Dhaka, Moscow agree to settle Rooppur payments in Chinese yuan

Infographic: TBS

Bangladesh is set to make loan repayment for the Rooppur Nuclear Power Plant project to Russia in yuan as US sanctions on Russian banks have forced the two nations to settle payments using the Chinese currency, moving away from the US dollar.

The decision was made on Thursday in a meeting between the Economic Relations Division (ERD) and Russian officials following a request by Moscow in March last year to halt loan repayments after losing access to the global payment channel SWIFT due to Western sanctions.

Under the new arrangement, Bangladesh will make payment settlements with Russia through a Chinese bank, and Russian beneficiaries will receive payments using China's Cross-Border Interbank Payment System (CIPS), a limited alternative to SWIFT for yuan-based payments.

SWIFT is a Belgium-based secure messaging platform that facilitates cross-border payments.

According to the ERD meeting, there is currently an installment of $318 million repayment pending against a total loan of nearly $12 billion that Russia provided for the Rooppur project. 

The meeting decided that Bangladesh will pay a maximum commitment fee of $.25 million yearly, if the yearly allocated loan portion remains unused.

Under the loan agreement with Russia, Bangladesh had to pay a commitment fee of 0.5% on unused allocation. If the Russian contractors who are implementing the project fail to use the allocation, Bangladesh has to pay a commitment fee. 

Every year, Bangladesh had to pay a commitment fee of around $4 million for the failure of Russian contractors to use the allocated portion, which was a significant cost despite not being Bangladesh's fault. 

In this context, Bangladesh decided to pay up to a $.25 million penalty yearly, even if the amount goes higher.

Russia is providing loan assistance for the construction of the Rooppur nuclear power plant in Bangladesh, and the project is being implemented by a contractor led by Rosatom State Atomic Energy Corporation. 

Repayment of some part of the loan for this project has begun, and it is being done through Sonali Bank. Pay of Russian workers in Bangladesh is also being paid through the banks. 

However, due to the SWIFT ban, Russian banks have stopped all transactions.

In 2020, Moscow offered Dhaka a bilateral currency swap arrangement for trade settlement, but the move was put on the back burner following US sanctions.

Russia then offered Bangladesh Bank to join the SPFS, a payment channel developed by Moscow, but Bangladeshi banks were unwilling to join. Bangladesh proposed that Russia settle trade in the Chinese currency as yuan became a reserve currency in 2018.

In response to that, Russia claimed a conversion loss of currency, which the Bangladesh Bank did not agree to pay. After lengthy discussions, both countries have now agreed to settle trade in yuan, also known as renminbi.

Md Mezbaul Haque, executive director and spokesperson of Bangladesh Bank, stated that the central bank had several meetings with Russia about the payment method as loan repayments remained suspended after US sanctions. 

The central bank sent the final proposal to the ERD and it has not received any decision yet. Therefore, he refused to make any further comments in this regard.

How payment will be made 

Bangladeshi banks will make payments only in yuan to any Chinese bank and the Russian beneficiary will receive the payment and convert it to ruble at their own cost. 

Chinese CIPS will be used as the payment channel as China is already using this channel with Moscow, according to Bangladesh Bank officials. 

The Bangladesh Bank has already opened a window for yuan transactions by allowing banks to maintain an account in yuan with their corresponding branches abroad to settle cross-border transactions in the Chinese currency in September last year. 

Bangladeshi exporters were also allowed to hold yuan in their export retention quota for trade settlement in Chinese currency. 

These developments came after China offered a currency swap agreement between the Bangladesh Bank and the People's Bank of China, its central bank, for using both renminbi and taka as currencies of pricing and settlement in bilateral trade in August last year.

The Bangladesh Bank has been building up the share of yuan in its foreign exchange reserve, cutting down the share of dollar as the Chinese currency is gaining acceptance faster in global markets for international payments as an alternative to the greenback.

The share of yuan in Bangladesh's foreign exchange reserve increased to 1.32% in August last year from 1% in 2017 when the dominating US dollar reserve fell significantly to 75% from 81% during the period, according to Bangladesh Bank data.

The share of yuan has been growing steadily in the country's foreign exchange reserve after the Chinese currency was included in the Special Drawing Rights (SDR) currency basket of the International Monetary Fund (IMF) in 2016.

The IMF included the yuan in its SDR basket as a fifth currency, along with the US dollar, the euro, the Japanese yen, and the British pound. The inclusion in the SDR basket means the yuan is now an internationally convertible currency.

At present, the Chinese yuan ranks third in terms of weight in the SDR basket, after the US dollar and the euro.

The Bangladesh Bank declared the yuan as an approved currency for reserve holding sometime after and started to build up the share of Chinese currency in the reserve, aiming to facilitate foreign investors amid rising business engagement with China.

Other trade settlements with Russia will be in yuan

Bangladesh is in talks with Russia about exporting potatoes and other items which will be also settled through China's currency, according to Bangladesh Bank officials. 

Bangladesh has decided to resume the export of potatoes to Russia this year but it was not finalised due to uncertainty in payment. 

Earlier in February this year, Agriculture Minister Muhammad Abdur Razzaque told journalists, "Prior to imposing a ban by Russia on exports of the vegetable, a huge amount of potatoes were exported to that country. As it has lifted the ban recently, we shall export potatoes again."

He made the remark after meeting with the Russian Ambassador to Dhaka Alexander Mantytskiy.

The minister also said alongside potatoes, Russia expressed its interest to import mangoes, cauliflowers, and cabbages from Bangladesh. 

How Russia is relying on ruble and yuan for cross-border payments 

According to a Nikkei report, Russia has increasingly been relying on the yuan and the ruble for cross-border payments and financing since the war with Ukraine about a year ago. 

Western sanctions have limited Russia's access to the dollar and the euro. Last March, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) disconnected several major Russian banks from its global settlement network over the war. 

As of September, the dollar and the euro accounted for only 34% and 19% of Russia's export payments, respectively, down from 52% and 35% before the sanctions took effect in January.

Although certain payments for Russian gas are still being made in dollars and euros, including through Gazprombank, a subsidiary of state oil and gas company Gazprom that is exempt from the SWIFT ban, a growing proportion of payments (47% as of September) are being made using the yuan and the ruble. 

Gazprom has switched gas exports to China to the yuan and the ruble from the dollar. Some European importers are also now paying in rubles. 

European sanctions on Russian oil have fueled a rise in exports to Asia, further accelerating a shift toward the yuan.