Russia has put forward a proposal for repaying the loans lent out to Bangladesh for the construction of Rooppur Nuclear Power Plant (RNPP) in its own currency, ruble. The country wrote to the Bangladesh government officially regarding the issue.
The proposal came in the wake of Western sanctions and the expulsion of Russian banks from SWIFT (Society for Worldwide Interbank Financial Telecommunication), the global transaction network, following the commencement of the Ukraine war.
The Economic Relations Division (ERD) of the finance ministry is now assessing the proposal. According to them, Bangladesh can carry out the transaction through China, but it would push up the cost and risk in the repayment of the loan and its interest.
Uttam Kumar Karmaker, additional secretary of the ERD, told Prothom Alo that they have been reviewing the proposal, but are yet to take any decision in this regard.
Letter from Russia
Russia is providing loans and technical support to the 2,400-megawatt power plant in Pabna. It is scheduled to go into production in 2024.
According to the Ministry of Science and Technology, the estimated cost of the Rooppur project is a little more than USD 13 billion, which is equal to Tk 1,370 billion (with the exchange rate of Tk 105 per USD). Russia lent USD 11.38 billion of the total cost and has already provided USD 4.97 billion.
There are two problems in paying off the interest and principle in ruble. It has not been decided who will bear the additional expenses of several rounds of currency swaps. Besides, the exchange rate of the Russian currency is not as stable as that of the US dollar
According to the terms of the Russian loan, Bangladesh will pay interest only until 2026 and thereafter principal with interest in annual installments.
Russia sent two letters to Bangladesh regarding the RNPP loan repayment. The first letter, issued on 23 June, proposed to amend the clauses of the inter-government credit agreement (IGCA) signed between the two sides.
Later, on 10 August, Russia sent another letter with the proposal of repaying the principal and interest in ruble due to the sanctions on transaction in US dollar and euro.
According to the proposal, the exchange rate between the US dollar and the ruble will be fixed on the basis of the exchange rate followed by the Central Bank of the Russian Federation. They will take the rate of 10 days earlier into account in the repayment process.
The intergovernmental credit agreement, which was signed by the two sides in 2013, requires some revisions to use ruble as a debt repayment currency as the deal mentioned the US dollar as the lone currency for repayment.
A decision will be taken regarding the issue after thorough review of the matter
However, the agreement signed on 26 July, 2016, allows the use of currencies acceptable to both parties, instead of only the US dollar.
In the letter, Russia has also mentioned the detailed process to repay the debt liabilities in ruble. Bangladesh would have to repay the debt through a third country, which would be free of the Western sanctions. Besides, the country must have special drawing rights (SDR), an international reserve asset created by the International Monetary Fund (IMF).
It means the country must be with a reserve currency of the IMF. The IMF reserve currencies are - the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.
Bangladesh can transact through China as the Bangladesh Bank has transactions with the Chinese banks in yuan. According to the process mentioned by Russia, Bangladesh will send the repayment amount in yuan to the Chinese banks. Later, China will pay the amount to Russia in ruble.
Where the problem lies
There are two problems in paying off the interest and principle in ruble. It has not been decided who will bear the additional expenses of several rounds of currency swaps. Besides, the exchange rate of the Russian currency is not as stable as that of the US dollar.
The ERD believes multiple currency swaps would significantly increase borrowing costs and risks.
Ali Hossain, additional secretary of the science and technology ministry, told Prothom Alo that multiple rounds of currency swaps require conversion charges and the process should clarify who will bear this cost.
A decision will be taken regarding the issue after thorough review of the matter, he added.
Interest rate should also be fixed
According to the ERD, the loan agreement between Bangladesh and Russia is based on the London Interbank Interest Rate (LIBOR). But this rate will no longer exist after 1 July, 2023 and it will be replaced by the Secured Overnight Financing Rate (SOFOR).
The ERD said there are differences between the LIBOR and the SOFOR and this is why the interest rate limit should be fixed on the Russian loans. A high-level decision is needed to implement the matter.
Selim Raihan, professor of economics department at Dhaka University, said the question is who will bear the cost of currency swaps. If the Russian government bears it, then the Bangladesh government can consider the matter.
***This story first appeared in the print version of Prothom Alo and has been rewritten in English by Misbahul Haque.