market in order to diversify their investor bases.
While various Russian credits have ambitions to tap the Islamic market whether many will print transactions is yet to be seen.
There are possible obstacles, such as finding appropriate assets, and achieving legal transfer of ownership to the issuing SPV could prove to be a challenge for credits that see sukuk as one of the means to finance infrastructure projects.