After the SWIFT announcement, a more important move came regarding the Central Bank of Russia’s management of its international reserve assets: EU countries banned all transactions with the Russian Central Bank. This is also a strategic intervention as it means the Bank’s external financial assets can be frozen. At the same time, the Central Bank of Russia aims to close the swap transactions channel and limit foreign reserve resources. Reserve management principles are explained on the website of the Central Bank of Russia as follows:
“The Central Bank of Russia carries out operations with foreign exchange assets in the foreign market and gold in the domestic market to manage international reserves.
In the foreign market, the Central Bank of Russia places deposits, buys and sells financial assets, draws up repurchase agreements, carries out other transactions. In the domestic market, the Central Bank of Russia buys precious metals.”
Reserves of the Russian Central Bank… Source: Bloomberg, CBR
If we look at the reserve composition of the Central Bank of Russia; Of the official reserves of 630 billion dollars, 463 billion dollars are in convertible foreign currency. Let’s say the majority of it is dollars. Of course, the importance of the dollar comes from the fact that the control of the world’s reserve money is in the USA. This is why it is of great importance to cut off the Central Bank of Russia from foreign financial transactions. Because most of the foreign reserves are in the G-7 countries. There is the potential for a serious financial lockdown and bank shock if these Russian assets are frozen. 132.3 billion dollars of gold reserves are kept in Russia. The 60 billion dollar renminbi is in China.
Developing countries and Russia’s international reserves and reserve/GDP comparisons… Source: Bloomberg
Russia’s 630 billion dollar reserve is equivalent to 44.32% of GDP, which is the highest reserve adequacy among developing countries. Since the SWIFT restriction will make it difficult to transfer money to a certain extent, it will limit the reserve contribution of trade revenues. Restricting access to reserves is a huge challenge and makes it difficult to defend the ruble. Prolonged sanctions will intensify the need to use reserves. In the 2015 crisis, FX reserves fell below the $300 billion band. At that time, around 100-150 billion dollars are used to finance the economy and control the fluctuations in the foreign exchange markets. If we look at the reserve change in recent years; After the Ukraine crisis in 2014-15 and the economic turmoil that followed, it is seen that the reserves are constantly being reinforced and strengthened. It is important to what extent the volatility of the ruble will disrupt the economic balances. Balancing with interest rates becomes more difficult because the debt profile will suffer non-financial damage due to war and sanctions. It seems that Russia will experience a contraction for a certain period by locking the economy seriously.
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