International reserves as a pillar of policy of BRICS’ central banks amid global geopolitical shocks: VECM-analysis of Brazil and Russia

Amid of 2020-2024 the original BRICS countries have accumulated 72% of the rest of the world international reserves (IR), pushing them towards self-insurance – that is, against the risks of financial liberalization or against domestic economic shocks. Brazil's and Russia's IR have long been used to mitigate domestic economic stress, while external risks have been exacerbated by global geopolitical shocks. The focus of this study is a comparative analysis of IR supply and demand factors (their precautionary and operational functions) using vector autoregressions with error correction (VECM). First, the calculations showed the role external economic factors play in shaping the demand for IR and the supply of IR of the Central Bank of Brazil(CBB) and the Bank of Russia(BR). Then, the factors dominated during of geopolitical shocks (2020-2022 and Q2 2022-2024) so far IR are intended to close the country's external vulnerabilities in stressful situations they are also used for domestic policy. The research can be summarized in the following stages: (1)based on the results of a graphical analysis of the dynamics of external sector indicators in combination with the adequacy indicators of Brazil’s and Russia’s IR, and after procedures for diagnosing the statistical characteristics of data from 2020 to 2024, three groups of IR factors were identified: trade, monetary and debt, which in turn were formed according to the IR functions; (2)the identified non-stationarity of the sample time series predetermined the Engle-Granger method to select the cointegration pairs, the Granger test to check cause-effect relations of time series, the VECM; (3)the cause-and-effect relationships between variables of cointegration vectors showed, for example,that the liquidity buffer of the CBB was sufficient until June 30 2021 for 9 months of export and import settlements, and for 6 months of payments on external obligations until June 30 2022; these are signals of reaction to geopolitical events of the period; (4)cointegration equations VECM showed which variables influenced the Brazil’s IR and Russia’s in the short term, their contribution to the long-term equilibrium of IR in terms of adequacy; the combination of factors determines the speed of IR recovery after an external shock; (5)the resulting test of the reaction of the CBB’s and BR’s IR to changes in the factors themselves established that external risks are transmitted through exports more intensively in both countries.