Reserve currency: who appoints it and what the issuer pays for the status

A reserve currency is a currency that the central banks of other countries hold as part of their international reserves and that parties to foreign trade choose by default for contracts and settlements, even when neither side of the deal is based in the issuing country. The key point of the definition is not the strength of the economy and not "reliability" as such, but the willingness of third parties to accept this currency without negotiating it every time. The status is not conferred by a decision of the issuer and is not revoked by a declaration: it emerges from what the world invoices in, what it borrows in and what it keeps as a buffer against capital outflows.

What exactly makes a currency a reserve currency

The status rests on several pillars, and none of them works alone. There has to be a deep debt market in the currency — a place where a foreign central bank can park a large holding and quickly withdraw it again without a disastrous effect on the price. There has to be free convertibility and no restrictions on taking money out: a reserve that cannot be sold instantly ceases to be a reserve. There has to be a network of correspondent accounts and settlement infrastructure through which a payment reaches its recipient. And there has to be predictable monetary policy — not necessarily tight, but explicable.

An important consequence follows: a currency's share of world trade and its share of reserves diverge. A country can export a great deal and still not have a reserve currency, because its debt market is narrow and capital movement is restricted. The reverse also happens: a currency remains a reserve currency through the inertia of the network effect for longer than the issuer's economic weight justifies. Changing the currency of contracts is expensive — agreements have to be rewritten, hedging rebuilt, accounting staff retrained — and that expense is the main mechanism protecting the incumbent's status.

What the issuer pays

The benefits are obvious: cheap debt, demand for its liabilities from foreign central banks, the ability to borrow in its own currency and take on no currency risk. The costs are less visible.

For the world to be supplied with your currency, you have to give it away — that is, persistently buy more than you sell, or export capital. Running an external deficit for a long time while preserving faith in the stability of your currency is difficult: this is the Triffin dilemma, formulated back in the era of the Bretton Woods system and turned into a practical problem by 1971, when the link to gold was severed. The second bill is the loss of part of the control over your own exchange rate: it starts to be determined by safe-haven demand rather than by the state of your economy. The third is that the issuer's exporters live with a chronically overvalued currency.

What matters here for a Russian investor

The practical interest lies not in which currency will "win", but in which currency your own risks pass through. It is useful to break them down along different axes, and the Russian terms here are not synonyms.

The settlement currency is the one in which payment under a contract is actually made. The functional currency is the one in which a company really earns its money and keeps its books, and it may differ from the reporting currency. The base currency and the quote currency are about how a currency pair is built, not about reliability: reversing the order in the quote flips the sign of your position. These distinctions are worked through in the site's glossary, and each has a separate article — for example, settlement currency and functional currency.

For a portfolio this means something simple. An exporter's revenue on the equity market depends on the currency of its contracts, not on where the issuer is registered: a change of settlement currency alters the timing of cash receipts, the cost of the hedge and, ultimately, the dividend base — its schedule is conveniently tracked in the payout calendar. On the debt side, a rouble issue and a foreign-currency issue by the very same borrower are two different risks; how rouble government debt is structured is described in the OFZ section, and a general overview is in the bonds section.

What should not be confused with a reserve currency

The digital form of money has no direct bearing on reserve status. The digital rouble remains a rouble — a liability of the central bank in a new technical wrapper, and this is examined in the piece on the digital rouble. Digital currency under Russian law is a different category altogether: property with no obligated party, see legal status. Neither becomes a reserve of a foreign central bank of its own accord: what becomes a reserve is what third parties accept and what can be sold quickly.

A candid caveat about the data

The site does not keep in its database the currency composition of international reserves, the shares of currencies in global payments or the size of government debt markets — these are external statistics from central banks and international organisations, and they cannot be inserted here by a directive. That is why the text contains no shares and no volumes at all: any specific values must be taken from the publications of the Bank of Russia and the IMF as of their dates. What the site does show is Russian instruments and the events affecting them: market news and the corporate events calendar.