Beyond Oil: Why Bahrain Matters for Foreign and Russian Investors

Taking its economic system development into account, the Kingdom of Bahrain holds a special position among its neighbouring Gulf states. It is the smallest Arab state, the territory, population and economy size of which are not that huge, especially in comparison with Saudi Arabia or UAE. A small size is nonetheless is unequivocally outweighed by the effectiveness of approaches to economic and financial management, which is the reason for Bahrain being an appealing partner for the foreign investors.

First and foremost it is worth mentioning that due to the more constrained natural mineral fuel reserves, Bahrain’s economy has never been affected by oil and gas exports fluctuations as some other GCC countries. Even at the times of a general plunge of Gulf monarchies’ export during the 2014-2017 oil prices decline - Bahrain’s export while having reduced the oil per cent in it from 65% to 30% has not faced any significant changes.

Hydrocarbons share in the export of smaller states of the Gulf (1999-2023)

Bahrain’s export (1999-2023), $B

The government strives for tax base expansion, non-oil revenue growth and reducing the overall state budget dependence on oil. This has already been partially achieved by tax increase on alcohol and tobacco production, also as on public sector services.

There is an important observation that Bahrain’s revenue from mineral resources is still sufficient for creation of large currency reserves, which, consequently, leads to ensuring a stronger national currency and the lower level of inflation

Bahrain was the first country in the region to discover oil, that is why the fuel industry growth led to a huge leap in the development of economy in its contemporary type, on the one hand, while necessitating the careful attitude towards energy sources. Right now Bahrain conducts an active transformation process of its oil and gas export structure. It aims to leave behind the role of the “resource-based state” and to enhance its relevance within the value-added chains by transitioning from own hydrocarbons export to crude oil purchase in Saudi Arabia via Aramco-Bapco pipeline with the reverse export of refined oil and petroleum products. The strategy has been undertaken in 2015 and handled quite successfully by far. The Bapco revenue from refined oil and petroleum products already help Bahrain in ensuring a stable flow to the government budget from the energy sources export, world fuel prices notwithstanding, while the consistent investments increase productivity of the pipeline. Saudi Arabia used to be and remains the key ally of Bahrain in this field with its support being highly beneficial for economic development in this direction.

Among major investment priorities of Kingdom of Bahrain there are social projects and infrastructure development (the most renowned ones are the construction plan of new urban transport system, also as the creation and development of an artificial islands chain), however, many other fields are also worth attention.

General investment attractiveness is not the only reason for Bahrain's appeal for the further development of partner relations. Aside from favourable economic performance, the Kingdom of Bahrain is one of the world centres for Islamic finance. It is the very place where the headquarters of Accounting and Auditing Organization for Islamic Financial Institutions(AAOIFI), which responsibility is unique among all the other international organisations, being focused in the practices on partnership-style finances within the audit, financial reporting and management, where the ethical aspect should be taken into account. The Shari’ah banking standards set by AAOIFI have been adopted as the main legal regulators in the countries of Central Asia, GCC, Africa, South Asia, etc. In addition, a partner organisation of the industry-leading Islamic Development Bank - The General Council for Islamic Banks and Financial Institutions (CIBAFI) - is located in Bahrain as well.

For Russian Federation “Turn to the East” marked developing interest in Islamic financial system. In 2023 several regions of Russia (Bashkortostan, Dagestan, Tatarstan and Chechen Republic) were announced to hold the experiment in partner-style (Islamic) finance - application of Islamic financial practices to Russian economic system. Afterwards, not only the experiment has been extended to 2028, but the new regions and companies contributed to the territorial expansion of its participants (namely such prominent Russian banks as ‘Sberbank’, ‘TBank’ and ‘Ak Bars’. In November 2024 the Central Bank of Russian Federation became the member of AAOIFI, followed with the ‘Ak Bars’ Bank, ‘Sberbank’ and ‘VTB’ Bank

Signing the agreement of ‘Ak Bars’ Bank membership in AAOIFI

Signing the agreement of ‘VTB’ Bank membership in AAOIFI

Several conferences, educational programs and workshops took place within the partnership with AAOIFI experts, while the main goal of bankers’ and financial organisation work at the moment is the adaptation of AAOIFI Shari’ah standards of islamic fiance to Russian legislation.

Such level of cooperation with one of the most prominent financial organisations in the Kingdom of Bahrain is a sign of a growing interest of Russia in economic cooperation with the countries of the Gulf, its desire to develop in the field of alternative sustainable banking solutions, and, which is of the highest importance, identifies Bahrain as one of the key strategic partners on this route.

Edited by Martha Paramonova, Middle Eastern economy, politics and Arab language specialist