Divide Forex Reserve Into Two Components

The United States (US), European Union (EU) and several countries have imposed a raft of punitive measures on Russia for invading Ukraine. One of the more serious forms of sanctions has been the freezing of the Russian central bank’s assets held in foreign-denominated currencies. When a country earns more foreign exchange (forex) than it spends, it moves the surplus into its reserve account for future contingencies. These reserves are not held in physical currency, but in different forms of financial assets such as gold and debt instruments (bonds and bills) of foreign governments. Countries prefer to invest in currencies that are liquid (easily convertible), widely accepted and trustworthy. The US dollar fits all these criteria.