T
here have been suggestions made by Russia to conduct trade in Indian rupees to circumvent the US sanctions on Russian banks. According to local news reports, there have been suggestions made by Russia to develop a payment mechanism which will enable payments through Indian rupees in order to evade the US sanctions and also to help pay for the Rooppur Nuclear Power Plant.
It is an example of the trend followed by the sanctioned economies to find ways through which they can make payments without being part of the dollar financial system where the presence of US is more evident.
The reason for proposing this issue is a loan that cannot be repaid due to an infrastructure project. Bangladesh has been unable to make payments related to the loan taken to construct the Rooppur Nuclear Power Plant that was financed by Russia due to sanctions imposed on Russian banks by the US.
The magnitude of this challenge is substantial, since the repayment of this loan of $11.38 billion has been formally postponed by 18 months.
This is not a trivial technical issue; this is a huge infrastructure project and non-payment may cause delays in the project and negatively affect relations between the two countries due to their active promotion of the investment.
The rupee settlement did not come about quickly for Bangladesh and Russia. Dhaka and Moscow apparently tried to conduct their bilateral business through the Chinese yuan initially, but this attempt was apparently unsuccessful.
The rupee settlement idea is more realistic since some portion of the bilateral transactions between Russia and India is carried out in Indian rupees, and Dhaka apparently conducts some transactions with New Delhi in Indian rupees in addition to the US dollar and other currencies.
It gives a leg up on this mechanism in comparison with the totally untried yuan mechanism despite being a third currency in a two-party transaction.
A currency choice alone is not going to resolve the payment issue because there is also going to be a need for new banking infrastructure. It has been suggested that the solution will involve the development of dedicated payment infrastructure through the establishment of a branch of a Russian bank in Bangladesh.
With this physical banking infrastructure in place, payments can be settled without passing through correspondent banks in the West, which serve as bottlenecks at which sanctions are applied.
The Russian solution combines the use of rupee-denominated settlement mechanism with the dedicated payment infrastructure in order to ensure smooth commercial relations between the two countries.
The trade arrangement that is safeguarded is by no means small. Bangladesh exports items amounting to $245 million to Russia for the period July-May of the current financial year, as per figures provided by the Export Promotion Bureau of Bangladesh.
This shows the reason why the two governments are willing to maintain their commercial contacts rather than letting them reduce because of sanctions.
In addition to the nuclear power plant loan arrangement, regular business transactions—which also include things like jute and other items, apart from those from Russia—require a viable payment system.
The rupee solution is set to make the transition from unofficial discussion to official negotiations soon enough. The rupee proposal is set to become part of the discussion agenda of the upcoming meeting of the Bangladesh-Russia Intergovernmental Commission on Trade, Economic, Scientific and Technical Cooperation, which is scheduled to take place in either September or October.
This timeline has been hinted at separately by the Bangladeshis themselves, as the solutions proposed by the Russians to solve the payment problem will likely be discussed at the bilateral meetings to be held later this year, Bangladeshi media reports quoting unnamed officials from Dhaka's Economic Relations Division.
It was already highlighted by the central bank of Bangladesh that there is a legal impediment with respect to the way the deal has been conceived. According to a Bangladesh Bank representative, existing regulations limit the use of alternate currency such as Indian rupees only for bilateral trade between India and Bangladesh.
Therefore, payment to a third party such as Russia would clearly run against the established central bank regulations. Addressing this problem would not be easy either.
Any amendment in the regulation would require creating a completely different set of trilateral regulations for legalizing clearing operations of non-Indian trade using Indian rupees.
However, in spite of all this rupee discussion, there has been no change in the official attitude of Bangladesh regarding the issue. The US dollar continues to serve as the compulsory conduit for carrying out significant transactions on behalf of the state by the formal banks of Bangladesh.
Why is this so important? It means that for the time being, the rupee initiative is regarded as exceptional and therefore will have to be implemented in a very limited sphere such as repayment of loans for the Rooppur project.
It is not the first time that a rupee mechanism of bypassing has attracted attention from the United States. In a previous case when sanctions were being imposed on Russia for purchasing its oil, the US Secretary of Commerce described India's decision to purchase cheap Russian crude through the use of an alternate payments system to avoid the western limitations as "deeply disappointing."
The example demonstrates how the United States government had reacted previously against any rupee mechanism for circumventing sanctions against Russia.
