The importance of nuclear power plants in developing countries such as Bangladesh cannot be underestimated. This has prompted Bangladesh to embark on a nuclear energy project with the assistance of Russia. In February 2011, Rosatom signed an agreement with the Bangladesh Atomic Energy Commission to build two reactors in Rooppur. The initial contract for the project, valued at $12.65 billion, was signed in December 2015. The project is primarily financed by a Russian loan, covering 90% of the costs, with an interest rate of Libor plus 1.75%, capped at 4%, and a repayment period of 28 years, including a 10-year grace period.
Although the Rooppur power plant is expected to integrate into the grid in the next couple of years, the transactional processes of the Russian debt have presented some challenges for Bangladesh, hindering the smooth progress of the development process and timely payment of the debt. To mitigate such unforeseen calamities and ensure the continuation of the development process, Bangladesh has decided to use other currencies to pay the Russian debt.
Bangladesh is set to pay $318 million worth of yuan to Russia for the Rooppur nuclear power plant, marking an innovative move in the country’s efforts to diversify its international trade options. Unfortunately, Western sanctions on Moscow had previously prevented Bangladesh from using US dollars to make the payment. To overcome this challenge, the payment will now be facilitated by a Chinese bank via China’s Cross-Border Interbank Payment System (CIPS). This system offers an alternative to SWIFT, the US dollar and euro-dominated cross-border banking system.
Initially, Russia insisted on payment in Ruble and declined Yuan due to concerns about potential conversion losses. However, a representative for Rosatom, the state-owned company building the nuclear plant, has confirmed that the payment will indeed be made in yuan.
This partial repayment is part of a $12 billion loan that Bangladesh had previously received from Moscow, which will help fund the construction of the Rooppur nuclear power plant near Dhaka, the country’s capital city.
Moreover, the use of China’s cross-border interbank payment system is significant, as it underscores Bangladesh’s efforts to reduce its dependence on the US dollar and explore alternative currencies. With Russia banned from the rival SWIFT payment system, this move also demonstrates the importance of developing new and creative ways to conduct international trade and mitigate risks associated with economic sanctions and global currency markets.
On the other hand, the employment of the Yuan as a means of payment could be a feasible alternative for Bangladesh, given that it has been utilizing the Chinese currency in commercial transactions for a period of three years. Therefore, the payment will not be perceived as a term of estrangement for Bangladesh. In addition, the Bangladesh Bank clarified the situation, as their spokesperson stated.
“The Chinese currency has been an official currency for us since 2019, and we have been doing regular trade settlements with it.” We settle many Japanese loans in yen. And we invest a portion of our reserves in yuan.”
Why pay in other currencies?
In the wake of the Ukraine conflict, Russia found itself facing an onslaught of Western sanctions that hit almost every aspect of its economy. Among these was a limitation on the country’s access to the SWIFT payment system, which made it difficult for the Ruble to be used in international trade with the US dollar.
For developing countries like Bangladesh, where the economy is rapidly evolving, the US dollar remains the primary currency for cross-border transactions, including debt repayment. Unfortunately, Western sanctions on Russia have made it challenging for Bangladesh to use US dollars to pay its debts, especially in the wake of the Ukraine conflict.
The sanctions imposed by the US on Russia forced Bangladesh to reconsider its payment options, leading the country to explore alternative currencies. This move became particularly necessary when 69 Russian ships were barred from Bangladesh’s ports earlier this year to comply with US sanctions, causing delays in deliveries as alternative routes or vessels had to be arranged.
In light of these challenges, Bangladesh made the innovative decision to pay its debt for the Rooppur power plant in yuan. This choice reflects the country’s commitment to finding new and creative ways of conducting international trade while mitigating risks associated with global currency markets and economic sanctions.
Furthermore, Bangladesh recognized the need to reduce its dependence on the US dollar and explore alternative currencies, especially since the global economic crisis has devalued the reserve currencies of many countries. This move towards diversification marks an important step towards securing Bangladesh’s economic future and reinforces the country’s commitment to growth and development.
Pros and cons
Opting to repay debt in foreign currencies can yield various advantages for nations, although it may also present several obstacles. To begin with, utilizing a foreign currency to repay debt can aid in reducing the potential hazards linked to variations in the local currency. Through selecting a more consistent exchange rate or engaging in currency hedging, the borrower can attain a degree of financial stability and experience more favorable loan conditions, including decreased interest rates or extended repayment durations. Furthermore, it has the potential to facilitate entry into global markets, thereby enabling investment diversification and potentially yielding greater returns.
In addition, discharging debt obligations in Yuan has the potential to enhance commercial ties with China, thereby streamlining transnational dealings and augmenting economic expansion. This could prove to be particularly advantageous for Bangladesh, which is endeavoring to strengthen its commercial ties with significant economic allies. Equally, the altered geopolitical terrain and the fluctuating power dynamics in the world economy may pose certain strategic predicaments for Bangladesh.
Moreover, the utilization of a non-domestic currency for the purpose of discharging debt can alleviate the strain of relying solely on the US dollar, thereby affording the debtor the ability to investigate alternative investment prospects. The effective management of foreign reserves has become an increasingly important issue as the world continues to grapple with the issue of currency depreciation. The move towards diversification of currency holdings in Bangladesh signifies a measured and equitable strategy adopted by the country’s economy, which has historically been heavily reliant on the US dollar.
Nonetheless, there exist certain obstacles linked to the repayment of debt denominated in foreign currencies. The potential for currency fluctuations to result in escalating expenses over an extended period is a noteworthy apprehension. The process of engaging in cross-border transactions, especially when dealing with various currencies, can be intricate and lead to escalated transaction expenses and administrative complexities.
In summary, Bangladesh has opted to settle its outstanding obligation to Russia, amounting to $318 million, for the Rooppur nuclear power plant in yuan currency instead of US dollars, citing Western sanctions imposed on Moscow. The mode of payment shall be facilitated via China’s Cross-Border Interbank Payment System (CIPS), which serves as a substitute for SWIFT. The aforementioned action highlights Bangladesh’s endeavors to diminish its reliance on the US dollar and investigate substitute currencies. The adoption of the yuan as a mode of payment in commercial transactions over a period of three years in Bangladesh has rendered it a viable substitute. Utilizing alternative currencies can potentially mitigate the hazards linked to economic sanctions and fluctuations in the worldwide currency markets. Nevertheless, it could also pose certain hindrances, such as geopolitical complexities and variations in currency exchange rates.
– S. M. Saifee Islam is a Research Associate at the KRF Center for Bangladesh and Global Affairs (CBGA).
Published in The Geopolitics [Link]