We do not url encode all the characters of friendly urls and for many languages it seems to work ok with non-ascii urls even though the spec says that urls should always be url encoded. 

It is also possible to use the closest ascii equivalent for some languages with this setting.

<add key="UseClosestAsciiCharsForUrls" value="true" />

A good discussion of the challenges of using non-ascii characters in urls can be found in this blog post by Keyvan Nayyeri http://nayyeri.net/nonenglish-urls

Due to some of the problems many people choose to use English urls even though it is less than ideal. For languages that use similar alphabets to English, we can also use a strategy to replace the non-ascii characters with their closest ascii equivalents.