Geopolitical shifts and the evolution of reserve management: adapting to a new reality

The opinions expressed in this chapter are solely those of the author, and do not represent the official position of the Central Bank of Brazil.

The landscape of international reserve management has undergone a fundamental transformation. What was once primarily a technical exercise centred on balancing safety, liquidity and returns within a relatively stable global order, has evolved into a complex endeavour where geopolitical risk has emerged as a central consideration. As Canadian prime minister Mark Carney stated at the World Economic Forum in January 2026, “we are in the midst of a rupture, not a transition”. This observation, though made in a broader political context, precisely captures the challenge facing central banks today as they navigate an increasingly fragmented and uncertain global environment.

For decades, central bank reserve managers operated within a framework of increasing globalisation, integrated financial markets and a relatively predictable geopolitical environment. The focus was on optimising portfolios within the traditional trinity of reserve management principles: safety, liquidity and return. However, recent years have revealed the limitations of this approach. The freezing of Russian central bank assets following the invasion of Ukraine, escalating tensions between major powers, conflicts in multiple regions and the weaponisation of financial infrastructure have forced a fundamental reassessment of how reserves should be managed.

The shifting geopolitical landscape

The current geopolitical environment is characterised by multiple, overlapping tensions that directly affect financial markets and reserve management strategies. The war in Ukraine continues to reshape European security architecture. Middle Eastern hostilities, including the ongoing Israel-Gaza conflict and war with Iran, create volatility in commodity markets and pose risks to global trade routes. Potential conflict over Taiwan represents another significant geopolitical risk to global financial stability, given the region’s centrality to global supply chains and technology production. Meanwhile, unconventional developments such as pressure on territories such as Greenland add new dimensions of unpredictability to the international system.

The post-Cold War period of relative great power peace appears to be ending, replaced by an era of renewed great power competition. This shift carries profound implications for financial markets and reserve management. Great powers have begun using economic integration as weapons, tariffs as leverage, financial infrastructure as coercion and supply chains as vulnerabilities to be exploited.

Financial market implications

Geopolitical transformation is generating significant ripple effects across financial markets. One of the most consequential trends is de-globalisation – or, more accurately, regionalisation. Global supply chains, optimised for efficiency over decades of integration, are being reconfigured to prioritise security and resilience. This restructuring inherently reduces efficiency, potentially leading to higher costs and inflationary pressures. Central banks must now factor in the possibility that inflation may prove more structurally elevated than in the pre-pandemic era, not merely because of monetary policy, but also because of fundamental changes in how goods are produced and traded.

Equally significant is the deterioration of fiscal positions across advanced economies. The Covid-19 pandemic triggered an unprecedented peacetime fiscal expansion. To this already challenging fiscal baseline, two structural pressures are now being added. Ageing demographics are discreetly placing increasing strain on pension and healthcare systems across developed economies, a trend that will intensify over the coming decades. Simultaneously, the end of the ‘peace dividend’ that followed the Cold War is driving a resurgence in defence expenditures. Germany plans to more than double its defence budget, from €86 billion ($100 billion) in 2025 to €162 billion by 2029.¹ The US may see an even more dramatic increase, as president Donald Trump suggested plans to boost annual defence spending by more than 50% to $1.5 trillion for 2027. These are not temporary adjustments, but likely represent a structural shift in government spending priorities.

For financial markets, this fiscal deterioration has important implications. After years in which monetary policy dominated market dynamics – particularly following the extensive use of quantitative easing after the global financial crisis – fiscal policy has returned to prominence. Group of 10 countries face worsening fiscal outlooks with limited prospects for improvement. This environment of expanded government borrowing, combined with geopolitical uncertainty, is likely to keep sovereign bond yields elevated and potentially more volatile than the pre-pandemic period.

The fragmentation of global trade is creating winners and losers in unpredictable ways. Countries well positioned in reconfigured supply chains may gain unexpected advantages, while others may see their competitive positions erode. This creates both analytical challenges and strategic opportunities for reserve managers.

The integration of sanctions as a routine tool of foreign policy has added another layer of complexity to financial markets. The comprehensive sanctions imposed on Russia demonstrated both the power and the limitations of financial weaponisation. While sanctions succeeded in imposing economic costs, they also accelerated the search for alternative payment systems, reserve currencies and financial infrastructure that could operate outside western control. This dynamic is creating parallel financial ecosystems that, while still modest in scale, represent a fundamental change from the highly integrated global financial system of the early 21st century.

The gold response

The clearest and most immediate response to heightened geopolitical risk has been the sustained surge in central bank gold purchases. From 2022 to 2024, central banks purchased over 3,220 tonnes of gold – more than double the amount purchased in the three years from 2014 to 2016. In 2025, despite elevated prices, central banks added 863 tonnes, maintaining historically elevated levels of accumulation.²

This buying has been geographically diverse, with China, Poland (approaching 30% of reserves), the Czech Republic, Kazakhstan, India and numerous emerging market central banks maintaining consistent purchases, often citing national security concerns.

According to the World Gold Council’s 2025 survey, 95% of central banks expected global official gold reserves to increase over the subsequent year – the highest level of optimism in the survey’s eight-year history. More significantly, 43% of central banks indicated plans to increase their own gold holdings, up from 29% in 2024, with no-one anticipating a reduction.

The post-Cold War period of relative great power peace appears to be ending, replaced by an era of renewed great power competition

The motivations behind this gold accumulation are clear. Gold offers what no other reserve asset can: the absence of counterparty risk and immunity from seizure or sanctions based on jurisdictional issues. Research from the European Central Bank³ notes that central banks hold gold primarily as a portfolio diversifier to hedge against economic risks, including inflation and cyclical downturns, but secondarily as protection against geopolitical risk. The correlation between gold prices and real yields, negative for years, broke down following Russia’s invasion of Ukraine, suggesting that geopolitical factors have become a dominant driver of gold demand.

Beyond accumulation, there is a notable trend toward repatriation of gold reserves. Several central banks have moved portions of their gold holdings from foreign custodians to domestic storage, reflecting concerns about potential asset-freezing or seizure. The World Gold Council’s 2025 survey found that 59% of respondents reported some domestic storage of gold reserves, compared with 41% in 2024. This shift represents a tangible manifestation of heightened concerns about jurisdictional risk.

More recently, other precious metals have begun to attract attention. Silver prices have been appreciating significantly, potentially reflecting a broader search for physical assets amid concerns about currency devaluation driven by fiscal deterioration. While gold remains the primary focus, the widening interest in precious metals more broadly suggests that central banks and investors are seeking hedges against a range of scenarios that may unfold in an uncertain geopolitical environment.

Beyond gold: broader portfolio implications

However, the implications of geopolitical shifts extend well beyond increased gold holdings. Reserve managers must now consider several additional dimensions in their strategic asset allocation (SAA) frameworks.

First, heightened geopolitical risk implies greater volatility and wider trading ranges for asset prices. Research from the International Monetary Fund⁴ demonstrates that major geopolitical risk events can trigger significant declines in stock prices and raise sovereign risk premiums. These findings underscore the need for central banks to build larger buffers and prepare for periodic market dislocations.

Second, geopolitical tensions are driving fragmentation and realignment of capital flows. The assumption of frictionless global capital markets that underpinned much strategic thinking in recent decades no longer holds. Countries are increasingly making financial decisions based on geopolitical alignment, rather than purely economic optimisation. This fragmentation complicates reserve management by potentially reducing liquidity in certain markets and creating new corridors of capital flow that may not follow historical patterns.

Third, there is likely to be continued evolution in the relative weights of strategic assets in reserve portfolios. The current environment features an unusual paradox: excessive concentration of global investment in US assets, particularly in technology and artificial intelligence sectors, occurring simultaneously with concerns about US dollar dominance and fiscal sustainability. Strong demand for US technology companies has provided support to American assets, yet this has not been sufficient to prevent dollar depreciation and an increase in currency hedging. After many years of appreciation, the dollar appears to have entered a period of adjustment, weakening against other G10 currencies. As an example, Amundi, the largest asset manager in Europe, is reducing its US exposure and recommending clients to follow, as its chief executive said in an interview with the Financial Times.⁵ A further consideration is the compositional shift among US asset buyers, with private investors gaining ground relative to institutional participants. If continued, this trend could lead to increased volatility in this market. This creates both challenges and opportunities for reserve managers.

It is important to emphasise that so-called de-dollarisation does not signal the end of the dollar’s role as the primary reserve currency. The US dollar still accounts for nearly 60% of global reserves, and is used in 90% of foreign exchange transactions.⁶ No alternative currency or asset possesses the combination of deep markets, institutional credibility and global acceptance necessary to displace the dollar. However, the era of unquestioned dollar dominance may be yielding to one of greater – though still modest – diversification.

Fourth, diversification itself takes on new meaning in a geopolitically uncertain environment. It is no longer sufficient to diversify across currencies and asset classes – reserve managers should also diversify across counterparts and custodians. The goal is to reduce the risk that geopolitical developments could render a significant portion of reserves inaccessible or subject to legal challenges. This multi-dimensional approach to diversification represents a significant evolution from traditional frameworks.

Structural and operational adaptations

Responding effectively to this new environment requires not just portfolio adjustments, but also structural and operational changes within central banks. Several areas require particular attention.

Strategic asset allocation processes should explicitly incorporate geopolitical risk analysis. This means moving beyond traditional financial metrics to include systematic assessment of political stability, jurisdictional risks and potential sanction scenarios. The challenge lies in quantifying inherently qualitative risks. Unlike credit risk or interest rate risk, geopolitical risk does not lend itself easily to probabilistic modelling. Events like the invasion of Ukraine or the weaponisation of financial infrastructure are, by nature, low-probability but high-impact occurrences that standard value-at-risk models fail to capture adequately. This suggests the need for complementary approaches, including scenario analysis, reverse stress-testing (asking what events could cause the portfolio to fail its objectives), and qualitative assessment frameworks that can incorporate expert judgement alongside quantitative metrics.

The traditional emphasis on safety, liquidity and returns requires recalibration, with greater weight on the security pillar and increased allocation to defensive assets. This does not mean abandoning return objectives, but rather recognising that safety considerations have become more complex and may sometimes take precedence, particularly for reserves deemed most critical for crisis response.

This recalibration may manifest in several ways. Central banks might maintain a larger proportion of reserves in highly liquid, unencumbered assets that can be accessed immediately regardless of geopolitical conditions. There might be increasing demand for supranational money market instruments, as these would be protected from specific country risks. If that occurs, a positive externality would be central banks investing in institutions with multilateral focus. They also might reduce concentration in any single jurisdiction or counterparty, even if this comes at some cost to returns. Weighting security, they might place greater weight on physical assets like gold that cannot be frozen or seized through legal mechanisms. Each of these adjustments involves trade-offs, but the changing risk environment may justify accepting somewhat lower returns in exchange for enhanced security and liquidity.

Geographic diversification of reserve portfolios should be enhanced, although this must be done carefully. The goal is not to abandon major markets, but rather to develop exposure to emerging corridors of trade and investment that may become more significant as supply chains reconfigure. For instance, certain economies may benefit disproportionately from supply chain adjustments, creating new opportunities for prudent diversification while contributing to enhanced resilience. Emerging markets can offer good alternatives, but at marginal sizes for large portfolios.

Great powers have begun using economic integration as weapons, tariffs as leverage, financial infrastructure as coercion and supply chains as vulnerabilities to be exploited

Geopolitical pressures are also accelerating technological innovation in financial infrastructure. Distributed ledger technologies, tokenised settlement assets and fast-payment systems offer not just efficiency gains, but also alternative channels that operate outside traditional correspondent banking frameworks. Some central banks and regional blocs view these innovations as opportunities to reduce exposure to geopolitical leverage from dominant jurisdictions, potentially limiting the reach of certain sanctions regimes. This dynamic suggests that geopolitical considerations may drive not only portfolio diversification, but also the development of new market infrastructure models designed to enhance monetary and financial sovereignty.

Liquidity management requires a more dynamic approach. Central banks need mechanisms that permit rapid response to tail events. This implies more frequent stress-testing, with scenarios that explicitly model geopolitical shocks and their potential market impacts. It also suggests the value of maintaining access to multiple sources of liquidity across different jurisdictions and the potential benefit of pre-established credit lines or swap arrangements that could be activated quickly if needed.

The 2020 experience with Covid-19 demonstrated the value of central bank swap lines in providing dollar liquidity during global stress. However, access to such arrangements is limited, and may be influenced by geopolitical factors. This creates incentives for central banks to maintain larger buffers of highly liquid assets and to develop diverse sources of potential liquidity support. Regional financial arrangements may take on greater importance as complements to global institutions.

This new environment may also imply more economic fragmentation, with monetary policy diverging between advanced countries. Dynamic hedging strategies may become more important. Given the likelihood of increased volatility, reserve managers should have the operational capability to adjust positions relatively quickly in response to changing conditions. This requires not just the technical infrastructure for executing trades, but also clear governance frameworks that permit timely decision-making in rapidly evolving situations. If inflation has turned into a higher regime, inflation-linked bonds will continue to be demanded.

Many central banks operate with governance structures designed for stability and deliberation, rather than for rapid response. Finding the right balance between appropriate oversight and operational flexibility is a key governance challenge for many institutions. SAA decisions typically take place annually, but in the current environment, it might be beneficial to hold deliberations more frequently.

Beyond traditional asset classes, some central banks are beginning to explore exposure to private markets and digital assets as potential diversification tools. Private equity offers targeted exposure to specific sectors, allowing investments in countries with less liquid public markets. While illiquidity remains a consideration, carefully sized allocations to private markets could provide diversification benefits and access to growth opportunities not available in public markets. Cryptocurrencies represent another area of potential interest – albeit one that requires considerable caution. While offering a hedge against fiat currency concerns through algorithmic supply rules, they remain an immature, highly volatile asset class.

Institutional and analytical capabilities

Perhaps most fundamentally, central banks may need to enhance their institutional capabilities for analysing and responding to geopolitical risk. Traditionally, reserve management teams have consisted primarily of financial professionals with expertise in fixed income, foreign exchange and portfolio management. While this expertise remains essential, there is growing recognition of the need to integrate geopolitical analysis more systematically.

Some central banks can explore ways to combine political intelligence with data science to create early-warning systems for potential systemic shocks. This might involve monitoring geopolitical risk indexes, tracking unusual patterns in cross-border capital flows, analysing changes in trade patterns or using sentiment analysis of political communications to identify emerging tensions. The goal is to move from reactive responses to geopolitical events towards more pre-emptive risk management.

This also requires investment in human capital. Reserve management teams may need to access specialised geopolitical research, request more information in that field from counterparts, send delegates to international forums and invest in training. Hiring specialists might be an alternative for large reserve teams.

Collaboration and information-sharing among central banks may become more valuable in this environment. While each central bank must make decisions based on its own circumstances and mandate, the complex nature of geopolitical risks creates significant benefits to collective learning. International forums such as the World Bank’s Ramp (Reserve Advisory & Management Partnership), regional central bank groups and bilateral dialogues provide structured venues for this exchange. In a more fragmented world, such collaboration becomes not just beneficial, but essential, helping institutions navigate shared challenges while respecting their individual sovereignty and strategic interests.

Looking ahead

The geopolitical landscape will likely remain unsettled for the foreseeable future. The structural factors driving current tensions – great power competition, technological rivalry, resource constraints and ideological differences – are unlikely to be resolved quickly. Reserve managers must therefore prepare for an extended period of elevated uncertainty.

This does not mean abandoning sound principles of reserve management. The fundamental objectives of maintaining adequate reserves – to support exchange rate stability, provide confidence in the domestic currency and serve as a buffer against external shocks – remain unchanged. Similarly, the basic principles of diversification, risk management and long-term strategic thinking continue to provide essential guidance.

However, the implementation of these principles must evolve. Geopolitical risk, once a secondary consideration, has moved to the centre of the reserve management framework. This requires enhanced analytical capabilities, more sophisticated approaches to diversification, greater operational flexibility and institutional structures that can integrate different forms of expertise.

The current moment represents both a challenge and an opportunity. Central banks that adapt their frameworks thoughtfully, invest in necessary capabilities and maintain a long-term perspective while remaining operationally nimble, will be best positioned to navigate the turbulent waters ahead. Those that cling to approaches optimised for a different era risk finding their reserves less resilient than assumed when the next crisis arrives.

The rupture in the global order identified by Canadian prime minister Carney is not merely a political phenomenon – it is reshaping the architecture of international finance. Central banks, as stewards of their nations’ international reserves, have a crucial role to play in adapting to this new reality. The institutions that rise to this challenge will not only protect their own reserves, but contribute to the stability of the broader international monetary system during a period of fundamental transformation.

Notes

1. Kowalcze, K, ‘Germany aims for Nato goal with €162 billion budget by 2029’, Bloomberg, updated July 28, 2025.

2. World Gold Council, Gold demand trends: Q4 and full year 2025, January 29, 2026.

3. European Central Bank, ‘Gold demand: the role of the official sector and geopolitics’, special feature in The international role of the euro, June 2025.

4. International Monetary Fund, ‘Chapter 2 – Geopolitical risks: implications for asset prices and financial stability’ in Global financial stability report, April 2025.

5. Dunkley, E, and Livsey, A, ‘Amundi says it will cut exposure to US over coming year’, Financial Times, February 4, 2026.

6. Bertaut, C, von Beschwitz, B, and Curcuru, S, The international role of the US dollar – 2025 edition, Board of Governors of the Federal Reserve System, July 18, 2025.

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