What does the Ukraine war mean for Bangladesh?

A world with China and Russia together against the US, Europe, and Japan places very heavy demands on countries such as Bangladesh who choose to stay neutral

Fortunately, Bangladesh is far from the battle-fields of the Ukraine, but this does not mean that it is immune to the consequences. 

For Bangladesh the immediate impact will be temporary -- higher fuel prices. With the generation of electricity running increasingly on heavy fuel oil and diesel, the cost of producing electricity and of transportation will rise.

Already the government is facing large demands for subsidies in the energy sector. This is going to get worse over the next year. There are three bad choices: Raise the price of energy by 100-150%, increase deficit spending to finance the subsidies crowding out private investment and slowing the economy, or reduce government expenditure. 

The first and the third are deflationary and will not be well received. 

The middle choice will generate inflation that will be very badly received. 

Putin’s war will make a difficult situation even more so. But the war’s impact on energy prices will vanish in a few months.

The second consequence arises from the impact of sanctions on the international trade and investment between Russia and Bangladesh. The imports from Russia were around $800 million per annum before the pandemic and exports to Russia about $40 million. The main import from Russia was wheat; the main import from the Ukraine was also wheat. 

The main disruption from the war is the roughly $1 billion of wheat coming from these two countries.

The price of wheat, sunflower oil, and maize are rising.

The other large transaction with Russia is the Rooppur Nuclear Power Project.  This large power project when completed will have the capacity to generate 2,400 MWs and is largely financed by a loan of about $10 billion from Russia to Bangladesh. 

Sanctions may prevent or make it more difficult for Bangladesh to buy wheat from Russia and the Ukraine.  Sanctions may make it more difficult for Bangladesh to repay the loan to Russia. 

It may be impossible or more difficult for Bangladesh to use dollars or euros to pay for or receive Russian products. This could make trade much more difficult between the two nations.  

When the sanctions become completely announced the extent of these problems will be better understood. But the difficulties are limited.

In my previous article, the idea was developed that Russia and China may be driven by this Ukrainian war to establish a second payment system for trade involving those two countries. This would cause great difficulties in the smooth flow of foreign trade. Such a development is very likely.

But the greatest potential problem for Bangladesh is the world dividing much more than at present. 

A world with China and Russia together against the US, Europe, and Japan places very heavy demands on those countries such as Bangladesh who choose to stay neutral.

In such a world South and Southeast Asia are in a tough spot.

Will India take the side of the US in such a divided world?  India’s unwillingness to condemn Russia at the UN last week suggests that for the US,  India is an unreliable ally. 

On the flipside, the US will not likely be prepared to give much support and certainly not troops in the event of war breaking out along the Indian-Chinese border.

The events in Ukraine and Afghanistan have demonstrated the inability of the US to project power in support of another country. 

This division of the world may cause large changes in the flows of gas and oil. All else flows from there.

In South Asia, it is increasingly a battle between Indian and Chinese influence.

Only Bangladesh has managed to stay neutral.

To remain so will in future be a continuing and harder challenge.

Forrest Cookson is an economist who has served as the first president of AmCham and has been a consultant for the Bangladesh Bureau of Statistics.