Criteria for International Reserves ’ Adequacy : What level of reserves does Ukraine need ?

Discussion of reserves’ adequacy has renewed after financial crises in Asia and Russia. It became evident that large international reserves made countries less prone to crisis. Special attention was paid to the ratio of a country’s external short-term debt to reserves as a very successful marker of potential external vulnerability that generally outperforms other reserves’ adequacy criteria. This paper studies applicability of various reserves’ adequacy criteria to Ukraine as a transition economy with large foreign trade turnover and relatively low external capital flows. It is argued that, despite low capital mobility, a rise of short-term public debt was a crucial factor for Ukraine’s financial crisis in 1998. At the same time, historical data provide no proof for high vulnerability of current account as a source of instability. So, it is stated that debt-related criteria for reserves adequacy could be relevant for Ukraine. This paper provides calculations of the minimal necessary level of international reserves based on benchmarks proposed by Wijnholds and Kapteyn, as well as a discussion of costs of reserves’ holding. 1 The author is thankful to Dr. Ricardo Giucci for the idea of this paper and for support. I also owe Dr. Ferdinand Pavel, Nina Legeida and Boris Dodonov for their very useful comments and suggestions. All mistakes are mine. INSTITUTE FOR ECONOMIC RESEARCH AND POLICY CONSULTING