Financial shield of Ukraine: the role of gold and foreign exchange reserves in the struggle for stability

Gold and currency reserves are a strategic financial resource of any state, especially in conditions when the country is experiencing instability or fighting for its existence. For Ukraine, gold and foreign exchange reserves have become a real protective mechanism that helps keep the economy afloat in the conditions of a long military conflict, sanctions pressure and global economic turbulence. Each hryvnia, each gold bar in these reserves is an important lever of influence on foreign markets, as well as a guarantee of financial independence. However, reserves are not unlimited. A reasonable question arises: exactly how much money does Ukraine have in its gold and currency reserves, what are they spent on and how long can they serve as a stabilizer?

Components of reserves of the National Bank of Ukraine

As of August 1, 2024, the international reserves of the National Bank of Ukraine amounted to 37.232 billion US dollars. During the current year, the volume of reserves fluctuated between 37 and 43.8 billion dollars. The lowest figure was recorded in February, when the reserves decreased to $37.06 billion, and they reached the highest value in March, approaching $43.8 billion. However, after March, there is a tendency to gradually decrease reserves.

The main part of Ukraine’s gold and currency reserves are securities, the total amount of which is 27.677 billion dollars. In addition, reserves include cash, correspondent accounts and deposits totaling $7.486 billion, as well as monetary gold valued at $2.068 billion.

Regarding the currency composition of reserves, the largest share is the US dollar, the volume of which is equal to 33.483 billion dollars. Other currencies, such as the euro, the British pound, the Japanese yen and the Chinese yuan, occupy much smaller positions in the reserve structure.

The investment portfolio of securities included in the reserves consists primarily of AA-rated assets totaling $24.456 billion. A smaller portion of the portfolio consists of assets with the highest AAA rating, equal to $3.152 billion, while the smallest share is represented by A-rated securities, which amount to $0.07 billion. Such a structure of reserves reflects a cautious management strategy aimed at investing in high-value and liquid assets, as emphasized by the NBU.

It should be noted that most of the NBU’s international reserves are invested in debt securities of reliable sovereign issuers, such as the United States, or are kept in accounts with international financial institutions and reliable banks. Almost all of them are represented by assets of high quality and liquidity, which allows them to be quickly used for currency interventions.

What are state reserves spent on?

During the war, the National Bank of Ukraine faces a number of difficult challenges, the most important of which is ensuring the stability of the national currency, the hryvnia. In the conditions of a military conflict, when the economy is under pressure, this aspect becomes critical for maintaining the economic stability of the state. The gold and currency reserves accumulated during the previous years are a key tool in achieving this goal.

The main task of the NBU during the war is to protect the national currency from excessive devaluation, which can lead to serious economic and social consequences. At the same time, the war significantly reduces confidence in the national currency, which creates additional pressure on its exchange rate. Economic activity in the country is decreasing, the volume of exports is decreasing, and imports, on the contrary, are increasing due to the increased need for military and humanitarian goods. All this leads to a shortage of currency in the domestic market.

To overcome this deficit, the NBU conducts currency interventions — the sale or purchase of foreign currency on the interbank market. These operations allow the bank to smooth out exchange rate fluctuations, ensuring the stability of the hryvnia. Such stabilization is critically important, as sharp exchange rate fluctuations can lead to rising inflation, lowering the standard of living of the population and creating additional risks for the economy.

Also, one of the important aspects is that in the current conditions, the gold and currency reserves of Ukraine are practically not used to service the foreign debt. A significant part of Ukraine’s foreign debts was restructured, which made it possible to significantly reduce the pressure on reserves in terms of their use to repay debt obligations.

Debt restructuring is extremely important in times of war, as it allows the country to postpone payments on external obligations and direct available resources to other critical needs. This decision allowed the NBU to focus its efforts on maintaining internal financial stability, and not on repaying debts, which would be a heavy burden in the conditions of a war economy.

Optimal level of reserves

The question of the optimal level of gold and currency reserves is one of the most difficult and at the same time the most important aspects of the economic policy of Ukraine, especially in wartime conditions. The assessment of this level depends on many factors, among which the most important are the volumes of exports and imports, the macroeconomic situation in the country, as well as international economic and political trends.

Gold and currency reserves serve as a kind of financial shield that protects the country from external economic shocks. In the conditions of a military conflict, when exports decrease and imports of critically needed goods increase, this shield becomes especially important. The current volume of Ukraine’s reserves allows to cover the costs of critical imports for five months, even under conditions of complete absence of exports. Although this is an abstract indicator, it gives an idea of ​​the potential stability of the economy in the face of extreme scenarios.

Usually, the optimal level of reserves is considered to cover the country’s imports for three months. This level provides the minimum necessary reserve in case of a sharp decrease in income from exports or other foreign exchange sources. In the case of Ukraine, the current level of reserves exceeds this minimum standard, which is a positive signal for financial markets and international partners.

It is also worth considering that the issue of the optimal level of reserves is dynamic and changes depending on external and internal factors. For example, a sharp decline in exports due to armed conflict or economic sanctions may require a significant increase in reserves to maintain stability. On the contrary, stable economic development and export growth allow the country to maintain a lower level of reserves without losing financial security.

In addition, there are other criteria that influence the determination of the optimal level of reserves. These may be risks associated with possible financial crises, the need to ensure the stability of the national currency, as well as the country’s ability to attract international loans. All these factors are taken into account when planning and managing reserves.

Long-term risks and sustainability of reserves

However, maintaining such a level of reserves in the conditions of prolonged military conflict and economic instability is associated with a number of risks. One of them is that the long-term use of reserves to support the exchange rate can lead to their depletion. Although the NBU’s foreign exchange interventions help to stabilize the hryvnia in the short term, they may negatively affect the financial stability of the country in the long term.

In addition, if the war drags on or the macroeconomic situation worsens, the reserves may decrease to a critical level, which will make it difficult to maintain a stable exchange rate of the hryvnia. This, in turn, can lead to an increase in inflation, which will have an extremely negative effect on the standard of living of the population and on the general economic development of the country.

In addition to the risk of depletion of reserves, there are also other threats associated with their use. One of them is the risk of lack of funds for emergency needs, such as the import of critical goods, in particular, energy resources, medical supplies or food. If the reserves are spent to support the national currency, this may limit the government’s ability to respond quickly to such needs, creating an additional risk to national security.

Another important aspect is the country’s ability to attract international financial assistance. A decrease in reserves can negatively affect the confidence of international partners and creditors, which will make it difficult to access new loans or grants. This may jeopardize the stability of public finances as a whole. Therefore, the National Bank of Ukraine should approach the use of reserves very carefully, trying to find a balance between short-term stabilization of the exchange rate and long-term financial stability. On the one hand, maintaining the stability of the hryvnia is critically important for maintaining economic and social stability in the country. On the other hand, the depletion of reserves can lead to the fact that the country will find itself in an even more difficult situation in case of further deterioration of economic conditions or protracted conflict.

Therefore, the gold and currency reserves of Ukraine today are not only a financial shield, but also the last line of defense against the economic chaos that can cover the country in case of exhaustion of these resources. Long-term use of reserves to support the hryvnia is a game with fire, where the future of economic stability is at stake. At a time when every billion in reserves is worth its weight in gold, the country must choose between current stability and the ability to weather a long-term storm. The NBU is facing a difficult choice: how to keep the ship afloat without losing all the fuel halfway. And this choice can become decisive in the struggle for the economic survival of Ukraine.

Oksana Ishchenko