Of course it does not 'convert'!  It shall not!  BLOB data are binary (non-encoded) data.  Store you data in a TEXT column if you want encoding to apply! This is not a bug (as you report it). But I am not able to understand how a BLOB in the comes a varchar in the dump. 
Anyway it also looks like you are using a very old SQLyog version.  Which one? It looks like a pre-6.0 version (where we did not fully support unicode).