Russia has long been a sort of unchartered territory for Bangladesh! But as the country (Bangladesh) looks to diversify its market-base, Russia is increasingly becoming significant, more so considering its massive size and the burgeoning buying prowess of the consumers there.
As per Statista, the revenue in the Russian apparel market in 2021 amounted to US $ 34,935 million even if the market is expected to grow annually by 2.75 per cent (CAGR 2021-2026) with the women’s segment holding sway over others accounting for market volume of US $ 19,006 million and men’s and children’s apparels making up the rest.
Meanwhile, as per reports, current Russia-Bangladesh trade is said to be around US $ 1100 million with apparel items, home textiles, leather, etc., being the principal export items from Bangladesh. According to the BGMEA, Bangladesh exported to Russia around US $ 594 million worth of apparel goods in FY 2020-21, which was US $ 440 million in 2019-20 fiscal year.
Although Bangladeshi RMG goods have huge demand in Russia, transactions through banking channels have posed a major obstruction for trade to flourish so much so that Bangladesh Commerce Minister Tipu Munshi sought Russian support to ensure direct export of domestic products, including apparels to the latter’s market. He said despite a huge demand for Bangladeshi products in the Russian market, RMG was being exported through third country due to several issues, which relate to transaction in the banking channel predominantly and to a great extent duties.
Finding the alternate route through currency swap…
Bangladesh is now preparing to take an alternative route to strengthen trade ties with Russia, bypassing the US sanctions on the latter, as part of which Bangladesh’s central bank (Bangladesh Bank) would enter into a bilateral currency swap agreement with the Central Bank of Russia.
Signing of the swap deal would allow Bangladesh exporters to bill in Taka and receive the money in Taka even if the Central Bank of Russia will owe that amount to the Bangladesh Bank. Similarly, if Bangladesh imports any product from Russia, the Central Bank of Russia will pay the price of that product to its exporter in local currency Rubel while the Bangladesh Bank will be indebted for that amount to the Central Bank of Russia.
Every three months, the central banks of the two countries will adjust the accounts receivable.
Keeping with the export communities’ interest, the Bangladesh Bank (BB) board approved the proposal to sign the currency swap agreement with the Central Bank Governor Fazle Kabir in the chair.
“The BB board agreed with the Government’s proposal in expectation of better bilateral trade relations…,” stated BB Executive Director and spokesperson Md Serajul Islam.
It all started with US sanctions on various Russian banks and institutions enforcing Bangladesh not to execute direct banking relations with Russian banks and as Bangladeshi banks have Nostro accounts with US banks — Nostro account refers to an account that a bank holds in a foreign currency in another bank. The opposite term is ‘Vostro accounts’ derived from the Latin word for ‘yours’, which refers to the accounts of a bank that other banks have on its books in its home currency — if they transact with Russian banks, there is also a risk of facing US sanctions.
What is currency swap and its benefits?
First introduced by the World Bank in 1981 in an effort to obtain German Marks and Swiss Francs, currency swap allows a customer to re-denominate a loan from one currency to another even as the re-denomination from one currency to another currency is done to lower the borrowing cost for debt and to hedge exchange risk with the concept behind is to match the difference between the spot and forward rate of any currency over a specified period of time.
Usually, banks with a global presence act as intermediaries in swap transactions, helping to bring together the two parties. Sometimes, banks themselves may become counter-parties to the swap deal, and try to offset the risk they take by entering into an offsetting swap deal.
Additionally, currency swaps help institutions and companies to reduce exposure to anticipated fluctuations in exchange rates — currency swap reduces the impact of volatility in exchange rates arising from dependency on a third currency — which in particular could prove beneficial for the Bangladesh garment exporters as they can use this tool to help hedge against that type of currency risk by swapping cash flows in the foreign currency with domestic at a pre-determined rate.
BGMEA push for enhanced cooperation
Very recently the apex garment makers’ body BGMEA sought cooperation from the Russian Government for resolving the trade barriers and paving the way to export more apparels to the Russian market even as the President of the trade body Faruque Hassan took up this issue during his meeting with Ambassador of Russia to Bangladesh Alexander Vikentyevich Mantytskiy.
They discussed on various trade related issues especially how bilateral trade between Bangladesh and Russia could be enhanced further.
The BGMEA President said Russia is a promising market where demand for Bangladeshi garments was huge but transactions in banking channels alongside tariff complications were playing the spoilsport.
“The existing banking system between Bangladesh and Russia needs to be simplified to help expand the bilateral trade between the two counties…,” underlines Habib Ullah Dawn, the President of Commonwealth of Independent States – Bangladesh Chamber of Commerce and Industry (CIS-BCCI) amidst calls from the garment makers to ink the currency swap deal at the earliest.
“…we want the signing of the swap deal with Russia as soon as possible; our export potential to Russia is higher than in many European countries,” claims Senior Vice-President of Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) Mohammad Hatem, adding Russians also have more purchasing power than in many European countries.
If the swap deal falls through, it will be possible to increase Bangladesh’s exports to one of the world’s largest markets significantly in a few years, hopes the BKMEA Senior VP emphasising there is a considerable demand for Bangladeshi knitwear items in Russia.
With the intent of expanding the footsteps, Bangladesh has already undertaken various initiatives including signing an agreement akin to the Trade and Investment Cooperation Forum Agreement (Ticfa) signed with the US while preparations are also underway to sign an agreement between the Bangladesh Standards and Testing Institution and the Russian quality control agency named the Federal Agency on Technical Regulating and Metrology as well.
And now with the LDC graduation imminent, which would come with its own share of challenges, expanding the horizon with focus on Russia seem to be the new gameplan for garment makers in Bangladesh.
FTA route with EAEU to pave way for enhanced exports?
“…our main target is Russian market…We have to go through EAEU to get any facility there,” states a Commerce Ministry official on condition of anonymity even as according to the latest reports, Bangladesh has formally proposed to the Eurasian Economic Union (EAEU) signing the FTA. The proposal was made very recently on the back of a tip from the Eurasian Economic Commission (EEC) so that it could seek concurrence of its member-states-Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan.
These five Eastern European countries have over US $ 1.5 billion annual bilateral trade with Bangladesh, which could be increased manifold over if the FTA falls through, opined many within the industry as they underscored the importance of Russia along with these countries, leveraging the prospects in which could give the much-needed traction to apparel exports in the aftermath of the LDC transition, they felt.
Product exchange weighs on in the existing equation…
Considering that Bangladesh imports more from Russia than it exports, many experts underlined the need to pursue product exchange deal as Bangladesh imports almost twice as much as it exports to Russia, for which in every three months, Bangladesh has to pay the remaining import prices along with interests.
They cited the example of India in this direction to prove their point.
India’s exports and imports of certain products with Iran run under the product swap deal as India is one of the largest buyers of Iranian petroleum. In return, India exports to Iran the goods that the latter needs.
Now if Bangladesh would push only for the currency swap deal or stress on the product exchange condition as well remains to be seen.
