Oil Fund of Azerbaijan Successfully Fulfills Its Goals SOFAZ Executive Director

Trend's Exclusive Interview with Shahmar Movsumov, the Executive Director of the State Oil Fund of Azerbaijan

Question: Seven years has past since the adoption of Rules on State Oil Fund of Azerbaijan. Is it possible to assert that the goals set for SOFAZ has been achieved?

Answer: I can confidently state that the Oil Fund successfully fulfills the tasks set for it. SOFAZ is actively involved in the collection and accumulation of currency reserves from the exploitation of Azerbaijan oil reserves for future generations, defends the economy of the country from negative impact of rapidly growing foreign inlflows and preserves the macroeconomic stability through spending the Fund capital on current social and infrastructure needs.

The funds flowing from the exploitation of oil reserves are accumulated in the Oil Fund and their volume increases year by year. Presently, the amount of currency assets in the Fund amounts to $1.5bln. The Fund's capital is invested in the reliable foreign banks as well as in securities. In this way the economy of the country is protected from impact of big currency inflows, and on the other hand they increase as a result of management of currency reserves of the Fund.

Part of the Fund's capital is directed at important investment projects to ensure dynamic development of the economy. The role of the Fund in financing the state programs and projects of strategic significance boosts year by year.

From 2002 till the end of October 2006 the State Oil Fund has directed over $312mln at financing Azerbaijan's share in the Baku-Tbilisi-Ceyhan pipeline. The Fund transferred more than $941mln to the public budget to provide financing of the state investment projects and social programs.

At the Government meeting held after two weeks as Mr. Ilham Aliyev began to act as the President of Azerbaijan, one of the most significant tasks he set before the government was to liquidate all tent camps in Azerbaijan by the next 5 years. I can confidently say that this task has been fulfilled earlier than the required period and all tent camps will be liquidated by the end of 2007.

I am proud to emphasize that the Oil Fund shares a large part of this success. From 2001 to late October 2006 SOFAZ has allocated $178.5 mln for the resolution of the social problems of refugees and internally displaced people.

Question: How has the Oil Fund fulfilled its responsibilities and what success has been achieved within 3 years after Mr. Ilham Aliyev was elected as the President?

Answer: Presently we witness the large-scale creative work, reforms and positive changes that take place in Azerbaijan. Quite a new stage has begun in the economy of the country. Exploiting the oil resources of our country in co-operation with the foreign companies is increasing year by year due to the National Oil Strategy founded by our national leader His Excellency Heydar Aliyev and due to the positive result of the political and economical doctrine implemented by our honorable President Mr. Ilham Aliyev, over the past three years.

Other significant achievements are the launch of Heydar Aliyev Baku-Tbilisi-Ceyhan main oil export pipeline, which was called as pipeline dream one time and exports oil from Baku every day now and the pipeline that will ensure the exportation of gas from the Shah Deniz field soon. Both projects emphasize formation of the full-fledged transportation system, which will ensure the reliable transit of the hydrocarbon reserves of the country to foreign markets. All these foster the rapid increase of the currency potential of our state.

This year the Oil Fund initiated to finance two large-scale projects within implementation of its budget Construction of the water pipe from Oguz-Gabala zone to Baku city and Reconstruction of Samur-Absheron irrigation system. The water supply of Baku city will further improve. The irrigation system of the country will be reconstructed due to realization of these projects.

Establishing balanced economy and development of the dynamic non-oil sector in parallel with the developed oil sector became new priorities and these goals are accepted as significant strategic targets. All of the above mentioned are the tasks put by the President of Azerbaijan Republic, Mr. Ilham Aliyev, before the Government of the Country. It needs to be properly highlighted that this strategically important steps were taken by the President over the recent years. Directing a year-by-year increase of oil and gas revenues towards the non-oil sector, Long-term strategy on management of the oil and gas revenues was adopted in accordance with the decree of the President dated September 27, 2004, in order to achieve the balanced development of the economy and ensure the efficient management and use of the revenues. Adopting this significant document created a solid ground for effective and expedient use of the oil and gas reserves and directing them towards the development of the non-oil sector.

In accordance with the Long-term strategy on management of the oil and gas revenues, another important decision was made by the President this year, in order to direct the oil and gas revenues towards the development of the non-oil sector and the investments allocated to the renewal of the material and technical base of the enterprises in this sphere. According to the decree of the President dated March 30, 2006, Azerbaijan Investment Company Open Joint-Stock Company has been founded. It was decided SOFAZ to direct money to formation of the statutory capital of the Company.

As described in the decree, the activities of the Company are directed to implementation of long-term investment allocations by purchasing shares and stocks of the joint-stock companies and other commercial organizations functioning in the non-oil sector of the country's economy. In accordance with the 2006 budget of the State Oil Fund confirmed by the Decree of the President of Azerbaijan Republic, it was envisaged to allocate AZN 90 million to formation of the authorized capital of Azerbaijan Investment Company. Formation of the statutory capital of the company was completed within the framework of implementing the Fund budget for the current year.

Founding the Investment Company is an integral part of the investment policy pursued by the State. However, unlike the state investments, a new investment mechanism meeting the new and advanced principles has been applied in the country due to the activities of this Company. On one hand, promoti0ng of the enterprises and implementing the projects will be realized success, the investment policy implemented with regards to the development of the non-oil sector finds its application, and on the other hand, the protection of the proportionality between the property markets of the state and private sector is ensured by directing the state investments towards purchasing the shares of the enterprises in the authorized capital or towards participation share in the projects due to the application of the new mechanism. The activities of the Company in relation with the allocation of the capitals and loans may be an important stimulus for the promotion in the currencies market of the country and development of the corp
orative management forms. The dividends from the shares of the Company in the enterprises will flow as revenues into the State account i.e., in the Fund, which means the additional income source and increase of the Fund.

Question: What work has been done within the framework of an institutional development of the State Oil Fund, which has been implemented at the expense of USTDA since last year and when is the second phase of the project scheduled to commence? Do the international consultants put forward proposals on expansion or alternation of a list of foreign managers on managing the SOFAZ funds? Were their activities ever monitored?

Answer: Agreement over the project on Improvement of Institutional Building of the Oil Fund, was signed in January 2005 between the State Oil Fund and Overture Financial Services LLC and U.S. Trade and Development Agency. The agreement was approved by TDA on April 7, 2005. After the detailed study over the Fund's activities, Overture Financial Services made recommendations on the improvement of its institutional activities, and technical opportunities and assisted in the implementation of several projects.

The scope of technical assistance envisaged by the grant agreement included reviewing and refining current asset and risk management guidelines and policies, building performance measurement capacity and external manager selection and performance evaluation criteria, selection and implementation of portfolio management software, legal advisory (or legal support), preparation of operations procedures of the Fund, as well as training of Fund's personnel.

SOFAZ announced a tender for the selection of a global custodian bank. The Bank of New York became the winner of the open tender for provision of custodial services to SOFAZ. Consultations were provided on specialized software on the registration and shareholding of the SOFAZ assets, within the framework of the project. Work over registration and shareholding of the SOFAZ assets, conduct of definite analysis linked with portfolio enabling to carry out estimation of risks has been commenced.

SOFAZ will more probably set the implementation of the second phase of the project up in the beginning of 2007.

As to the second question, I should note that in 2007 it is planned to increase number of the external managers of SOFAZ. Relevant work in this direction is underway. SOFAZ carries out monitoring of foreign managers activities every month. The report of their activities is included in the reports of financial activities of SOFAZ.

Question: You are also the head of the Commission on Extractive Industry Transparency Initiative (EITI). Could you inform us about results of EITI last conference in Oslo? Do they consider Azerbaijan experience as a positive result?

Answer: As you know, the third international conference at the initiative of the EITI was held in Oslo in October. The forum brought together officials from 50 countries. Representatives from the international NGOs, big extractive companies and international organizations participated at the event. Speakers to the conference appraised Azerbaijan's successes in the application of EITI and called on other countries to use Azerbaijan's experience in this respect.

The conference made a resolution on the establishment of a Board of EITI with respect to ensure international support and coordination of its activities. The participants in the conference states that Azerbaijan occupied a leading place in the application of the EITI and confirmed the membership of the Government of Azerbaijan in the composition of the Board of EITI which united 8 countries. Five of them are the countries which applied the EITI Azerbaijan, Guinea, Gabon, Kyrgyzstan and Nigeria. 3 countries supported this initiative the United States, UK and Germany. Representative of international NGOs, extractive and investment companies will be also represented in the Board.

Almost all speakers in the conference stated the importance of successful application of Initiative in Azerbaijan. Some countries voiced their intention to join it and use the Azerbaijan experience. The 1st meeting of the Board will take place on 6-7 December, and the delegation representing Azerbaijan is also to attend the meeting, which is held at the UN headquarters in New York.

Question: What role could take the Oil Fund at anti-inflation measures?

Answer: Taking into consideration that professional economists and financers work in the Oil Fund, in order to widely use this potential, the Fund, in co-operation with the Oxford Economics Institute of Great Britain, has prepared the long-term macro-economic model of Azerbaijan with various scenarios and as a result, held a presentation for the governmental agencies responsible for economic management.

The results of the model show that high rates of the economic development will be observed in Azerbaijan in the near future. Keeping the one-digit inflation will be the key term to ensure this development.

Presently, the Fund's role on sterilization of currency inflows amid increase of the impact of the foreign currency flow to the country is very tangible. The negative impact of the foreign currency inflow would be bigger if money from exploitation of oil reserves would not enter the Fund, but fully turn out in circulation. It would certainly result in the establishment of conditions for increase of inflation, speedy consolidation of manat and fall in export-directed economy.

The preservation of the macroeconomic stability and tendency on the development of the oil sector are taken into consideration while spending capital of the State Oil Fund for social and infrastructural projects.

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