Quote:Cut off from Western capital markets, Russia is stepping up efforts to tap into the huge pools of capital in the Middle East by issuing Islam's answer to bonds, sukuk, which are not subject to Western sanctions.

Sukuk are especially attractive for Russia following its downgrade to junk status by rating agency Standard & Poor's in January. As the bonds are asset backed, the quality of those assets will be more important to potential investors than Russia's sovereign rating.

Quote:"Today, Russia has a low rating and is suffering from sanctions, but it is not the rating that will attract the investors but the quality of the assets and the returns the bond pays," Linar Yakupov, head of Russia's Islamic Business and Finance Development Fund, tells bne IntelliNews.

Russia's Islamic banking is still in its infancy, and the state has yet to launch a debut sukuk, but the government is actively working on putting in place the regulations that would allow for the issue of what is essentially a regular asset-backed bond with some special rules and restrictions.

"Islamic bonds are a mix of ethics and a structural product. They are broader than just the banking business and wider than the Middle East. It is a horizontal product," says Omar Shaikh, member of the board of the Islamic Finance Council in the UK. "It is a young market and still evolving. And it is not just for Muslims. Sukuk have attracted several billion dollars worth of investment and non-Muslim governments like the UK have issued them."

And Russia is already actively marketing itself; in December, officials from Moscow Industrial Bank, VEB, SME Bank and the Russian Direct Investment Fund (RDIF) were part of a trade mission to the Gulf region, where Islamic finance possibilities were high on the agenda.

And in the same month, Russia's National Rating Agency signed an agreement with the Bahrain-based Islamic International Rating Agency to jointly rate Russian sukukissuers. A few Russian firms have already got an Islamic bond rating, including an Islamic leasing firm in the Russian republic of Dagestan and a fish skin leather manufacturer in Ingushetia.