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Russia-Ukraine War: Bangladesh economy feels the pinch

Bangladesh economy has started feeling the pinch of the Russia-Ukraine war with a number of direct and indirect impacts, including rising inflationary pressures and volatility in external trade.

The western world has slapped unprecedented sanctions on Russia, including expulsion of its banks from SWIFT system, since the largest European nation waged the war against its neighbour Ukraine on February 24.

As a result, global fuel price hit 14-year high. Local exporters and importers are struggling with bills payment, falling exports coupled with higher import bills. These are fuelling inflation, particularly in essential commodity prices.

Skyrocketing prices of daily essential commodities in the local market, especially the imported edible oil, have been a major concern for the economy as it has a direct impact on inflation.

Bank and business sources say businessmen are facing problems in opening Letter of Credit (LC) after Russian banks were excluded from the SWIFT system, while exports to Russia have faced a severe setback.

Besides, exporters said they are not getting their payment even though they have already exported goods to Russia.

In recent years, Bangladesh has been trying to capture a sizeable pie of US$40 billion dollar apparel market of Russia and has been able to achieve some success. But the war is going to destroy that prospect.

Apparel exporters are now concerned about the export fall in the Russian market as the war is having direct impacts on apparel exports.

The world famous Swedish apparel retailer H&M has already stopped its sales in Russia. Not only that, its local office has suspended orders at Bangladeshi factories, industry insiders said.

Although only 1.5 percent of the country’s total RMG export goes to Russia, the exporters who ship apparel to the country are facing problems, they added.

During the July-January period, Bangladesh shipped nearly $24 billion worth apparels of which $420 million earned from Russia.

“Seven of our apparel exporting members have formally informed us that $4 million of the export earning has got stuck in Russia,” Bangladesh Garment Manufacturers and Exporters Association (BGMEA) President Faruque Hassan said.

“Global fuel price has surpassed $100 per barrel, which will definitely have a direct impact on the country’s all types of export and import, RMG exports in particular,” said Fazlul Haque, another leader of the apparel sector.

Apart from the fuel, prices of gas, wheat, maize, mustard, lentil and some industrial raw materials, which are usually imported from Russia and Ukraine, have also seen a sharp hike.

Edible importers claimed that price of per tonne soybean oil surpassed $1800 after the war. There is also an allegation of market manipulation for essential commodities by a section of unscrupulous trades to cash in on the unrest.

In addition to RMG, Bangladesh exports plastic and leather goods, shoes, ceramic items, toys, mattress, jute and frozen food to Russia, while its export medicine to Ukraine, including these items.

In 2020-21 fiscal year, the country’s RMG exports to Russia stood at Tk 50.74 billion while it was Tk 1 billion for Ukrainian market, against $480 million import from Russia. The European country is a key source of Bangladesh’s wheat and maize import, Export Promotion Bureau (EPB) data suggest.

After the sanctions imposed on SWIFT system, these exports and imports and Russian investment in Bangladesh have become uncertain. Once the war is prolonging, keeping the financial transaction open with Russia may stop fully.

However, Finance Minister AHM Mustafa Kamal has spoken of finding out alternative means to keep financial transaction with Russia, a long business and trade partner of Bangladesh.

Meanwhile, Bangladesh Bank is thinking about “currency swap” system as the alternative means of SWIFT.

“Financial transaction has been restricted with only the Russian banks expelled from SWIFT. A proposal of settling transaction with currency swap method has been sent to the ministry for scrutiny. It can be function, if the government wants it at this situation,” spokesperson for the central bank Sirajul Islam informed.

Besides, the Russia-funded Rooppur nuclear power plant project may suffer a setback after the imposition of western sanctions on 12 Russian and two banks of Belarus.

One of the banks that provides fund to this scheme has recently requested Bangladesh Bank for keeping financial transaction stopped for the time being.

Similarly, some commercial banks of Bangladesh have also received such types of messages from other Russian banks under the sanction, banking sector sources said.

“All the export import LCs opened with the restricted banks will be stuck. The Rooppur nuclear power plant funding may also be stopped, once Russia is fully cut off from the global financial system,” Policy Research Institute (PRI) Executive Directo