The currency swap arrangement between the Bank of Russia and the Bangladesh Bank has entered a new phase as Russia is willing to introduce its own payment channel for transactions with banks instead of inking a currency swap deal.
The latest development in the bilateral currency swap arrangement, initiated in 2020, is that Russia is pursuing the Bangladesh Bank to encourage local banks to join SPFS, a Russian equivalent of the SWIFT financial transfer system developed by the Russian central bank.
But banks in Bangladesh are not willing to join this system for fear of facing US sanctions as Russia has already lost access to the global payment channel SWIFT.
The issue was discussed at the recent board meeting of the Bangladesh Bank, where board members decided to go slow on joining SPFS (System for Transfer of Financial Messages) because of the reluctance of local banks, central bank sources told The Business Standard.
Besides, even though Russia is asking that Bangladesh join SPFS, a system developed only for financial transfer messaging thus far, the currency vehicle issue remains unclear, according to a senior executive of the Bangladesh Bank.
Russia could not make it clear as to how a currency will be transferred, he said, adding that banks will most probably have to touch the SWIFT system for this purpose, which is risky for them.
The two countries agreed on a currency swap arrangement in December 2020 aimed at reducing dependency on a third currency. Following the agreement the Bangladesh Bank prepared a concept paper.
According to the concept paper, the nature of the swap will be a credit line of 10 billion Bangladeshi taka for Russia and 10 billion Russian rubles for Bangladesh.
The tenure of the credit line will be three years.
The Bangladesh Bank will maintain a ruble account with the Bank of Russia having a credit line of ruble, while the Bank of Russia will maintain a taka account with the Bangladesh Bank.
Russian exporters will get their payment in ruble from the Bangladesh Bank's ruble account with the Bank of Russia based on documents submitted by their banks to the Russian central bank. Bangladeshi exporters will get their payment in taka from the Bank of Russia in the same way.
Import payments also will be settled in a similar fashion.
The reconciliation will take place on a quarterly basis and the surplus side will get its payment from the deficit side. An agreed-upon third currency or the surplus balance may be carried forward for the next cycle.
The board of the Bangladesh Bank approved the concept paper in November 2021 and sent it to the Bank of Russia the following month.
Both parties were working on the issue but Russia's approach changed after the Russia-Ukraine conflict broke out this February, said a senior executive of the Bangladesh Bank.
The senior executive of the Bangladesh Bank said during its discussions with the Russian central bank, the Bangladesh central bank demanded that deficits be settled in a third currency, but Russia was willing to use ruble for the purpose with a view to making its local currency stronger.
Russia currently has currency swap agreements with 13 countries, but the country is not much interested in currency swaps in the wake of the conflict with Ukraine, he noted.
In this context, Russia is pursuing Bangladesh to join SPFS.
The central bank official also said the Bangladesh Bank had raised the issue as to whether Bangladesh will get an equity share of SPFS as in the case of SWIFT, but the Russian authorities replied in the negative.
The risk for the Bangladesh Bank in joining the Russian payment channel is that dispute settlements will be done as per Russian law, while SWIFT follows international law, he added.
During a recent visit to The Business Standard office, acting Russian Ambassador to Bangladesh Ekaterina A Semenova said the currency swap issue was then on the table for discussion at the Bangladesh Bank.
SPFS has been developed as an alternative payment channel for SWIFT, she mentioned, adding that local Bangladeshi banks could join this messaging system, she said.
The annual trade between Russia and Bangladesh is nearly $1 billion.
In FY21, Bangladesh's exports to Russia stood at $547 million, while imports were worth $481 million, according to Bangladesh Bank data.
Exports to Russia grew by 16.6% year-on-year to stand at $638 million in FY22. Import data is yet to be released.