Lydia Mikheeva, Secretary, Civic Chamber of the Russian Federation, Doctor of Law, Professor
EASTERN QUEST
Russians often hear the phrase “pivot to the East,” frequently coming from the legal profession eager to adapt the legal support following a shift in the geography of economic ties. In a way, a pivot towards the East is feasible, but does not imply that the Russian law enforcement should abandon its fundamental principles of goodness and justice. When speaking of such a turn, we are rather calling on different legal systems to engage, share ideas, and establish mechanisms for economic, cultural, and spiritual exchange.
Moreover, it is fair to say that the Russian private law—the law governing economic relations—is largely similar to the legal systems of the vast Eastern world. It can easily be explained, as private law worldwide shares the same universal ideas—good faith, justice, and unwavering respect for the individual, their rights and interests. There are numerous examples in support whereof: notably, the significant conceptual parallels between the Chinese Civil Code, its underlying principles, and certain institutions mirror those found within the legal frameworks, analogous codes and statutes in the West, including the Russian Civil Code.
The same applies to Islamic banking, often deemed fundamentally incompatible with the Russian legal framework. But in fact, it is not the case or not quite so.
Islamic finance is becoming increasingly common in a growing number of legal frameworks. Countries such as Egypt, Malaysia, Bahrain, Qatar, the UAE and a few others of the so-called Eastern world have long embraced this system of relations for well-known reasons.
More recently, Islamic banking has emerged in the United Kingdom, Switzerland, and Germany—nations renowned for their advanced legal systems, which export their legal culture and often dictate trends to lawmakers worldwide.
Lately, Islamic banking is emerging in the post-Soviet space too. For example, in 2017, the Civil Code of Kyrgyzstan saw a new chapter titled “Financing in Accordance with Islamic Principles of Financing,” introducing new types of contracts to the country, such as mudarabah, murabaha, shirkah, musharakah, ijara, qard hasan, istisna, salam, wadi’ah amanah/wadi’ah dhamanah.
Islamic banking models, as adapted to those familiar to Western lawyers, are feasible due to the freedom of contract, which allows for the inventive development of various contractual terms, tailored to the different needs of the parties involved. This is precisely why such adaptations are a success. For example, in Western-based legal systems, a partnership agreement (German: Gemeinschaft) is similar to Islamic banking relations such as mudarabah or musharakah, and leasing agreement aligned with murabaha, ijara, or musawamah.
Islamic banking is typically characterised by a prohibition on charging interest, a ban on speculative activities (which means neither exploiting another counterparty’s disadvantage nor financing excessive risk that encourages economic volatility or potential potential fraud), and the objection to financing ethically prohibited activities, such as alcohol production, gambling, etc.
At first glance, such wordings will not be found in legal textbooks or the legislation of countries where the European legal tradition prevails. However, a careful analysis of the foundations of Islamic banking reveals that the discrepancies between Islamic approaches and the principles of Western private law are not as pronounced as one may think.
Both legal systems, whether in the East or the West, encourage market participants to engage in good faith, honest, prudent, courteous, and ethical conduct. The prohibition on the so-called speculative activities is a common feature across all Western nations, where such actions often result not only in substantial fines but even in criminal liability.
Moreover, it should be noted that while Islamic banking rejects the interest charge (Ribaa), it still allows investors to earn a profit.
Why does it even matter what the investor’s return is called—interest or profit share? Ultimately, whoever provides the financing seeks to receive more in return than given, and this is fair for both the West and the East.
So, what then are the fundamental differences between the rules of Islamic banking and those prevailing in the Western system? Apparently, there are two major distinctions:
1) All future terms of “Islamic” deals (sample documents for financing) are reviewed for compliance with Sharia principles and approved by the Sharia Council. Should any profits derive from the financing contravene Sharia principles, the Council decides on their distribution.
2) In disputes arising from Islamic finance contracts, the matter is not referred to a state (secular) court, as such disputes fall under the jurisdiction of the Sharia Council.
The opposition secular vs. religious jurisdiction, or at least the addition of religious jurisdiction to the secular framework, is indeed a significant and unbridgeable gap between these systems.
Moreover, it is fair to say that the Russian private law—the law governing economic relations—is largely similar to the legal systems of the vast Eastern world. It can easily be explained, as private law worldwide shares the same universal ideas—good faith, justice, and unwavering respect for the individual, their rights and interests. There are numerous examples in support whereof: notably, the significant conceptual parallels between the Chinese Civil Code, its underlying principles, and certain institutions mirror those found within the legal frameworks, analogous codes and statutes in the West, including the Russian Civil Code.
The same applies to Islamic banking, often deemed fundamentally incompatible with the Russian legal framework. But in fact, it is not the case or not quite so.
Islamic finance is becoming increasingly common in a growing number of legal frameworks. Countries such as Egypt, Malaysia, Bahrain, Qatar, the UAE and a few others of the so-called Eastern world have long embraced this system of relations for well-known reasons.
More recently, Islamic banking has emerged in the United Kingdom, Switzerland, and Germany—nations renowned for their advanced legal systems, which export their legal culture and often dictate trends to lawmakers worldwide.
Lately, Islamic banking is emerging in the post-Soviet space too. For example, in 2017, the Civil Code of Kyrgyzstan saw a new chapter titled “Financing in Accordance with Islamic Principles of Financing,” introducing new types of contracts to the country, such as mudarabah, murabaha, shirkah, musharakah, ijara, qard hasan, istisna, salam, wadi’ah amanah/wadi’ah dhamanah.
Islamic banking models, as adapted to those familiar to Western lawyers, are feasible due to the freedom of contract, which allows for the inventive development of various contractual terms, tailored to the different needs of the parties involved. This is precisely why such adaptations are a success. For example, in Western-based legal systems, a partnership agreement (German: Gemeinschaft) is similar to Islamic banking relations such as mudarabah or musharakah, and leasing agreement aligned with murabaha, ijara, or musawamah.
Islamic banking is typically characterised by a prohibition on charging interest, a ban on speculative activities (which means neither exploiting another counterparty’s disadvantage nor financing excessive risk that encourages economic volatility or potential potential fraud), and the objection to financing ethically prohibited activities, such as alcohol production, gambling, etc.
At first glance, such wordings will not be found in legal textbooks or the legislation of countries where the European legal tradition prevails. However, a careful analysis of the foundations of Islamic banking reveals that the discrepancies between Islamic approaches and the principles of Western private law are not as pronounced as one may think.
Both legal systems, whether in the East or the West, encourage market participants to engage in good faith, honest, prudent, courteous, and ethical conduct. The prohibition on the so-called speculative activities is a common feature across all Western nations, where such actions often result not only in substantial fines but even in criminal liability.
Moreover, it should be noted that while Islamic banking rejects the interest charge (Ribaa), it still allows investors to earn a profit.
Why does it even matter what the investor’s return is called—interest or profit share? Ultimately, whoever provides the financing seeks to receive more in return than given, and this is fair for both the West and the East.
So, what then are the fundamental differences between the rules of Islamic banking and those prevailing in the Western system? Apparently, there are two major distinctions:
1) All future terms of “Islamic” deals (sample documents for financing) are reviewed for compliance with Sharia principles and approved by the Sharia Council. Should any profits derive from the financing contravene Sharia principles, the Council decides on their distribution.
2) In disputes arising from Islamic finance contracts, the matter is not referred to a state (secular) court, as such disputes fall under the jurisdiction of the Sharia Council.
The opposition secular vs. religious jurisdiction, or at least the addition of religious jurisdiction to the secular framework, is indeed a significant and unbridgeable gap between these systems.
What about Islamic banking in Russia?
On August 2023, Federal Law No. 417-FZ “On conducting an experiment to establish special regulation in order to create the necessary conditions for carrying out partnership financing activities in certain constituent entities of the Russian Federation and on introducing amendments to certain legislative acts of the Russian Federation” was adopted. Initially, this experiment in Bashkortostan, Tatarstan, Chechnya, and Dagestan was meant to wrap up by September 2025. However, the Russian parliament recently extended it for another three years. While neither the title nor the text of the law mentionsIslam or Sharia, its coming into force has been presented in the media as a full-fledged incorporation of Islamic banking into Russian law1.
Russia has a very comprehensive Civil Code that includes several dozen types of contracts and, more importantly, is based on the principle of freedom of contract (Article 421). Every single transaction related to the forms of Islamic banking well-known in the East has long been familiar to Russian civil law, albeit under different names—partnership agreements, interest-free loans, gratuitous use, leasing agreements, and so forth. Furthermore, many services of Islamic banking also fall under mixed contracts in Russian law or under special terms of previously known transactions.
To apply the principles of Islamic finance, the following provisions may be used and have long been viable:
Nevertheless, the Russian legislation has taken the bold step of enacting Law No. 417-FZ—presumably, primarily to introduce regulatory mechanisms familiar to Russia, even for previously legitimate transactions.
Before the enactment of Law No. 417-FZ, any individuals or organisations could enter into transactions involving Islamic finance, as it was recognized under the general principle, whether explicitly provided for by law or not. However, following the new law, the oversight of such transactions has been entrusted to the Central Bank.
The Russian legislation has allowed both conventional banks and other entities to engage in Islamic banking. But the latter are subject to a rather stringent requirement—the minimum capital (net assets) must be at least 15 million rubles. Both types of entities will be overseen by the Bank of Russia.
Partnership financing in Russia is indeed an experiment, with its real results likely to become apparent not when the first enterprise, established using investments attracted through Islamic banking, starts operating, but rather when the first legal dispute regarding the return of investments or profit sharing is resolved.
It appears that such cases are inevitable. They are imminent primarily because Law No. 417-FZ—right from its drafting—failed to eliminate the possibility for courts to apply the “conventional” rules of the Russian Civil Code regarding interest payments.
The list of valid transactions for participants in the experiment, as outlined in Law No. 417-FZ, contradicts the very principles of Islamic banking that underpin this very initiative. Both the loan agreement and the deferred payment on goods transactions in the current version of the law, as well as the account agreements in the amendments adopted by the State Duma on 15 July 2025, are classified under the Civil Code as onerous transactions that always imply interest charge.
The adopted amendments did not rectify this flaw, although the law now includes a clarified provision, which Participants in the experiment are not entitled to establish remuneration in the form of an interest rate... the law permits to establish and receive remuneration (payment) as a variable amount that fluctuates based on the terms set forth in the agreement.
For a Russian court faced with an “Islamic” loan agreement or account agreement, these terms actually imply the possibility of charging interest, the amount of which should be defined based on the “terms set forth in the agreement.”
Given the practices of Russian lawyers, one may say that such a significant legislative oversight is highly likely to be exploited by the party involved in the “Islamic” transaction to challenge or avoid fulfilling it. For that it is sufficient to approach the court and argue that the “variable amount” stipulated in the transaction is interest by its nature. This would mean that Law No. 417-FZ no longer applies to the transaction.
On August 2023, Federal Law No. 417-FZ “On conducting an experiment to establish special regulation in order to create the necessary conditions for carrying out partnership financing activities in certain constituent entities of the Russian Federation and on introducing amendments to certain legislative acts of the Russian Federation” was adopted. Initially, this experiment in Bashkortostan, Tatarstan, Chechnya, and Dagestan was meant to wrap up by September 2025. However, the Russian parliament recently extended it for another three years. While neither the title nor the text of the law mentionsIslam or Sharia, its coming into force has been presented in the media as a full-fledged incorporation of Islamic banking into Russian law1.
Russia has a very comprehensive Civil Code that includes several dozen types of contracts and, more importantly, is based on the principle of freedom of contract (Article 421). Every single transaction related to the forms of Islamic banking well-known in the East has long been familiar to Russian civil law, albeit under different names—partnership agreements, interest-free loans, gratuitous use, leasing agreements, and so forth. Furthermore, many services of Islamic banking also fall under mixed contracts in Russian law or under special terms of previously known transactions.
To apply the principles of Islamic finance, the following provisions may be used and have long been viable:
- Article 487 of the Civil Code of the Russian Federation regarding the advance payment for goods,
- Articles 488 and 489 of the Civil Code of the Russian Federation regarding the payment for purchased goods with deferred payment or in installments,
- The mutual investment fund, including a closed-end mutual investment fund (Federal Law No. 156-FZ of November 29, 2001, “On Investment Funds”),
- The personal fund model (Clause 1.1 of Section 7, Chapter 4 of the Civil Code of the Russian Federation), known in the West as a Foundation or Stiftung, and is quite suitable for establishing what is known in Islamic banking as a waqf.
Nevertheless, the Russian legislation has taken the bold step of enacting Law No. 417-FZ—presumably, primarily to introduce regulatory mechanisms familiar to Russia, even for previously legitimate transactions.
Before the enactment of Law No. 417-FZ, any individuals or organisations could enter into transactions involving Islamic finance, as it was recognized under the general principle, whether explicitly provided for by law or not. However, following the new law, the oversight of such transactions has been entrusted to the Central Bank.
The Russian legislation has allowed both conventional banks and other entities to engage in Islamic banking. But the latter are subject to a rather stringent requirement—the minimum capital (net assets) must be at least 15 million rubles. Both types of entities will be overseen by the Bank of Russia.
Partnership financing in Russia is indeed an experiment, with its real results likely to become apparent not when the first enterprise, established using investments attracted through Islamic banking, starts operating, but rather when the first legal dispute regarding the return of investments or profit sharing is resolved.
It appears that such cases are inevitable. They are imminent primarily because Law No. 417-FZ—right from its drafting—failed to eliminate the possibility for courts to apply the “conventional” rules of the Russian Civil Code regarding interest payments.
The list of valid transactions for participants in the experiment, as outlined in Law No. 417-FZ, contradicts the very principles of Islamic banking that underpin this very initiative. Both the loan agreement and the deferred payment on goods transactions in the current version of the law, as well as the account agreements in the amendments adopted by the State Duma on 15 July 2025, are classified under the Civil Code as onerous transactions that always imply interest charge.
The adopted amendments did not rectify this flaw, although the law now includes a clarified provision, which Participants in the experiment are not entitled to establish remuneration in the form of an interest rate... the law permits to establish and receive remuneration (payment) as a variable amount that fluctuates based on the terms set forth in the agreement.
For a Russian court faced with an “Islamic” loan agreement or account agreement, these terms actually imply the possibility of charging interest, the amount of which should be defined based on the “terms set forth in the agreement.”
Given the practices of Russian lawyers, one may say that such a significant legislative oversight is highly likely to be exploited by the party involved in the “Islamic” transaction to challenge or avoid fulfilling it. For that it is sufficient to approach the court and argue that the “variable amount” stipulated in the transaction is interest by its nature. This would mean that Law No. 417-FZ no longer applies to the transaction.
It should also be borne in mind that when assessing the true classification of such a transaction for the purpose of establishing its consequences, including tax implications, the Russian court will rely on the rules of contract interpretation (Article 431 of the Russian Civil Code, Decree of the Plenum of the Supreme Court of the Russian Federation dated December 25, 2018, No. 49 “On Some Issues of Application of General Provisions of the Civil Code of the Russian Federation on the Conclusion and Interpretation of the Contract”).
The fundamental principle of judicial contract interpretation in Russia continues to hinge on assessing the literal meaning of the wording in the text. In this regard, it is almost certain that comparing the phrases “loan agreement” and “payment in a variable amount,” included in the transaction, will lead the court to conclude that the nature of the relations is that of a loan. Subsequently, the court will determine that the transaction does not fall under Law No. 417-FZ but rather is subject to Chapter 42 of the Russian Civil Code, and that interest should be calculated and recovered at least at the key rate of the Bank of Russia (Clause 1, Article 809 of the Civil Code).
Alternatively, the transaction may be deemed invalid due to one party’s misconception that it adhered to Islamic banking. The outcome would be unfortunate—the investments would need to be returned immediately.
It is also worth noting a recent amendment to Law No. 417-FZ in the summer of 2025.
The law was supplemented with a new Article 12.1 dedicated to the Standards of Partnership Financing, mandatory for all participants in the experiment alongside the acts of the Bank of Russia.
It is important to note that the Standards of Partnership Financing are not a regulatory legal act, as they will be developed and approved by the Committee on Standards of Partnership Financing, which is not a government body, but rather a prototype of the Sharia Council known to traditional Islamic banking.
The issue, however, is that Article 3 of the Russian Civil Code does not allow the standards developed by such a committee to be considered a source of law. In other words, Russian courts are not entitled to refer to such standards or apply them when considering tax or economic disputes. This would also contradict Article 13 of the Arbitration Procedure Code of the Russian Federation and Article 11 of the Civil Procedure Code of the Russian Federation.
Nor can the Standards of Partnership Financing be considered analogous to the mandatory documents of a self-regulatory organisation (the law does provide for the establishment of a credit company association uniting major participants in the experiment, although it does not call it a self-regulatory entity). In fact, the amendments to Law No. 417-FZ adopted by the State Duma read that the standards are approved not by the general meeting of the association but only by a certain committee. Moreover, under the new amendments to the law, these standards will become mandatory even for those participants in the experiment who are not members of this association. Of course, such amendments contradict numerous provisions of the current Russian legislation.
So far, the attempt to introduce an analogue of the Sharia Council into Russian legislation, which would endorse the future terms of “Islamic” transactions, cannot yet be deemed successful. The most serious challenge in this regard is the conflict of the Sharia Council’s mandate with the sovereignty of public authority. Addressing this conflict may require more than merely amending Law No. 417-FZ. Therefore, when discussing the very concept of Islamic banking in relation to the Russian legal system, it is necessary to note two important but fundamentally opposing aspects—the easy integration of these models and the impossibility of their full adoption.
The conceptual foundation of Islamic finance itself—the prohibition of sinful relations and gambling, the prevention of a counterparty falling into poverty—aligns closely with the principles underpinning transaction regulation in Russia. The principle of protecting good faith and denying defence in cases of bad faith may be derived from generally similar existential foundations, common for both worlds.
The difference becomes evident, as Russia considers the issue of transactions a matter confined solely to the jurisdictional, secular plane. In contrast, countries with Islamic banking require prior religious approval of the services offered in the market, thereby adding an extra layer to the framework. And this difference is indeed fundamental.
An even more fundamental aspect of Islamic banking, as previously noted, is the replacement of the secular court with the Sharia court (or committee). It is quite evident that adapting such an idea to Russian legal traditions is currently out of the question.
The fundamental principle of judicial contract interpretation in Russia continues to hinge on assessing the literal meaning of the wording in the text. In this regard, it is almost certain that comparing the phrases “loan agreement” and “payment in a variable amount,” included in the transaction, will lead the court to conclude that the nature of the relations is that of a loan. Subsequently, the court will determine that the transaction does not fall under Law No. 417-FZ but rather is subject to Chapter 42 of the Russian Civil Code, and that interest should be calculated and recovered at least at the key rate of the Bank of Russia (Clause 1, Article 809 of the Civil Code).
Alternatively, the transaction may be deemed invalid due to one party’s misconception that it adhered to Islamic banking. The outcome would be unfortunate—the investments would need to be returned immediately.
It is also worth noting a recent amendment to Law No. 417-FZ in the summer of 2025.
The law was supplemented with a new Article 12.1 dedicated to the Standards of Partnership Financing, mandatory for all participants in the experiment alongside the acts of the Bank of Russia.
It is important to note that the Standards of Partnership Financing are not a regulatory legal act, as they will be developed and approved by the Committee on Standards of Partnership Financing, which is not a government body, but rather a prototype of the Sharia Council known to traditional Islamic banking.
The issue, however, is that Article 3 of the Russian Civil Code does not allow the standards developed by such a committee to be considered a source of law. In other words, Russian courts are not entitled to refer to such standards or apply them when considering tax or economic disputes. This would also contradict Article 13 of the Arbitration Procedure Code of the Russian Federation and Article 11 of the Civil Procedure Code of the Russian Federation.
Nor can the Standards of Partnership Financing be considered analogous to the mandatory documents of a self-regulatory organisation (the law does provide for the establishment of a credit company association uniting major participants in the experiment, although it does not call it a self-regulatory entity). In fact, the amendments to Law No. 417-FZ adopted by the State Duma read that the standards are approved not by the general meeting of the association but only by a certain committee. Moreover, under the new amendments to the law, these standards will become mandatory even for those participants in the experiment who are not members of this association. Of course, such amendments contradict numerous provisions of the current Russian legislation.
So far, the attempt to introduce an analogue of the Sharia Council into Russian legislation, which would endorse the future terms of “Islamic” transactions, cannot yet be deemed successful. The most serious challenge in this regard is the conflict of the Sharia Council’s mandate with the sovereignty of public authority. Addressing this conflict may require more than merely amending Law No. 417-FZ. Therefore, when discussing the very concept of Islamic banking in relation to the Russian legal system, it is necessary to note two important but fundamentally opposing aspects—the easy integration of these models and the impossibility of their full adoption.
The conceptual foundation of Islamic finance itself—the prohibition of sinful relations and gambling, the prevention of a counterparty falling into poverty—aligns closely with the principles underpinning transaction regulation in Russia. The principle of protecting good faith and denying defence in cases of bad faith may be derived from generally similar existential foundations, common for both worlds.
The difference becomes evident, as Russia considers the issue of transactions a matter confined solely to the jurisdictional, secular plane. In contrast, countries with Islamic banking require prior religious approval of the services offered in the market, thereby adding an extra layer to the framework. And this difference is indeed fundamental.
An even more fundamental aspect of Islamic banking, as previously noted, is the replacement of the secular court with the Sharia court (or committee). It is quite evident that adapting such an idea to Russian legal traditions is currently out of the question.
