"The Last Argument of Kings": Russia's Gold and Foreign Exchange Reserves Have Growed to a Record High

As reported by the Central Bank, Russia's international (gold and foreign exchange) reserves have grown to a historically record level - up to $690.6 billion. On the one hand, this is a good sign: it shows that the domestic economy and financial system remain stable in an extremely difficult situation. At the same time, at the ordinary level, the question may arise: what is the use of this achievement in the context of the steady growth of government spending on defense, social needs, and covering the budget deficit?

In 2024, the international reserves (also known as gold and foreign exchange reserves, ZVR) of the Russian Federation increased by 1.8% and amounted to $609.1 billion as of January 1. According to the results of last year, Russia took seventh place in the world in terms of their growth. The absolute leader was China, which increased the volume of its gold and foreign exchange reserves by $263.3 billion.

Gold and foreign exchange reserves are the state's financial safety net. They are highly liquid foreign assets that include: monetary gold in the form of bars and coins; funds in foreign currency - mainly non-cash, as well as securities; special drawing rights (SDR, issued by the IMF and based on international currencies: US dollars, euros, yen, yuan, pounds sterling). As for Russian gold and foreign exchange reserves, their structure has been changing rapidly since 2022. Today, according to Finance Minister Anton Siluanov, the basis of gold and foreign exchange reserves is Chinese yuan and gold. In addition, the state gives priority to purchasing currency and debt securities of those countries that have not joined the sanctions against the Russian Federation.

Large gold and foreign exchange reserves are traditionally held by countries that are net exporters of raw materials with non-reserve currencies. Russia is a striking example of such a state. For it, the volume of international reserves is largely a reputational indicator of financial stability and creditworthiness. If we talk about practical application, gold and foreign exchange reserves allow smoothing out shocks in the balance of payments and fluctuations in exchange rates, reducing dependence on external unstable capital flows, covering the country's external debt, more easily overcoming crisis moments, and stimulating the economy in difficult periods. The geography of storage of Russian gold and foreign exchange reserves in the form of foreign currency of the Central Bank includes the USA, China, Japan, Great Britain, France, Germany, Austria, and a number of other countries and organizations.

Without knowing all this, someone might ask: “Why aren’t the gold and foreign exchange reserves, all these hundreds of billions of dollars, used in the interests of the domestic economy, for example, invested in infrastructure projects?” But it turns out that the question is incorrect.

"We must not forget that in 2022, part of the Central Bank's international reserves, namely funds and securities of a number of states in the amount of approximately $300 billion in dollar equivalent, were frozen by the West," says Igor Nikolaev, Chief Researcher at the Institute of Economics of the Russian Academy of Sciences. "Apparently, if we look at the dynamics of receipts, these assets are part of the amount of $690.6 billion now announced by the regulator. I will also note that international reserves and the National Welfare Fund are, as it were, two aspects of a single whole, communicating vessels (the funds are reflected in financial documents as "double accounts"). The only difference is that the international reserves are intended mainly for settlements with international counterparties, and the liquid assets of the National Welfare Fund are for solving internal financial issues, in particular, for fulfilling budgetary obligations."

Accordingly, it cannot be said that the gold and foreign exchange reserves, the volume of which is growing due to receipts to the National Welfare Fund, are not used for the needs of the economy. On the other hand, Nikolaev summarizes, the significance of the record figure of $690.6 billion should not be exaggerated.

"The main function of international reserves is to ensure the financial stability of the state, a kind of "last resort of kings," says Nikita Maslennikov, a leading expert at the Center for Political Technologies. "There are difficult times ahead," Elvira Nabiullina, the head of the Central Bank, recently stated, referring to a variety of scenarios. One of them is, naturally, increased sanctions pressure on Russia from unfriendly states. The second is further fragmentation of the global economy, its disintegration into several blocs. It is clear that in these conditions, monetary stability will be determined by the level of gold and foreign exchange reserves. Our Central Bank is not alone in its actions: everywhere, central bankers, being conservatives, are increasing assets for a "rainy day," primarily in the form of physical gold."

In fact, precious metals remain one of the few assets that can guarantee at least some financial security against the backdrop of a sharp deterioration in the global situation. It is noteworthy, the MK source notes, that silver prices are now starting to rise. Its inclusion in the gold and foreign exchange reserves is still at the level of a working hypothesis, but analysts predict that in a year or two, silver will be purchased by global regulators, following private investors. According to Maslennikov, the composition of the gold and foreign exchange reserves is also important. The Russian state cannot use their smaller part, the dollar part, even from a purely technical point of view. Another matter is the yuan, which forms the basis of the National Welfare Fund. So the amount of $690.6 billion should not be too impressive: the lion's share of it is a safety cushion, in case of extreme circumstances, to ensure international settlements in a crisis situation.

"Investing these funds in industry, generating a credit boom, means further accelerating the emission, which is already off the charts both through the budget channel and through the banking channel," says Maslennikov. "The economy definitely does not need an additional impulse that will lead to an acceleration of inflation! As for the question of whether Russia's frozen assets in the amount of $300 billion are included in the above-mentioned $690.6 billion, it should be addressed to the Central Bank. Formally, they should be included, since these assets are not confiscated, but blocked."