LONDON, 25 February 2007 — Russian President Vladimir Putin’s historic visit to Saudi Arabia earlier this month — the first official visit by a Russian president to the Kingdom since the two countries established diplomatic relations 80 years ago — will no doubt pave the way for strengthening bilateral economic, technical and political ties.
However, Saudi politicians and businessmen should be under no illusions about the difficult challenges that lie ahead in fostering Russo-Saudi ties. The pace of this relationship will be dictated by the “normalization” of the post-9/11 Saudi-US relations and the internal politics of Islam in Russia.
President Putin was keen to stress Russian willingness to cooperate with the Kingdom in the fields of nuclear energy, aerospace technology, defense equipment, satellites, railways, and oil and gas. As far as nuclear technology, defense equipment and satellites are concerned, Riyadh should keep the Russian option open, especially given the current outcry over Iran’s nuclear ambitions.
Russia is also emerging from decades of communist rule in which the economy was centrally planned and managed. Even in an era of new-found market enterprise, there remains an undercurrent of protectionism and bureaucratic authoritarianism in official policy in which transparency and disclosure is almost non-existent.
Saudi companies are particularly concerned about the 200 percent tariffs on Saudi exports to Russia, and the difficulty in getting business visas to visit Russia. They are also keen that Moscow introduces foreign investment protection laws including easy repatriation of capital and profits. Business information flows and correspondent banking business between the two countries are also poor.
Putin has promised to look at these, and Russophiles in the GCC are even talking about the establishment of a Russo-GCC Free Trade Agreement. Saudi-Russian bilateral trade is currently very low. According to the Union of Saudi Chambers Of Commerce, trade has increased from $88.5 million in 1999 to $412 million in 2005, with the Kingdom exporting wood, coal and paper products to Russia, and importing in turn yeast, copper products and steel. Joint investment currently is a paltry SR37 million in five projects.
Last year Russia became an observer member of the Organization of Islamic Conference (OIC). But Moscow’s relations with the Islamic world, is tempered in dichotomy. On the one hand, there is tangible progress on some fronts — facilitating Russian pilgrims for the annual Haj; co-operation between Saudi Aramco and Lukoil in oil projects; and Russian support for an equitable dispensation to the Israel-Palestinian issue.
The Russian airline Aeroflot, for instance, launched a direct flight to Jeddah and Riyadh last November, making it possible for the 18,000 Russian Muslim pilgrims to fly directly to the Kingdom.
Russian banks and institutions are even starting to access Islamic finance. In 2006, CCH International in London arranged a debut $20 million Murabaha facility for Globexbank in Moscow financed by a GCC-based Islamic bank.
“This is the first Murabaha facility,” confirmed Eren Nil, managing director of CCH International, “extended to a Russian institution by an Islamic bank. Islamic financial institutions have virtually no exposure to Russian risk and therefore the market is of great interest.” The irony is that while Moscow is currying favor with Muslim countries, its internal policy toward its own 50 million Muslim population borders on being Islamophobic. The lot of ordinary Russian Muslims especially those of Central Asian extract is very difficult. Many Muslim Russians feel that they are second-class citizens in their own country. This is further exacerbated by Moscow’s refusal to engage with some Chechen groups on autonomy, instead engaging in a heavy-handed military way under the guise of its own version of “the war against terrorism”. This policy has only given succour to the extremists on both sides, which has resulted in military brutality and terrorist outrages.
The problem is that various factions close to the Kremlin are constantly jockeying for political and economic power to control Moscow’s relations with the Islamic world. Take for instance, banking. The Central Bank of Russia, in December 2006, revoked the licence of Badr-Forte Bank, for alleged violation of Articles 6 and 7 of the Federal Banking Law.
The bank, which operates both on Islamic banking principles but also in conjunction with the Russian Banking Act, concentrated on financing Russian trade with OIC and emerging countries in Asia and Africa. It has one of the largest correspondent banking networks of any Russian bank. It was also an associate member of the main Islamic finance organizations including AAOIFI; ADFIMI, and the Islamic Development Bank in Jeddah, with which it was in negotiations to acquire an equity stake in the bank. It also has a cooperation agreement with the Islamic Financial Services Board.
The bank is financially sound, but was targeted arbitrarily without given a fair chance to defend itself.
In a letter from Deputy Governor of the Central Bank of Russia G. Melikyan, dated Dec. 4, 2006, the order is given to revoke the license of Badr-Forte Bank ordering the Bank to discontinue its operations; to inform all the correspondent banks of the revocation; and publishing the order or revocation in the Russian Banking Gazette.
This ignores a statement the Association of Russian Banks (ARB), of which Badr-Forte Bank is a member, that the Central Bank of Russia report and reasons for revoking the license of Badr-Forte Bank allegedly for numerous breaches of Russian Banking Law “cannot be acknowledged as valid and grounded”.
The ARB further stressed that “some of the shortcomings in Badr-Forte bank’s activities are purely technical in nature, which can be corroborated by elimination by most of the remarks made by the Central Bank of Russia Review of the bank.” Indeed, the ARB went on to warn that most of the objections of the Central Bank of Russia are “NOT based on the legal norms and acts of the Central bank of Russia. It is also important to note that Badr-Forte Bank has taken significant steps to eliminate the Central Bank of Russia’s objections, and has developed a plan of action to meet the recommendations of the Central Bank of Russia in the future.”
However, despite this, the Central Bank of Russia continued with its action, with no warnings or threats of fines. Badr-Forte Bank includes Russian, Azeri and Egyptian shareholders. Egyptian businessman and investor, Omar Said Al-Ahl, the chairman of Badr-Forte Bank is baffled by the unilateralism of the action of the Central Bank of Russia, and could only deduce that the action was taken for internal political reasons.
Unfortunately, the Central Bank of Russia is not known for its transparency; and has consistently failed to even reply to the correspondence from Chairman Omar Said Al-Ahl. Representations from the Egyptian Government and other officials have similarly fallen on deaf ears.
President Putin in Riyadh invited Saudi banks to open in Russia, and there is even talk of setting up a joint venture Saudi-Russian bank. In the spirit of cooperation, would it not be the mother of all gestures should the Central Bank of Russia revoke its decision on Badr-Forte Bank and invite the Islamic Development Bank and other Saudi banks to take over the institution?
