Bangladesh finds way to pay Russia for nuclear plant: with yuan

Using China’s currency to skirt bank restrictions could irk Western partners

Bangladesh appears to have found a workaround for stalled payments it owes Russia for a nuclear power plant: settling them in Chinese yuan.

With U.S. and European sanctions barring Russia from much of the international banking system, Dhaka has been scrambling for ways to settle repayments worth $110 million for the still under construction Rooppur power plant. But last week, a high-level delegation from Russia and Bangladesh’s Ministry of Finance agreed that the bills could be paid in yuan.

Uttam Kumar Karmaker, additional secretary of the ministry’s Economic Relations Division (ERD), told Nikkei Asia that repaying Moscow in China’s currency appeared to be the most viable option under the present circumstances. The sanctions went up in response to Russia’s war in Ukraine.

“Because of the sanctions against Russian banks,” Karmaker said, “we couldn’t process payments in U.S. dollars. Russia asked us to settle the payments in their currency, rubles, but that was not feasible. So we both opted for yuan.”

Rooppur, when completed, will be capable of generating 2,400 megawatts of power. It is to be a crucial element of Bangladesh’s plans to generate more energy and reduce its reliance on coal. The new arrangement, which should help ensure the project moves forward, comes amid growing calls from Global South nations and others to move away from the dollar and reduce the dominance of Western-led financial institutions.

Under the pact, Bangladesh will resolve payments with Russia via a Chinese bank, likely drawing on Dhaka’s own reserves of yuan. Russian beneficiaries will receive funds through China’s Cross-Border Interbank Payment System (CIPS), a yuan-driven alternative to the dollar-dominated SWIFT system.

SWIFT, a secure messaging platform that facilitates cross-border payments, still dwarfs CIPS. With 11,000 members, SWIFT transfers 50 million messages a day, enabling $5 trillion in trade, while CIPS, with 1,280 members, handles 15,000 messages, according to media reports.

The decision to block some Russian banks’ SWIFT access, however, appears to have opened a door for China to promote its alternative. And the world’s second-largest economy has found an eager partner in Russia, one of the world’s top energy exporters.

In late March, during a three-day bilateral summit with Chinese President Xi Jinping, Russian President Vladimir Putin said, “We are in favor of using the Chinese yuan for settlements between Russia and the countries of Asia, Africa and Latin America.”

For Bangladesh, China is the No. 1 trading partner, sharing over 17% of the South Asian nation’s annual volume. Russia, meanwhile, is building as well as funding over 90% of the $12.65 billion Rooppur plant — Bangladesh’s largest infrastructure project.

“Given the significance of this power plant project, it is natural that Bangladesh will try to keep it going at any cost,” said Shafquat Rabbee, adjunct faculty at the University of Dallas’ business school in the U.S., explaining why Dhaka is in effect signing on to China and Russia’s plan to counter the dollar.

But Rabbee argued that Dhaka would be wise to confine the payments to those for Rooppur. Otherwise, it “will cause much tension with Bangladesh’s Western partners,” he said.

There are few economic reasons for Bangladesh to engage in “a geopolitical adventurism against the West around trade currencies,” he added, noting that most of Bangladesh’s foreign currency earnings come from Europe, the U.S. and American allies.

Data from Bangladesh Bank, the country’s central bank, shows the U.S. was the largest importer of Bangladeshi products in 2021, importing $8.3 billion. In the same year, U.S. companies invested $4.3 billion in the country, accounting for over 20% of the total foreign direct investment stock.

On the other hand, even though China is Bangladesh’s largest trading partner, the relationship heavily favors China. Out of around $13.61 billion in bilateral trade in 2021, Bangladesh’s exports to China accounted for about $680 million, while imports from China added up to $12.93 billion.

“China is now the largest trading partner for most countries in the world,” Rabbee said. “Given China’s dominant trade status, the recent China-Russia or China-Saudi Arabia trade settlement agreements using yuan may start to gradually chip away at the dollar’s preferred trade currency status.

“However, China exports more to other countries than it imports from them and as a net exporter, China may not be yet ready to dominate the world of trade with its artificially undervalued currency.”

Bangladesh’s central bank has been building up the share of yuan in its foreign currency reserves since 2017, after the currency was included in the International Monetary Fund’s Special Drawing Rights (SDR) currency basket.

The yuan’s portion of the country’s forex reserves rose to 1.32% last August, from 1% in 2017, while the dollar declined to 75% from 81%, according to data published by local media and confirmed by a source familiar with the matter.

In September, Bangladesh Bank issued a circular allowing commercial banks to maintain accounts in yuan with their corresponding branches abroad to settle cross-border transactions. Last month, it also allowed local businesses to maintain export retention quotas — the portion of foreign currency that an exporter can retain after repatriating the export earnings — in yuan.

Mezbaul Haq, a spokesperson for Bangladesh Bank, told Nikkei Asia that the country has not adopted a deliberate policy to build up yuan reserves. “Considering the global situation and the market, we are just hedging our risk and diversifying our portfolio,” he said.

As for the nuclear plant payments, Haq said, “The decision on this has been taken by the ERD. We only made recommendations.”

Source: Nikkei Asia