International liquidity as a benchmark for managing the financial security of the state

Abstract

The study aims to substantiate the significance of a state’s international liquidity as a critical benchmark for managing financial security, with a focus on its role during crises. It is contributed to the literature by analyzing the interplay between international liquidity and financial security, using Ukraine’s experience under full-scale military invasion, and evaluating the effectiveness of foreign exchange reserves in mitigating external shocks. The scientific novelty lies in highlighting the conceptual tension between stock and flow approaches to liquidity measurement and empirically identifying currency leakage into informal savings as a factor undermining reserve efficacy. The “stock–flow” dichotomy solves by the majority of scholars in a flow-based understanding, emphasizing by its dynamism and inherent to both money and financial assets. It is justified two key risks in the deployment of foreign exchange reserves as an aspect of state financial security management: outflows of foreign currency assets into non-institutional savings (as it is in Ukraine) and structural inadequacy in terms of reserves main use. Practically, the findings emphasize the need for optimizing reserve structures and enhancing liquidity management to bolster financial security in existential shock terms. It is demonstrated the incretion in foreign cash outside the banking system of Ukraine by three times for every additional dollar in net foreign exchange interventions of the central bank. While at the moment the international reserves’ capacity to cover imports and short-term debt is improving, it still raises reasonable concerns. The findings underscore the urgency of refining reserve structures, optimizing resource use, and strengthening foreign exchange oversight, offering actionable insights for policymakers. The study concludes that international liquidity is pivotal for state financial resilience, yet its effectiveness in Ukraine is hampered by inefficiencies, such as outflows to non-institutional savings, despite improved reserve coverage of imports and debt, necessitating further research into these trends.