2.7 International Reserves and Risk Management

The CBRT holds international reserves in support of a range of objectives that include assisting the government in FX-denominated domestic and foreign debt servicing, maintaining adequate FX liquidity against external shocks, supporting monetary and exchange rate policies, and enhancing market confidence. The CBRT’s reserve management practices are governed by the CBRT Law No. 1211. Pursuant to this law, international reserves are managed by the CBRT in consideration of the three priorities as investment safety, liquidity, and return, respectively. Accordingly, the objective of management of international reserves is to generate returns under the constraints of protecting capital and providing the necessary liquidity, with the ultimate aim being the prudent management of reserves as the country’s national wealth.

The CBRT’s institutional decision-making framework for reserve management has a three-tier hierarchical structure. Firstly, in line with the duties and powers entrusted by the CBRT Law No. 1211, the Board, as the Bank’s top decision-making authority, sets the general investment criteria for reserve management by approving the Guidelines for Foreign Exchange Reserve Management and the Guidelines for Gold Reserve Management (the Guidelines). The decisions made by the Executive Committee or the Governor, who are assigned by the Board to take the decisions regarding the implementation, in line with the Guidelines, constitute the second tier of the institutional decision-making. At this point, a benchmark portfolio that reflects the CBRT’s investment strategy and general risk tolerance for the relevant year is determined upon the approval of the Executive Committee. The third and final tier of the institutional decision-making process is the implementation of reserve management practices within the preferences and constraints specified by the Guidelines and the benchmark portfolio. In line with the best practices, reserve management activities are carried out within an organizational structure based on segregation of duties. Accordingly, reserve management activities are carried out by the Reserve Management Division of the Markets Department, while related risk management activities are carried out by the Corporate Risk Management Division of the same department.

Subject to the objectives, constraints and limits set by the Guidelines and the benchmark portfolio, transactions that can be conducted are listed as: FX buying-selling transactions in international markets, FX deposit transactions, securities buying-selling transactions, repo and reverse repo transactions, securities lending transactions, and derivatives transactions. Regarding the management of the CBRT’s gold reserves of international standard, outright purchase and sales of gold, gold deposit transactions, gold currency swaps, location swaps and physical gold transfer transactions can be carried out.

Management of risks that the CBRT may be exposed to during the conduct of its reserve management operations begins with the determination of the benchmark portfolio. Reflecting the CBRT’s preferences for strategic asset allocation, the benchmark portfolio consists of target currency composition, target duration and limits of deviation from these targets, maximum permissible transaction limits and the investment universe representing the eligible transaction types, and countries and instruments to invest in. Accordingly, once the currencies, instruments and maturities to be employed in reserve management are set, the expected return and the financial risks involved are identified to a large extent.

In 2023, global economies and financial markets were mainly affected by monetary tightening policies implemented by major central banks in the face of growing inflationary pressure and expectations regarding these policies as well as by geopolitical developments, with the Russia-Ukraine war most prominent. Increased demand after the pandemic, the unfavorable course of climate conditions, and supply-demand imbalances caused inflation to remain elevated around the globe in 2023 as in 2022. Accordingly, in 2023, major central banks further tightened their monetary stances and carried on with rate hikes they started in 2022. While rapid and large rate hikes brought down inflation and inflation expectations on the one hand, they triggered concerns over a global recession on the other hand. Throughout 2023, global economic growth was adversely affected by the negative impact of rate hikes on production and demand, governments’ gradual withdrawal of the financial support they provided during the pandemic to secure fiscal discipline, China’s lower-than-expected economic growth due to the deflation process and the housing sector crisis in the country, and the geopolitical developments in Eastern Europe and the Middle East. However, as major economies were generally more resilient to these factors than expected, a global economic recession was avoided in 2023 and the recovery in global economic activity continued, albeit at a slower pace, despite having remained below the pre-pandemic levels. As of the second half of the year, due to the fall in inflation and possible adverse effects of rate hikes on economic growth, expectations started to dominate the financial markets that the rate hike cycle would come to an end in the USA and Europe, and rate cuts would begin in the first half of 2024. Accordingly, returns in the financial markets were shaped by these expectations. Against this backdrop, 2023 was marked by high economic uncertainties and financial volatility.

The above-mentioned developments shaped the CBRT’s reserve management strategies in 2023. Accordingly, in 2023, which was marked by high global economic and financial risks, reserve management activities continued to be carried out in line with the safe investment, liquidity, and return priorities.

In 2023, the CBRT continued its strategy to strengthen reserves as long as market conditions allowed, while the monetary tightening and steps to simplify the macroprudential framework also supported the upward trend in reserves. The CBRT’s international reserves rose by USD 12.3 billion from the previous year to USD 141.1 billion as of 29 December 2023. Of this total, foreign currency reserves accounted for USD 92.8 billion and gold reserves for USD 48.2 billion. Making up 34.2% of total international reserves, the CBRT’s gold reserves of international standard amounted to 726.4 tons as of 29 December 2023 (Charts 2.7.1 and 2.7.2).

Chart 2.7.1: CBRT’s FX and Gold Reserves Between 2001 and 2023 (USD Billion)

Source: CBRT

Chart 2.7.2: CBRT’s FX and Gold Reserves in 2023 (USD Billion)

Source: CBRT