Gold and foreign currency reserves of the Central Bank - what are they stored in?

О foreign exchange reserves are often talked about in the news and in interviews with politicians and economists. Such popularity of foreign exchange reserves is due to the fact that they play a huge role in managing a country's economy. They can be compared to personal savings, which act as a safety cushion: they allow us to survive difficult periods without shocks and make financial and economic policies more flexible in favorable times.

If we follow the formal definition, foreign exchange reserves are the official gold and foreign currency reserves of central banks and treasuries. However, reserves are not kept in the form of banknotes and gold bullion "in storage", as it is not only inefficient but also risky. In order to preserve and multiply funds of reserves, they are invested in various assets. In this article we will talk about what these assets are and what the Central Bank is guided in their choice.

Structure of gold and foreign exchange (international) reserves

If we analyze the statistics and summarize the currently available information on the storage of foreign exchange reserves, it turns out that it is mainly carried out in the following types of assets:

— золото;
— cпецифические активы International Monetary FundThe IMF's Special Drawing Rights, or SDRs, and IMF reserve positions;
— валюта (в прямом смысле) на банковских счетах;
— ценные бумаги (как государственные, так и негосударственные);
— банковские депозиты;
— сделки РЕПО (покупка/продажа ценных бумаг с обязательством обратной продажи/покупки).

The last four items on this list are often combined and referred to as foreign exchange reserves. Despite the fact that formally there are other assets (securities, funds on bank deposits and repo transactions) in addition to currency in the literal sense, they are united by the fact that they are all denominated in currency. That is why they are collectively called foreign exchange reserves.

Usually statistical data on international reserves are given in U.S. dollars, for which purpose all assets in the reserves are recalculated at their market prices exactly in dollars. According to the Central Bank, as of January 1, 2009, the amount of Russia's international reserves was 1.4T427 bln, of which over 96% was the foreign currency part. The distribution by type of assets is shown in Chart 1:

It should be noted that the proportion of reserves that the Central Bank invests in a particular type of assets changes from time to time. In doing so, the Central Bank is guided by the objectives of its current policy. Thus, in good times the Central Bank tries to invest in more profitable assets and in bad times - in more liquid assets, i.e. those, which are quickly convertible into money. Separately, it should be said that in choosing both suitable types of assets and specific securities or transactions within each type, the Central Bank is guided by legal restrictions. These restrictions require that invest the funds of foreign exchange reserves only in highly reliable securitiesThe probability of non-payment is minimal.

More about the currency part of the reserves

Except for the distribution by type of asset, gold and foreign exchange reserves can also be distributed by currency type (although this applies only to the currency part of the reserves). Despite the fact that the currency part of the reserves (or, what is the same, currency reserves) in the statistical data are given in dollars, in fact they may be denominated in different currencies. For example, one part of securities, bank deposits, and repo transactions are denominated in euros, while another part is denominated in US dollarsand the third in Japanese yen, etc. The main such currencies are the U.S. dollar, the euro, the pound sterling, the Japanese yen and the Swiss franc.

Thus, solving the problem of investing the currency part gold and foreign exchange reserves, the Central Bank The Bank of Russia chooses not only in what types of assets to invest them, but also in what currencies these assets will be denominated. The currency reserves (as of January 1, 2009) were distributed by the Bank of Russia as follows: 41.5% are denominated in U.S. dollars, 47.5% in euros, 9.7% in pounds sterling, 1.3% in Japanese yen.

Summary

So, foreign exchange reserves are not held in storage simply in the form of gold and cash. Reserves are invested in various assetswhich can be divided into 3 types: gold, IMF special assets and foreign exchange reserves. In turn, foreign exchange reserves are divided into currency in the literal sense, various securities, deposits and repurchase transactions. Any of the currency assets may be denominated in euros, U.S. dollars, Japanese yen, sterling or Swiss francs.

In deciding which types of assets to invest reserves in, the Central Bank is guided by financial and economic policy objectives, as well as by laws that limit its choices to reliable assets.

For an appetizer

In the article we mentioned that despite all the variety of assets in which reserves can be stored, when summing up the statistical results they are revalued at market prices in U.S. dollars. Market prices tend to fluctuate, and the volume of foreign exchange reserves can fluctuate with them.

It is quite normal that fluctuations can reach a few percent over the course of a week or month, which with more than $400 billion in reserves would result in double-digit changes in dollars. That's why you shouldn't pay much attention when you hear in the news about increase in foreign exchange reserves - it is quite possible that this was the result of a change in the price of gold, while the amount of bullion in the accounts of our state remained unchanged.