After establishment of the State Oil Fund of Azerbaijan (SOFAR) (December 1999) and accumulation of huge monies in it, the topic of oil revenues and their correct spending transformed into common attention. Indeed one of the paramount conditions of increasing competitive ability and steady development of the country is the effective use of the resources, which the country possesses. This axiom does not require proofs, since the most successful states precisely go in this way.
Over the last eight years (from 2000 to 2008) the functioning of the assets of the Fund composed 8 986.7 million manat ($11 219.2 million). For the comparison, only five-six years ago, the assets of the Fund composed nearly $700 million. But then, this was compared both with the volume of the international liquidity of the National Bank and with the volume of the annual budget of the country. Afterwards, the amount of the incomes of the Fund exceeded the amount of its expenditures, thanks to which accumulated finance got general tendency toward the increase.
Source: State Oil Fund of Azerbaijan
More than forty times increase in the incomes of the State Oil Fund occurred not only due to huge incomes from the realization of oil with high world prices, but also due to their correct and competent management.
Management of the oil revenues of SOCAR takes place according to Azerbaijan President's decree dated June 19, 2001 (on December 21, 2001 and March 1, 2005 changes were made) on application of Regulations of storage, placement and management of the finance of the State Oil Fund of Azerbaijan Republic. Managing oil revenues according to these regulations has as a goal to attain investment profit via safe storage and effective management.
Investment activity of SOFAR was clearly prescribed by the regulations and has a number of limitations. Thus, accounting account for the currency transactions of SOFAR inside the country can be opened only in the National Bank, and outside the Republic - in the banks, which have long-term rating estimations not below АА Standard & Poor's, Аа3 Moody's Investor Service and АА Fitch.
The partners of SOFAR in the world financial markets can be the financial structures, which have investment ratings on the long-term liabilities not below ВВВ Standard & Poor's and Fitch and Ваа Moody's.
The maximum specific weight of one financial structure or one investment asset in the investment portfolio of SOFAR must be 15 percent of the total amount of the investment portfolio of the Fund.
The part of monies can be transferred to the management of the foreign managers. In this case, the amount of the investment portfolio, which is transferred to the management of the foreign managers, is determined in the following order:
-0 the investment portfolio, which is transferred to the management of the foreign managers must not exceed 60 percent of the general investment portfolio of the Fund;
-1 the minimum amount of the investment portfolio, which is transferred to the management of one foreign manager, must be $30 million, maximum amount must comprise not less than 15 percent of the general investment portfolio of the Fund.
Currently 50 percent of the currency composition of the investment portfolio of SOCAR consists of the dollar assets, 40 percent were placed in Euro, 5 percent in the British pounds sterling. Depending on the situation in the world markets, other 5 percent are placed in the currencies of the countries, which have credit rating "A" (S& P, Fitch) or "A2" (Moody's), or in the US dollars or in the proportional ratio in the dollars, Euro or pounds sterling.
As a result of 2008, 52.67 percent of the assets of the Fund were nominated in the US dollars, 42.95 percent in Euro, 4.38 percent in pounds sterling and 0.89 percent in Azerbaijan manat.
Some $5857.21 million fell on USD, $3387.95 - Euro, $335.37 - pound, $99.31 million - AZN. However, manat funds do not enter the investment portfolio.
The investment portfolio of SOCAR should not be made up of deals of speculative character and is not available for the sector of real estate and precious metals.
Impact of various reasons on management of funds of SOFAR:
Last 2008 has some similar features with 2001 on above-mentioned points, except the period of activity of SOCAR, which during the last seven years, acquired sufficiently large experience in managing its means. Crisis in the world financial markets, recession of the economy of the USA, while more than 20 large banks of the USA broke and many well-known companies became bankrupt, did not contribute to the best indices of SOFAR from management of the oil revenues as a result of 2008.
Thus, the revenues of fund's assets totaled 231.2 million manat and out-budget revenues from re-assessment of currency assets - 652.6 million manat. Revenues from management of fund's assets (excluding currency exchange rates) averaged 3.79 percent in 2008, while this indicator was 4.24 percent in 2006 and 4.49 percent in 2007. The average yield on SOFAZ assets over the past three years was 4.17 percent.
Source: State Oil Fund of Azerbaijan
Due to the global financial process, the yield from SOFAZ funds managed by foreigners aside from the WB Treasury was close to zero last year. The foreign managers department runs about $20 million, excluding the WB Treasury's funds. SOFAZ managers include Clarident and Deutschebank Asset Management.
SOFAR will not provide a mandate to new foreign managers to handle its funds. On the contrary, consultations are already underway with the current management who will be told to be more responsible about their obligations. They will be offered to diversify their portfolio with more lucrative financial instruments.
The investments of the State Oil Fund of Azerbaijan mainly take short term character. Averagely the period of the investments of Fund into one form of securities is 1.15 years. In this case, the basic amount of the investments of the Fund - $6744.9 million (60.66 percent) of the portfolio fell on investments for the period from 1 to 3 years, $3714.88 million (33.41 percent) - period of up to 1 year, $613.19 million (5.51 percent) - period of 3-5 years.
Remaining investments do not exceed 0.5 percent of portfolio - $28.62 million (0.26 percent) is provided for the period of 5-7 years, $15.96 million (0.14 percent) - the period more than 7 years.
Practically since the moment of its establishment, the Fund has been investing large part of its accumulations in the bonds. Currently their share in the investment portfolio of SOFAR is approximately 80 percent. Moreover, their large part is corporate securities, which according to the extent of reliability are not a bit inferior to the treasury bonds of the leading countries of world. As known, as compared to the bonds, the stocks are characterized with larger riskiness and essential fluctuations in exchange. Therefore, in the initial stages, SOFAR was not deal with active trade with stocks and they charged this to external managers.
Long-term investment funds (pension, public funds) similar to Sofaz invest 30-40 percent of their funds in stocks, WB Treasury and RAMP Director Jennifer Johnson-Calari said at a joint news conference with Sofaz Executive Director Shahmar Movsumov on Jan. 28.
"Such long-term investments for a period of 10-20 years has always justified themselves, as the return on them is higher than on bonds. The population in Azerbaijan should understand that if the funds are invested in stocks, you have to be prepared for the fact that in a short term (within one year) the high volatility of securities' value leads to even negative returns," said Calari. For example, the portfolio of stocks of the Norwegian Oil Fund reaches 60 percent of its assets.
"Such long-term investments for a period of 10-20 years has always justified themselves, as the return on them is higher than on bonds. The population in Azerbaijan should understand that if the funds are invested in stocks, you have to be prepared for the fact that in a short term (within one year) the high volatility of securities' value leads to even negative returns," said Calari.
Calari believes in a short period of time the situation is usually resolved and the stock management revenues rise in a number of times. Before transition to such an investment policy, the country must be ready to any changes in stock prices.
"So far Sofaz had been pursuing a conservative investment policy, because a platform for management of funds was being formed during that period. However, it is high time to invest in more sophisticated financial instruments. They will give more revenues to the country," she said.
Sofaz announced its plans to expand the stock portfolio, but they have been postponed due to the global processes. This decision was correct, as evidenced by the fact that the crisis has had no impact on Sofaz revenues, as stock prices fell by nearly 50 percent. Perhaps, when the crisis slows down, we will reconsider our investment policy before the end of 2009 or beginning of 2010 and will invest our funds in securities of the companies which decreased their stock prices but are not close to bankruptcy.
Sofaz has been cooperating with the RAMP (Reserve Assets Management Programme) since 2007. The Fund transferred $100 million to the WB Treasury. The WB Treasury is managing $114 million, which has increased as a result of placement revenues.
Only 0.1 percent of Sofaz assets were places in stocks in 2007 and 0.02 percent ($2.34 million) in 2008.
As a result of 2008, 93.79 percent ($10.4 billion) of Sofaz investment portfolio was placed in securities. A total of 33.4 percent of the funds were placed in securities for up to one year, 60.66 percent - from 1 to 3 years, 5.51 percent - from 3 to 5 years, 0.26 percent - from 5 to 7 years and 0.14 percent for over 7 years.
Upon growth in the investment assets and stabilization of situation in the world financial markets, SOCAR proposes to divide its shares into three parts - portfolio of expenditures, which will be determined in accordance with the budget of the Fund, portfolio for the stabilizer and extraordinary situations, and also the depository portfolio, intended for the future generation.
SOFAR investment portfolio hit $11.119 billion, with total assets of $11.219 billion.
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