In recent years, there have been significant positive developments in Russian-Saudi relations. In 2003, the Crown Prince of the Kingdom of Saudi Arabia (KSA) Abdullah visited the Russian Federation for the first time in the history of our relations. The talks between Abdullah (now King of Saudi Arabia) and Russian President Vladimir Putin, as well as the signing of a number of important joint documents, laid a qualitatively new foundation for the dynamic development of business cooperation between the two countries.

Cooperation was established between the Russian Federation and the KSA - the largest producers and exporters of hydrocarbons. Lukoil Overseas is implementing a large-scale project to develop a gas field in the Rub al-Khali desert in Saudi Arabia. High-tech communications are developing productively. Between 2002 and 2005, more than ten Saudi communications satellites were launched by Russian rockets. ¹

At the beginning of February 2007, the most important event in the development of cooperation between the two countries took place - the first ever official visit of the President of the Russian Federation to the Kingdom of Saudi Arabia.² During the visit, the parties signed agreements on air transport, avoidance of double taxation of income and capital, as well as a memorandum of understanding and cooperation between Vnesheconombank, Roseximbank and the Saudi Development Fund.

Speaking at a business forum in Riyadh, Vladimir Putin called on Saudi businessmen to invest in the Russian economy, as well as to set up a joint Russian-Saudi bank that would promote bilateral investment and regulate financial flows. The Russian president stated: "This is a good plan, and nothing prevents the creation of a Russian-Saudi bank. Sustainable economic growth, political stability, and a sound legal framework are all favorable conditions for long-term capital investment. Saudi financial institutions could open their subsidiary banks in Russia. " ³

In this context, the study of the development of the KSA banking system, which is very specific, is particularly relevant and of practical value.

FORMATION OF THE SAUDI BANKING SYSTEM

The history of Islamic banking is inextricably linked to the Kingdom of Saudi Arabia. In 1975, the first international Islamic bank, the Islamic Development Bank, was opened in Jeddah. It was in Saudi Arabia that the International Association of Islamic Banks was established in 1977 on the initiative of a member of the royal family, Mohammed al-Faisal al-Saud. In 2000, the organization was transformed into the General Council of Islamic Financial Institutions, headquartered in neighboring Bahrain.

Islamic banks ensure the functioning of the national payment system. They act as financial intermediaries, accumulate monetary resources of the society that are not currently being used, transforming the liabilities created at their expense into a source of finance for the needs of individual economic units. Moreover, if traditional banks first borrow funds from one group of economic agents, and then provide them in the form of loans to another group, using interest payments on the deposit and interest on the loan, then Islamic banks act in accordance with Sharia law without charging interest rates. There is a special system based on profit and loss sharing and joint responsibility sharing. In general terms, it is based on the fact that when lending, the bank shares profits and risks on an equal basis with its client. When depositing, banks pay a certain remuneration to their clients or act as investment funds, investing the depositor's money in certain assets.⁴

Currently, the Saudi banking system is built on the parallel functioning of Western and Islamic financial institutions, allowing the country's citizens to use the unique capabilities of both systems.

The modern banking system of Saudi Arabia began to take shape in the late 20s of the last century. It was then that the country's leadership was faced with the need to create a monetary system.

Saudi experts agree that the financial and banking system of the kingdom owes its appearance to King Abdulaziz, who in the 1920s and 1930s issued the first laws and regulations in this area. The financial and credit institutions that existed at that time can be divided into two types.

The first is branches of foreign banks. So, in 1927, the first branch of a foreign bank was opened in Jeddah - the Netherlands Trading Society (now Saudi Hollandi Bank). This institution, as well as other similar structures that appeared in the 1930s (the Indian Al-Mu'in Trading Corporation, the Egyptian Arif Namiani Corporation), specialized in financing export and import operations, money transfer, and currency exchange. It is noteworthy that all of them avoided the term "bank" in their names and did not conduct depository and credit activities. This was due to the lack of a "joint" approach - the Western one, which is openly focused on making a profit on bank capital, and the Saudi one, which is based on an Islamic ideology that prohibits receiving "income" or "interest" on invested capital.⁵

The second type of financial and credit institutions dealt with issues related to deposits and lending. This financial mechanism (the dominant one at that time) is known as exchange dealers. These institutions were quite popular in the 1940s and 1950s.

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successful competitors to foreign banks. Acting as prototypes of "Islamic banks", they provided loans that were declared "interest-free", although they were supposed to receive a "commission" for servicing customers. However, the main activity of exchange dealers was focused on trading in foreign currencies.

The financial and credit institutions that existed in Saudi Arabia in the first half of the 20th century were mainly concentrated in Jeddah and Mecca. Their activities were mainly related to the service of pilgrims, as well as the implementation of import transactions. It should be noted that pilgrim services provided 75% of the kingdom's total revenue in the 1920s. Fluctuations in their numbers could negatively affect the stability of the economic situation in ^the country7.

In 1932, King Abdulaziz established the first state financial institution - the General Financial Agency, which was later transformed into the Ministry of Finance of the KSA. This institution began to regulate tax and monetary issues. In addition, it performed the functions of the Treasury and the central bank, which included accumulating funds, issuing banknotes (in this particular case, coinage), conducting public procurement, and servicing public debt.

The activities of the General Finance Agency at the initial stage of its existence were ineffective due to a number of factors. First, at that time, Saudi Arabia did not yet have a single national currency, and the currency of other Arab states, in particular, Egypt, was widely used within the country. Secondly, the kingdom was still developing a legislative framework for regulating trade activities and financial and banking institutions. Third, the possibilities of replenishing the treasury and the expenditure side of the budget were extremely limited.

The situation began to change after the King granted a concession to the American oil company Standard Oil of California in 1933 to explore for oil fields in the Eastern Province. In 1939, the first oil was found, and a new source of income appeared in the country. Since that time, oil revenues have become the main budget-forming element of the KSA economy.

With the advent of this source of income, government spending has also increased, primarily due to the increasing demand for imported industrial equipment and consumer goods, and as a result, domestic demand for foreign currency has also increased. At the same time, in Saudi Arabia, not only was there no real functioning national currency, but there was also no generally accepted "binding" to any one foreign currency when performing payment operations. The population refrained from investing money in development projects, preferring to keep it in cash or acquire real estate.

After the outbreak of World War II, many oil wells were closed. Budget revenues have fallen sharply. However, largely due to the massive financial assistance of Great Britain and the United States, the KSA leadership managed to somewhat ease the severity of budget problems.

The expansion of sales of Saudi oil abroad in the mid-1940s was crucial.In 1944, the United States began to make large purchases of Saudi oil. This stimulated an increase in oil production in the country from a modest 500 thousand barrels in 1938 to 60 million barrels in 1946. After the restructuring of the oil agreement with American oil companies in 1951, Saudi Arabia began to generate stable and significant oil revenues.

The prospects for generating large revenues from oil operations have led to a growing interest of foreign banks in expanding their presence in the KSA. Since the late 1940s, a significant number of branches of foreign banks have been opened in Jeddah, Mecca, Medina and the Eastern Province of the country (in the so - called "ARAMCO zone" - the territory where oil production was carried out).

From 1948 to 1952, branches of the French Banque d'Indochine, the British Bank of Middle East, the Pakistan National Bank of Pakistan, and the Egyptian Misr Bank were established in the kingdom. Between 1953 and 1959, this list was expanded to include the following banks: Banque du Caire, First National City Bank, and Banque du Liban.

It should be noted that these foreign bank branches have managed to gain only very limited popularity among the population of Saudi Arabia. The reason was that Coro's religious-minded subjects-

What the magazine wrote about 40 years ago

...The Arabian journey was not an easy one. In Saudi Arabia, a "closed country", photographing is prohibited, and for violating the ban you can pay with your head. And the very appearance of a non-Muslim foreigner in the interior of Saudi Arabia, especially in the area of the holy cities of Mecca and Medina, is an extraordinary event and, from the point of view of the fanatical local clergy, very reprehensible.

...The American company ARAMCO, which in the United States is called "the most fabulous enterprise of our time", annually produces about 100 million tons of oil and receives 1000 percent of the invested capital.

...Against this background, the poverty of the vast majority of the Saudi population is particularly striking. The luxury of a handful of "powerful people" is drowning in an ocean of hopeless poverty.

B. Zabirov. What is behind the Arabian veil? (Asia and Africa Today, 1967, No. 5)

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the Levites considered the collection of interest as an operation contrary to the canons of Islam. In this regard, the main share of income for Western banks was provided by operations to finance oil sales and import goods into the country with the involvement of intermediary foreign or mixed companies. At the same time, another segment of the monetary market-exchange dealers - continued to function and expand its activities.

In Saudi Arabia, the development of the national banking sector was strongly encouraged as an additional source of investment for the stable growth of the country's economy. Of particular importance was the introduction of a single national currency, the rial, into circulation in the early 1950s. At the same time, it is important to note that the Saudi leadership did not immediately establish a stable exchange rate of the rial against the dollar due to the fact that the implementation of exchange operations with currencies, according to some of the religious elite, "did not comply with the principles of the Koran."

It is important to note that the issue of the rial was carried out only in the form of coins - mainly silver, as well as gold, since religious authorities at that time opposed monetary transactions with paper money. However, this kind of issue was fraught with great difficulties, in particular due to the fact that in the 1950s the world saw a drop in silver prices.

BANKING SECTOR REFORMS IN THE 1950s AND 1970s

From the early 1950s, and especially in the 1960s, the Saudi leadership began to implement a broad program of social and economic transformation, including the construction of hospitals, schools, and universities. This required new approaches to the country's financial institutions.

In October 1952, the Saudi Monetary Agency (SAMA) was established to serve as the country's central bank. In 1953, the first National Commercial Bank was opened, which began to operate according to the principles of Western banks. This was followed by the issuance of paper money in the country, but in a very specific form - in the form of tourist checks - pilgrim checks. In the short term, pilgrim's checks solved the problem of seasonal demand for monetary units; in the long term, they eased the transition from coins to paper money accepted all over the world.

During 1956-1955, these checks were issued in denominations of 10, 5 and 1 rials. The pilgrim could use them both as a means of payment and for the purpose of exchanging them for coins at SAMA representative offices. The Government guaranteed that the pilgrim's cheques would be backed with foreign currency and precious metals.

Paper banknotes were introduced by King Faisal in 1961. By 1969, banknotes issued in denominations of 100, 50, 10, 5 and 1 rial had finally replaced cheques and coins.⁸ During the same period, the King officially pegged the rial to the US dollar at the rate of $ 1-3.75 rials (this rate has been preserved to this day).

It should be noted that the modern Saudi financial system was formed under King Faisal. After coming to power in 1958, he directly subordinated the Ministry of Finance, reduced government spending and introduced the practice of deducting oil revenues to specially created stabilization funds.

Since 1970, five-year national development plans have been implemented in Saudi Arabia. The introduction of planning elements was designed to support economic growth, reduce the country's dependence on oil prices, and diversify sources of budget revenues at the expense of non-oil and manufacturing sectors of the economy. Taking into account the fact that investments were needed for development, the country's leadership began to create and develop investment instruments.

Much attention was paid to the reform of the Saudi banking sector, which was supposed to actively accumulate large enough funds of the population for their subsequent investment in the economy. For this purpose, the activities of commercial banks, non-cash payments of state and mixed organizations, etc. were stimulated.

The Government has established 6 state-owned credit institutions to provide long-and medium-term interest-free development loans:

- Saudi Agricultural Bank;

- Saudi Credit Bank;

- Financial program for specialists;

- Public Investment Fund;

- Saudi Industrial Development Fund;

- Real Estate Fund ⁹.

In 1976, a program of "Saudization" of foreign banks operating in the country was launched. Its goal was to change the form of ownership of foreign banks. They were to become joint-stock companies, the main shareholders of which were to be subjects of the KSA.

By 1980, the "Saudization" of most foreign commercial banks was complete. The last "victim" of this campaign was the American First National City Bank¹⁰. The number of Saudi banks in the country has grown from 59 in 1970 to 259 by 1980 ¹¹

In parallel with the development of the banking services market, the market of exchange dealers also developed rapidly. By the 1980s, about 250 branches were officially registered, of which 150 were located in Jeddah, Mecca and Medina. The characteristic features of this market segment were that its activities were more financially efficient than those of commercial banks. This is due to a number of factors. Exchange dealers worked in a highly sought-after sector of the market that carried out operations with foreign currency. In addition, no licenses were required to start their operations.

FEATURES OF MODERNIZATION AFTER 1980

In the early 1980s, the assets of enterprises were increased, and an additional number of securities were issued. The Government sought to find optimal ways to raise funds accumulated by the private sector for use in implementing development programmes. In 1989, it was decided to start issuing a government bond, the so-called "Development Bonds".

During this period, Saudi banks entered the global market, opening branches in Geneva, London, Istanbul, Manama, Beirut, etc. In the kingdom of steel from-

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open representative offices of offshore companies.

However, in the early 1990s, the situation changed again. The war of 1990-1991 was a severe test not only for the Saudi economy, but also for the economies of all the Gulf countries. A considerable number of Saudis, having succumbed to panic, began to transfer money abroad. The Saudi banking sector was saved from collapse by the currency agency SAMA, which successfully implemented a number of anti-crisis management measures that helped restore public confidence in national banks (for example, the agency increased the liquidity of Saudi banks through foreign currency deposits).

The end of the Gulf War in 1991 allowed the KSA Government to adopt a number of additional regulations in order to increase banking activity. It is noteworthy that the Saudi banking sector was not affected by the global crisis phenomena.¹² This was primarily due to the fact that, starting in the 1990s, Saudi banks began to receive significant revenues from investments made in the 1980s, including in the field of modern technologies. Of particular importance was the introduction of ATMs, which increased the number of bank customers and expanded the use of non-cash money.

Currently, thanks to the assistance of the foreign exchange agency, Saudi commercial banks work with all types of modern payment and settlement systems. In 1997, an interbank system of express payments in Saudi riyals was established. This electronic settlement system, which operates in real time, is the main tool for interbank settlements and transfers in the KSA. In addition, an automatic clearing house, a Saudi system for registering cash payments, which allows ATMs to work efficiently and make payments by card, as well as an electronic securities trading System, have also become operational. Another trade information system TADAWUL was put into operation in 2005. This system performs operations in the service sector of government bonds and treasury bills ¹³.

With the development of advanced technologies in the country, the quality of services provided to citizens has improved, the costs of banking activities have been reduced, and measures for bank control and regulation of banking activities by the foreign exchange agency have become more effective.

In recent decades, the Saudi banking system has evolved rapidly. Its formation was influenced primarily by three factors: the needs of the country's leadership in attracting investment from the private sector, competition with Western banks, and the need to take into account the cultural and religious views of the population.

In the 1990s, "Islamic mechanisms", including Islamic banks, were widely used in Saudi Arabia to raise public funds. The fact was that more than 1/4 of the available funds remained as personal savings "on hand" and were not invested in commercial banks, did not go to finance the development of the economy. This was a significant financial resource, for which competition developed between banks and other potential consumers of borrowed funds (exchange dealers, etc.).

It should be noted that the success of exchange dealers was largely due to their provision of interest-free loans and other "Islamic financial products" that were positively perceived by the KSA population. This, of course, played a significant role in the decision of commercial banks to also start providing "Islamic" banking services to the subjects of the kingdom, a significant part of which was focused on the most orthodox forms (most close to those recommended by Sharia) of conducting financial transactions.

Commercial banks have significantly expanded their presence in various regions of the country, including in rural areas, using Islamic terminology that is understandable to the population. As a result, in the period from 1980 to 1990, the number of bank branches increased many times - from 188 to 1032,14 For example, Bank Riyadh has developed its own package of "Islamic lending" services for the population, including interest-free loans, current and savings accounts, comparable in volume to the package of previously provided "traditional" banking services.

^In general, in the mid-1990s and early 2000s, the range of services provided by the kingdom's banks covered all types of lending: opening and maintaining accounts, financing trade operations, providing loans and credits, non-cash services (credit cards, ATMs), services for providing Islamic banking products murabaha15.

The credit and banking system of Saudi Arabia, having passed a difficult path, represents today a modern high-tech sector of the economy, which, despite all its specifics, can be considered as a promising partner for Russian financial and economic structures.

¹ http://www.gisa.ru/17127.html

^{Ariel Cohen.} 2 Putin's Arab exit. The Washington Times, 04.03.07.

³ Vladimir Putin suggested that Saudi bankers open subsidiary banks in Russia. Prime-TASS, 12.02.07.

⁴ Russian Academy of Sciences, Institute of Oriental Studies. Moscow, 2002, p. 66.

^{Abdulaziz M. al-Dukheil.} 5 The Banking System and its Performance in Saudi Arabia. London, Saqi Books, 1995, p. 25.

⁶ Ibid., p. 28.

⁷ Ibid., p. 26.

⁸ http://www.sama.gov.sa/en/museum/issues/

^{Al-Salloom Yousulf ibn Ibrahim.} 9 Strategic Planning & Development in Kindom of Saudi Arabia. Riyadh, 1996, p. 118.

^{Mohamed A. Ramady.} 10 The Saudi Arabian Economy: Politics, Achievements and Challenges. Springer Science, 2005, p. 114.

¹¹ http://www.sama.gov.sa/newreports/annual/en/index.htm

¹² This refers to the global financial crisis of 1997-1998. This crisis, which began in Southeast Asia, led to currency and financial disasters, falling global commodity prices, a decline in production and domestic demand, which were the main reasons for the slowdown in global GDP growth. And disruptions in the economy and finances of some developing countries have led to the destabilization of the entire world economy. Read more: Bulletin of the Bank of Russia / Central Bank of the Russian Federation. June 9, 1999. N 35 (379).

^{Mohamed A. Ramady.} 13 Op.cit.., p. 118

¹⁴ http://www.sama.gov.sa/newreports/annual/en/index.htm

¹⁵ The most popular method of long-term financing. This popularity is associated with the short-term nature of this type of operation, the right to demand security for the client's obligations, a high degree of probability of making a profit, and the ability to compare it with the average market interest rate.

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