Rachel Morarjee in Moscow -

The global Islamic finance industry has boomed in recent years, but until recently Russia hasn't featured much in this development. But now the Republic of Tatarstan is capitalising on its Muslim faith and industrial heritage to attract capital from Islamic investment companies from places as diverse as Yemen and Malaysia, has already established an Islamic technology investment fund, and is planning to issue a sukuk bond later this year.

Linar Yakupov, head of the Tatarstan regional government's small and medium-sized business development committee and one of the brains behind the bid to turn Tatarstan into a hub for Islamic finance, claims that this central Russian republic identified the potential of Islamic investment and began building ties with Middle Eastern investors earlier than any other region in Russia. "We have spiritual ties, so there is a natural affinity, and we aim to become a gateway and a platform for Islamic investment into the whole of Russia," he says.

In the 1990s, most foreign investors headed straight for Moscow. With a population of about 15m people, Moscow is the largest city in Europe and bigger than most Central European countries. However, over the last decade Russia's regions have become more attractive to foreign investors who want to avoid the gridlock of Moscow traffic and its stratospheric wages. The Tatarstan capital of Kazan, one of Russia's largest and most prosperous cities, offers lower property and labour costs than both Moscow and St Petersburg. And Tatarstan lies at the heart of the Volga region, with 11 of the 13 Russian cities with more than 1m population less than 1,000 kilometres away.

And the word is getting out. Moscow's New Economic School and Ernst & Young listed 15 obstacles to business in a March survey and asked respondents to rank their significance. The survey found that Kazan was the easiest place to do business in Russia and Moscow the most hostile. Meanwhile, Penny Lane Realty ranked the city as the second best place in the country to invest in property based on eight criteria ranging from the city government's development plans, the environment and the strategic significance of the companies operating there.

Local partner

The business environment has been a big draw for Islamic investors and the local government has set up the Tartastan International Investment Company (TIIC) to act as local partner for Islamic investors.

TIIC's first foray is a $50m technology fund, which was launched in June in cooperation with Foras International Investment Company, which represents Saudi interests. The $50m fund will focus on the region's strengths in biotechnology, nanotechnology and IT, and counts among its founding investors the Islamic Development Bank (20%), the Republic of Tatarstan (20%), Foras International Investment (15%) and some smaller investors from Saudi Arabia, Malaysia and Yemen. The tech fund has already garnered $10m from the founding investors and is in the process of raising the rest, with the ultimate aim of building up the fund to $100m, says Emil Gasimov, general director of TIIC.

Gasimov says TIIC aims to be a bridge between Islamic investment companies and Russian financial institutions, such as GazpromBank and VTB Capital, which are actively exploring the Islamic investment market. It is currently looking at 10-15 projects in areas as varied as pharmaceuticals, biotechnology and aircraft engineering, and will likely invest in established projects that are looking for second phase financing. "There is no need for investors to put money into untested projects," says Yakupov.

Indeed, Kazan was known in Soviet times as a centre of learning and its universities still churn out many of Russia's best engineers. It is also home to a flourishing aviation industry (Kazan Helicopter is a leader in the market and its order book is full for the next three years), as well as a burgeoning automotive sector (home to the Russian Kamaz heavy truck maker, as well as Ford and Chevrolet's Russian production). "We are focused on the Volga region and the attractive investment climate the government has created here with tax breaks and incubators," says Amizan bin Mohd Nor, head of Foras International Investment. "One of the most attractive elements in this region is the high level of science and engineering, especially in things like civil aviation."

"The companies here are advanced and the level of technology is as good as anything I have seen in Europe," he adds. "the trouble with Europe is it is a highly saturated market and very expensive to do deals; in Russia, we can easily find companies where we can really increase the value, with willing buyers in the Middle East and beyond."

Other Islamic investment projects on the horizon include plans by the Tatarstan regional government to issue a $100m-200m sukuk bond this autumn, the proceeds from which will be used to fund a new exhibition and convention centre in Kazan. "More people are coming to Kazan, so we want the facilities to host world class sporting events; the centre will have hotels and sporting facilities as well as meeting halls," says Yakupov.