Dear Zalman,

True, Ma'aser Sheni is for fruit that grows in Eretz Yisrael. But the Gemara is talking about a case where the owner of the Eretz Yisrael fruit and/or his money are now in Bavel. The fruit itself may indeed still be in Eretz Yisrael but he stil wants the fruit to be redeemed on his Bavel money.

According to the Rambam (Hilchos Ma'aser Sheni 4:14) the Chilul may be performed with money in Bavel if the money is a denomination that could be used by the owner in his present location, wherever that may be. According to the Ra'avad (ibid.) and other Rishonim the money in Bavel may be used for Pidyon if it is usable in Bavel regardless of where the owner is. (According to Rashi here, it might also be necessary for the owner to be in Bavel.)

All the best,

Reuven Weiner