THE STATE OIL FUND OF THE REPUBLIC OF ANNUAL REPORT 2015 CONTENT

1. ABOUT SOFAZ 2

2. FACTS AT GLANCE 6

3. GOVERNANCE AND TRANSPARENCY 8 3.1. SOFAZ management 8 3.2. Transparency and accountability 14

4. NATIONAL ECONOMY AND SOFAZ 18 4.1. Macroeconomic development 18 4.2. SOFAZ Revenues 25 4.3. SOFAZ Expenditures 30

5. INVESTMENT REPORT 38 5.1. Investment Strategy 38 5.2. SOFAZ Investment portfolio 43 5.3. SOFAZ Investment 65 portfolio performance 5.4. Risk management 69

6. 2015 SOFAZ BUDGET EXECUTION 72

7. CONSOLIDATED FINANCIAL 78 STATEMENTS OF SOFAZ

APPENDIX 155 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 01

ABOUT SOFAZ Objectives Legal framework for operating expenditures, are incorporated as part of an annual consolidated government budget presented SOFAZ’s activity is directed SOFAZ’s operations are to the Parliament for approval. to the achievement of the guided by the Constitution Thus, indirectly, all citizens following objectives: and laws of the Republic participate in the discussions of Azerbaijan, Presidential of the budget of SOFAZ. In decrees and resolutions, The State Oil Fund of the 1. Supporting macroeconomic compliance with this law, SOFAZ Statute and the Fund’s stability, participating in SOFAZ can only execute the regulations. ensuring fiscal-tax discipline expenditures envisaged by its Republic of Azerbaijan (SOFAZ) and decreasing dependence budget. on oil revenues while SOFAZ’s funding and stimulating development of withdrawal rules are clearly SOFAZ’s investment and was established in accordance the non-oil sector; defined by the “Statute risk management policies of State Oil Fund of the are defined by “Investment Republic of Azerbaijan” and Guidelines” and “Investment 2. Funding major national with the Decree of national the “Rules on the preparation Policy” approved by the scale projects to support and execution of the annual President of the Republic of socio-economic progress; program of revenues and Azerbaijan after the review leader No. 240 expenditures (budget) of of the Supervisory Board. 3. Ensuring intergenerational the State Oil Fund of the According to its “Investment equality with regard to Republic of Azerbaijan”. Policy” SOFAZ’s investment on December 29, 1999. the country’s oil wealth, According to the Law “On decisions should aim at accumulating and preserving budget system” of the maximizing the risk adjusted oil revenues for future Republic of Azerbaijan, all returns. According to the generations. SOFAZ expenditures, except “Investment Guidelines”, SOFAZ makes investment decisions independently.

In 2004, the President of the Republic of Azerbaijan Ilham SOFAZ is a mechanism whereby energy-related earnings are Aliyev approved “Long-term accumulated and efficiently managed for future generations. SOFAZ’s mission is to transform Strategy on the management of oil and gas resources”. depletable hydrocarbon reserves This document is considered SOFAZ is structured as an extra-budgetary fund and functions as a crucial milestone for as the legal entity separate from the government or central bank. into financial assets generating the long-term prosperity of Statute of SOFAZ was approved in 2000. the country, outlining the perpetual income for current development of the non-oil The cornerstone of SOFAZ’s philosophy is to ensure sector, human capital and intergenerational equality with respect to the benefit from and future generations. competitive economy. the country’s oil wealth. The Oil Fund is one of the central components in the implementation of the Strategy.

2 3 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 01 ABOUT SOFAZ

1.80% 2.90% 4.60% Our Values: Respect, Teamwork, 2.35% 4.70% 6.50% 10.20% 1.29% Trust and Transparency 0.11% 2% 3.30% 3.10% 3.10% $0.5 $2.5 $22.8 $34.1 $35.9 $37.1 $33.6 billion billion billion billion billion billion billion Since its very inception, SOFAZ has Respect built a strong cooperation with a 100% 100% 99.89% 94.36 % 90.20% 87.50% 82.1% number of financial organizations SOFAZ’s realitions with international organizations, financial institutions, 2001 2007 2010 2012 2013 2014 2015 and institutions in Azerbaijan and government bodies as well globally. Fund’s relations with its as its employees are based • First • Awarded with • First • Assets increased • Commitment • Further • Investment was on mutual respect. Deeply investments UN Public investments to over USD 30 to IFC investments were made to Japan partners are based on the principles were made. Service Award. into private billion. Infrastructure made to public property market. rooted into the Fund’s philosophy, trust and respect • Assets equity were • First Fund. equity and real • First investments of mutual respect, trust, teamwork increased to made. investments into • Total amount estate. through private are the main factors in over USD public equity, of gold • First time public property started. and transparency. maintaining healthy relations 2 billion. gold and real purchased equity indexes • Investments in workplace and cooperating estate were reached 30 were replicated in were made to fruitfully with partners. made. tons. house. European stock • New currencies • SAA was markets through were introduced amended. MSCI Europe to the portfolio. • Transfer of the ex-UK index. • Commitment purchased gold to IFC Catalyst to Azerbaijan was Fund. completed.

Teamwork Trust Transparency

Fixed Income Equities Gold Real Estate It is through teamwork Since its inception, SOFAZ SOFAZ’s activities are and joint efforts that adheres to the highest based on the principles Note: The diagram illustrates year by year AuM and breakdowns of the of transparency and investment portfolio by asset class SOFAZ succeeds in all standards of ethical behavior of its endeavors and and honesty to gain the accountability. Internationally strengthens its prestige trust of its partners. SOFAZ praised as a credible and locally and worldwide. expects all of its business transparent institution, Building strong working partners to operate on the SOFAZ, in line with the realitionships, praising same principles of mutual foremost international personal, achievements trust and cooperation. practices, ensures the highest and encouraging level of transparency towards teamwork contribute to its counterparties, employees the establishment as well and external managers. as further development of professional work environment.

4 5 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 02

FACTS AT GLANCE Chart 2.3. Currency composition

60% Chart 2.1. Growth in SOFAZ assets (USD billion) 50% AuM Growth in AuM 40%

30% 52.79%

35.9 37.1 20% 34.1 33.6

29.8 10%

32.81% 22.8 30.89% 0.0%

14.53% 14.9 3.42% 5.12% USD + Euro GBP AUD TRY RUB KRW CNY JPY Others Gold -9.52%

31.12.2015 30.06.2015 31.12.2014

2009 2010 2011 2012 2013 2014 2015

10.2% Chart 2.2. Chart 2.4. Annualized rate of return on portfolio Asset allocation 4.6%

3.1% Last 10 years 2.42%

Last 5 years 1.50% Fixed income Equites Last 3 years 1.51% Real Estate

Gold 82.1% 2015 1.24%

6 7 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 03

GOVERNANCE AND TRANSPARENCY

3.1. SOFAZ MANAGEMENT

The Supervisory Board, consisting of representatives of the state authorities and public organizations, carries out general oversight of the Fund’s operations.

Supervisory Board Supervisory Board consists The Supervisory Board held of the following members: 3 meetings in 2015.

The Board reviews and Artur RASIZADE On January 8, 2015 the Supervisory Board chaired by evaluates the Fund’s draft Prime Minister of the Republic annual budget, annual report of Azerbaijan Mr. Artur Rasizade, the Prime and financial statements, Minister of the Republic of along with audit report. Valeh ALESGEROV Azerbaijan and the Chairman Members of the Supervisory Vice-Speaker of the Parliament of the Supervisory Board Board are approved by the (Milli Majlis) of the Republic of discussed SOFAZ draft budget Azerbaijan President of the Republic for 2015, including the major of Azerbaijan. The board directions of its investment Vahid AKHUNDOV members act entirely on a policy and recommended voluntary basis. State Economic Policy Adviser its draft annual operating of the Republic of Azerbaijan expenditures for the approval by the President of the Republic of Azerbaijan. Minister of Finance of the Republic of Azerbaijan The subsequent meeting of SOFAZ’s Supervisory Board Shahin MUSTAFAYEV was held on June 1, 2015, Minister of Economy of the Republic of Azerbaijan where SOFAZ’s 2014 annual report, the audit findings of Elman RUSTAMOV financial activities, and the Governor of the Central Bank Fund’s budget execution of the Republic of Azerbaijan were discussed and deemed satisfactory. The Prime Minister Artur Rasizade 8 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 03 GOVERNANCE AND TRANSPARENCY

was re-elected as the Executive Deputy Executive Investment for performance attribution, Budget Forecasting Supervisory Board’s modelling and research, Chairman-in-office for the Director Director Department compliance, and supervision and Projects next term. (Front Office) of external managers. The Department department has 2 divisions: On October 30, 2015, the SOFAZ’s day-to-day activities Deputy Executive Director is • Risk and performance are managed by the Executive Supervisory Board discussed appointed by the President The Investment Department measurement division; The budget forecasting Director appointed by the of the Republic of Azerbaijan. the Oil Fund’s draft annual is responsible for developing • External asset management/ and projects department is President of the Republic of Israfil Mammadov was budget for 2016, including investment strategy, investing Research division. responsible for forecasting Azerbaijan. the major directions of its appointed as Deputy across eligible asset classes, SOFAZ’s revenues and investment policy as well Executive Director of SOFAZ including fixed income, money expenditures, organizing as draft annual operating The Executive Director on July 23, 2013. market instruments, equity, budgeting, economic analysis, expenditures, and submitted represents the Fund, real estate and gold. strategic research and for the approval by the appoints and dismisses Settlements macroeconomic modelling President of the Republic of employees of SOFAZ in work, as well as organizing The department has Department Azerbaijan. The Supervisory a manner determined by and supporting the activities 3 divisions: Board also approved a the legislation, carries out SOFAZ organizational (Back Office) of the Fund’s Supervisory transition of the SOFAZ’s operational management structure • Fixed income and money Board and the financing of accounting framework from of the Fund’s activities, market division; fund-sponsored projects. International Public Sector ensures the management • Equity and alternative Settlements department After the changes made to Accounting Standards (IPSAS) and investment of the Fund’s Investment activity at SOFAZ investment division; operates under the Fund’s the organizational structure to International Financial assets in accordance with the is conducted by front, middle • Real estate division. Finance and Operations Budget and forecasting Reporting Standards (IFRS). Guidelines approved by the and back offices. Front and Administration. and Project divisions were In addition, SOFAZ’s new President of the Republic of middle offices are responsible The Settlements department established within the Budget Accounting Policy and the Azerbaijan. for investment and risk is responsible for verifying forecasting and Projects Chart of Accounts were management functions, trades with counterparties, department. considered acceptable. respectively. Risk Management settling trades with the Department custodian and correspondent banks, reconciling cash and (Middle Office) transactions with statements from the banks, as well as reconciling external managers’ The Risk Management transactions and positions. Department is responsible for assessing investment activities, proposing changes to the Fund’s investment policy and strategic asset allocation (SAA), selecting benchmarks and defining the risk limits. In addition, this department is also responsible

10 11 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 03 GOVERNANCE AND TRANSPARENCY

EXECUTIVE DIRECTOR’S OFFICE: Assistant to Executive Director Figure 3.1. Public Relations division EITI Secretariat SOFAZ organizational structure EXECUTIVE DIRECTOR Internal Audit

Deputy CEO Finance and operations administration

Investment Risk Settlements Accounting Budget Oil contracts Security Legal Administrative Human IT department department management department department forecasting department department department department resources department and project department department

Fixed income Real estate Equity and Risk and External Budget and Project Information Security General Administrative Procurement IT operations IT support and money division alternative performance assets forecasting division security division division division management and logistical division group market investment measurement management/ division division division division division division Research divison

12 13 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 03 GOVERNANCE AND TRANSPARENCY

Extractive The EITI is a voluntary mechanism stipulated by the Rules of ethical initiative, supported by Memorandum. In accordance conduct Industries companies, governments, with the Memorandum, a Transparency investors and civil society competition is held to select Initiative organizations. The decisions a credible international audit Rules of ethical conduct information, anti-corruption experience play a crucial role of governements to join firm for each reporting cycle came into force in December measures, corporate values, in fostering ethical workplace the EITI and companies’ to analyze and reconcile 2013. This document environment, etc.) culture at SOFAZ. These are participation in this government and companies’ The Extractive Industries outlines the Fund’s the key factors which have process ensure adherence reports. The successful bidder Transparency Initiative to transparency and is selected by EITI Multi- attitude towards ethical Attributes such as teamwork, contributed to the success of (EITI) is designed to accountability standards at stakeholder Group (MSG), behavior and professional enthusiasm, openness to new SOFAZ both in Azerbaijan and promote transparency regional and international consisting of representatives conduct (Confidentiality of ideas, and willingness to share abroad. and accountability in the level in public life, public of the parties to the extractive industry. It was administration and business Memorandum. first announced in September environment. It provides 2002 in Johannesburg by the implementing countries All companies operating in the former British Prime with a significant capacity to extractive industries, as well Minister, Tony Blair. The first demonstrate a completely as relevant state enterprises EITI conference was held in transparent investment 3.2. TRANSPARENCY AND ACCOUNTABILITY are involved in EITI London on June 17, 2003. environment that is implementation process. The At the I International EITI attractive to investors and government has also ensured Conference held in London to international financial SOFAZ’s financial performance in 2015 was active participation of the in June, 2003, the President institutions. The EITI acts as civil society in development, of the Republic of Azerbaijan a major incentive to improve audited by Price Waterhouse Coopers. monitoring and evaluation declared the accountability and governance of the EITI implementation decision of the government in a politically stable and process. of Azerbaijan to join the EITI rapidly growing country. This,

and support the international in turn, helps to avoid any SOFAZ has continued efforts aimed at ensuring possible disagreements that Transparency and maintaining and further of the revenues from the its activities on EITI transparency in extractive may arise over the revenue accountability have been the developing its reputation of management of the natural implementation during 2015. industries. Azerbaijan distribution in the extractive key principles in SOFAZ’s being a transparent public reserves and their utilization. volunteered to become a industries. operations since its inception. organization, in accordance pilot country in the EITI In 2015, 7 Multi-stakeholder Regular auditing of the with the “Law of the Republic Press conferences with CEO implementation. The EITI is implemented Group’s (MSG) meetings on financial statements by a of Azerbaijan on Right to participation are held for according to updated implementation of EITI reputable international audit obtain information”. media representatives in order Memorandum of were held. firm is used as the primary The EITI Committee was set to keep them updated on Understanding on safeguard to ensure the up by the Cabinet of Ministers SOFAZ issues press releases SOFAZ’s activities. implementing the EITI in On January 1, 2015 the transparency of SOFAZ of the Republic of Azerbaijan about its assets, projects, Azerbaijan which was signed Validation under the new operations. in its 13 November, 2003 revenues and expenditures, by the EITI Committee, EITI Standard in Azerbaijan SOFAZ always takes an decree. The Committee, investment activity and etc. local and foreign oil and was commenced and, as interest in answering chaired by the Executive SOFAZ’s public relations gas companies and the a result, Azerbaijan’s EITI questions of public, and Director of the Oil Fund, are managed in accordance Increasing Transparency in the status was downgraded SOFAZ publishes quarterly replies to all verbal and consists of representatives with its Information Policy. Extractive Industries Coalition from the “Compliant” to the revenue and expenditure written Fund-related enquiries of the ministries of Foreign This policy was developed of NGOs in 2014 (first “Candidate” on April 14-15 at statements, annual reports directed to SOFAZ within Affairs, Economy, Energy, to properly coordinate Memorandum was signed the EITI Board meeting held in and reports on EITI activities the timeframe envisaged by Finance, Taxes, Ecology and and effectively manage in 2004). The government Brazzaville, Congo. through the press and its own the “Law of the Republic of Natural Resources, the State SOFAZ’s public relations, of Azerbaijan discloses its website (www.oilfund.az). It Azerbaijan on Right to obtain Statistical Committee and thereby meeting the public’s EITI reports according to the In April, 2015 the Coalition of ensures the transparency information”. SOCAR. need for information and

14 15 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 03 GOVERNANCE AND TRANSPARENCY

Azerbaijan Non-government Coalition also participated Coordinators and MSG embassies, civil society International and also announced that 9th Organizations for “Improving in the training. members in Istanbul, Turkey. institutions and mass media. annual meeting in 2017 will Transparency in Extracting Forum of Sovereign be hosted by JSC Samruk- Industries” (NGO Coalition) On September 23, 2015, On October 21-22, 2015, the On November 25, 2015, Wealth Funds Kazyna in Kazakhstan. held series of events named the workshop on “Validation 30th EITI Board meeting was the regional conference “Roundtables in regions” – corrective actions and held in Berne, Switzerland. dedicated to the first national In accordance with Santiago supported by the World action steps for the compliant Delegation headed by the report of Tajikistan on its Principle No. 24, SOFAZ Bank and SOFAZ in Shirvan, status” with the participation Chairman of the National EITI EITI implementation and the The International Forum published its first self- Neftchala and Gadabay. of the representative of EITI Commission, a member of development of the regional of Sovereign Wealth assessment report on its The events were aimed at International Secretariat, the EITI International Board cooperation was held in Funds (IFSWF or Forum) adherence to these Principles increasing the awareness Dyveke Rogan and MSG and the Executive Director of Dushanbe, Tajikistan. The was established by the in May 2011. This report of citizens, representatives members was held at SOFAZ. SOFAZ Shahmar Movsumov representatives of Azerbaijan International Working Group is reviewed on an annual of Civil Society and local The aim of the workshop was participated in the meeting. EITI Secretariat participated in of Sovereign Wealth Funds, basis and is presented in the authorities. to foster broad discussions on Appropriate discussions were that conference as speakers. at the meeting in Kuwait City Appendix. action steps which should be conducted and decisions were on 5-6 April 2009. IFSWF is a undertaken for the compliant made. voluntary group of Sovereign On May 5, 2015, the On December 9-10, 2015, status of Azerbaijan in the Wealth Funds (SWFs), which meeting of the MSG on the 31st EITI Board meeting EITI. On November 12, 2015, SGC meets, exchanges views on implementation of EITI was held in Kiev, Ukraine. Upstream, a company recently issues of common interest and in Azerbaijan with the Delegation headed by On September 29, 2015, the launched in Azerbaijan, signed facilitates an understanding of participation of the executive Sh. Movsumov participated Head of the Azerbaijan EITI the Instrument of Accession the Santiago Principles and of director of the Natural in the meeting. Appropriate Secretariat, Farid Farzaliyev to MOU. After signing the SWF activities. Resource Governance discussions were conducted participated as a speaker Instrument of Accession Institute Daniel Kaufmann and decisions were made. at the “7th International to MOU, SGC Upstream was held at SOFAZ. SOFAZ is an active member of Conference on improvement submitted its relevant IFSWF and has systematically of the EITI in Kazakhstan” in inputs into the 19th EITI participated in its meetings. On June 30, 2015, EITI Astana, Kazakhstan. report (2014 EITI report) on IFSWF held its first meeting 2014 Activity Report payments to the government in organized by the on implementation was On October 8, 2015, the of Azerbaijan. Thereby, 39 government of Azerbaijan and published. President of the Republic of extractive sector companies SOFAZ on 8-9 October 2009. Azerbaijan received the Chair joined Memorandum of the International Board of of Understanding on On July 16, 2015, 2013 EITI IFSWF met for its seventh the EITI, Clare Short. Views implementation of the EITI in Report was approved by annual meeting in Milan, on prospects of Azerbaijan`s Azerbaijan. the MSG and disclosed. The Italy on September 29-30, participation in EITI were report was prepared under 2015. IFSWF advanced on discussed at the meeting. On November 23, 2015, the 2013 EITI Standard’s its commitments made in the roundtable of the requirements. Doha in 2014 by discussing On October 8, 2015, the presentation of EITI NGO the knowledge sharing meeting of the MSG on Coalition’s opinion on the among IFSWF members, On July 30, 2015 the implementation of EITI 2013 EITI Report was held by investment and risk training on improvement in Azerbaijan with the the EITI NGO Coalition with management practices, as of professionalism in participation of Clare Short the support of the Council well as making progress on its filling of EITI reports and was held at SOFAZ. on State Support to NGOs internal governance issues. increasing of EITI report under the Auspices of the Forum selected its new quality for members of EITI On October 13-15, 2015, President of the Republic of Board members (Abu Dhabi Memorandum - local and F.Farzaliyev and two members Azerbaijan. The event was Investment Authority, Qatar foreign companies operating of the MSG Azerbaijan held for the representatives of Investment Authority, GIC in mining field was held at participated at regional governmental organizations, Private Limited and China SOFAZ. Members of NGO workshop for the National international organizations, Investment Corporation)

16 17 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 04

NATIONAL ECONOMY AND SOFAZ

since 2014. However, when Chart 4.1.1. 17 993 purchasing power parity is GDP per capita, Purchasing 762 17

also accounted for, the GDP Power Parity (in current 17 135

per capita is found to have international dollar) 16 063 15 562

grown by 4.2%. 15 355 14 568 Note: the 2015 data is an 4.1. MACROECONOMIC DEVELOPMENT 13 348 estimate made in the April

2016 IMF report 942 11

Source: IMF 9 407

The drastic fall of the global oil prices to atypical level, that began in the second half of 2014 continued 2006 2007 2008 2009 2010 2011 2013 2014 2015 throughout the last year as well. 2012

Hence, the average price year while the World Bank Republic of Azerbaijan for a barrel of crude oil (WB), being more pessimistic, (CBAR) undertook the first constituted USD 52 while it estimated it at the level of devaluation of the Azerbaijani fell all the way down to USD 2.9%. These uncomfortable manat in February 2015, 37 by the end of 2015. At the trends could not leave the thereafter the official USD same time, having sluggish exchange rate to AZN grew growth by 3.1% only instead unaffected, whose major from 0.78 to 1.05 (34.6%), of 3.5% as predicted by the export revenues are formed while after the Bank’s decision International Monetary Fund out of the hydrocarbon sales. to unpeg the currency and (IMF), the global economy switch to a floating regime, repeatedly underperformed. Bearing in mind the sharp the exchange rate rose further Thus, the global growth deterioration of Azerbaijan’s up by 47.6% to reach 1.55. rate was lower than that of positive trade balance and the preceding year for the serious pressures upon the In 2015, the GDP volume second time in a row. Taken national currency and its grew, compared to 2014, separately, developed and exchange rate, while also by 1.1% in real terms and developing countries have aware of the need to keep constituted AZN 54.4 billion grown by 1.9% and 4.0%, currency reserves at the (the growth rate equalled respectively. Based on the critical level and to protect 2.8% in 2014 and 5.8% in 2015 economic dynamics, the international competitiveness 2013). The GDP per capita IMF issued a 3.2% growth of the Azerbaijan economy, in 2015 was AZN 5 703.7, forecast for the upcoming the Central Bank of the particularly levelled off

18 19 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 04 NATIONAL ECONOMY AND SOFAZ

8.3% 9.1% In spite of certain economic Chart 4.1.2. 2% Chart 4.1.4. meltdown, overall household Expenditure structure of the The GDP structure 5.4% income in nominal terms rose 15.9% household income in 2015 by 5.7% in 2015, reaching 33.9% AZN 41.7 billion. Average Source: The State Statistical income per capita grew by Source: The State Statistical Committee of the Republic of 2.9% Committee of the Republic Azerbaijan 4.5% up to AZN 4 380.1 a of Azerbaijan year, while average monthly 19.3% salary increased by 5.0% to 72.1% constitute AZN 466.4. As to the expenditure breakdown, 72.1% of these incomes were Industry 2.7% 6.2% channeled into consumption, Agriculture, forestry 9.1% - into paying taxes, 10% 12.2% and fishery social insurance and voluntary membership fees, 15.9% were Consuption Saving Construction devoted to household saving Taxes and social Trade, repaire and 2.9% to paying interest insurance fees and Interest rate payments of vehicles rates on credits due. on credits The structure of the GDP oil sector. Though industry voluntary membership Accommodation of tourists dues which in 2015 totalled AZN still remains the largest 54 352.1 million was as sector in Azerbaijan’s GDP, and catering follows: 52.3% fell into the its share has been constantly Social and other share of the production of decreasing in the recent services Chart 4.1.3. goods, 39.4% - to services, years. The role of the services Transportation and while net taxes on goods and in the GDP has grown, its 2015 69.3% The share of non-oil storage imports accounted for the overall share increasing sector in the GDP remaining 8.3%. Compared from 33.6% to 39.4%. In the Information and 2014 61.3% to 2014, the production of reference year, construction communication Source: The State Statistical value added in real terms sector experienced a 13.4% Net taxes on goods Committee of the Republic of increased by 1.1% in the deterioration. and services 2013 56.6% Azerbaijan non-oil sector and 1.2% in the

2012 53.5% After subtracting all mandatory and voluntary Net taxes on goods and Chart 4.1.5. disbursements, the overall imports 3.6% 2011 48.8% disposable income amounted Sectoral growth Information and communication to AZN 36.7 billion, which 6.8% rates 2010 50.3% was 2.2% higher compared to Transportation and storage -1.7% the previous year. The 69.3% Social and other services 1.7% Source: The State of the country’s GDP fell into Statistical Committee Accomodation of tourists 2009 45.3% of the Republic of the non-oil sector share. and catering 14% Azerbaijan Trade; repair of vehicles 10.9%

Construction -13.4% Agriculture, forestry and fishery 6.6%

Industry 1.6%

20 21 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 04 NATIONAL ECONOMY AND SOFAZ

Chart 4.1.8. SOFAZ assets to GDP ratio Strategic foreign exchange reserves In the recent years, the share of SOFAZ’s assets in Source: SOFAZ, State Statistics Committee the country’s GDP has been of the Republic of Azerbaijan As of 31 December 2015, total by the SOFAZ’s assets (see interventions taken to shield increasing consistently, and foreign exchange reserves Chart 4.1.6.). The decrease in the currency from the negative reached 63.4% in 2015. of the Republic of Azerbaijan the reserves by 24.1% (USD impact of plummeting crude oil 2015 63.4% amounted to USD 38 590.8 12 271.6 million), observed in price. 2014 49.3% million, 87% (USD 33.57 the reference year, resulted 2013 billion) of which, were formed from the CBAR’s monetary The SOFAZ savings level 48.4% decreased by 9.5% in 2015 2012 48.9% 50.1 50.9 as the Fund experienced 2011 45.0% Chart 4.1.6. 45.8 a budget deficit. All in all, 40.3 38.6 2010 throughout the years of 42.8% Foreign exchange reserves 29.2 2001-2015, total SOFAZ 2009 33.6% 37.1

of the Republic of Azerbaijan 35.9 34.1 20.1 33.6 (billion USD) 29.8 revenues constituted USD 22.8 124.9 billion. USD 33.57

14.9 billion or 26.9% of those 14.2 13.8

Source: SOFAZ, CBAR 11.7 10.5 assets were set aside as Chart 4.1.9. 5.2 6.4

5.0 strategic reserves. SOFAZ’s reserve level, 2001-2015 (USD billion)

CBAR Total 124.90 SOFAZ revenues Strategic foreign Saving 33.57 exchange reserves 2014 2010 2011 2013 2015 2012 2009

Securing Fiscal sustainability During the reference year SOFAZ’s reserves experienced a drawdown of USD 3.53 billion or 9.5% and shrank to USD 33.57 billion by the end Revenues of the state budget were financed with transfers of the year. As illustrated in the chart below, it was the first year since 35.88 37.10 amounted to AZN 17 498.0 from SOFAZ. The budget the Fund’s establishment when its reserves experienced decline. 34.13 33.57 29.80 million in 2015, AZN 8 130 deficit was -0.5% of the GDP million or 46.4% of which in 2015. 22.77

Chart 4.1.7. 14.90 The assets of SOFAZ in 11.22 2001-2015 years (as of 2.48 1.39 1.45 0.6% 0.6% 31.12.2015, billion USD) 0.49 0.69 0.82 0.96 Chart 4.1.10. 0.3% State budget deficit/proficit as 2009 2010 2014 2015 a share of GDP in 2009-2015 2011 2012 2013 (percentages)

-0.5% -0.5% 2014 2010 2011 2013 2015 2012 2007 2001 2005 2002 2003 2006 2009 2008 2004 -0.7% Source: CBAR -0.9%

22 23 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 04 NATIONAL ECONOMY AND SOFAZ

Overall, AZN 63.9 billion were transferred 58.2% In 2015, non-oil export mainly thereof. As the chart 4.1.13. has decreased. Export of from SOFAZ to the state budget during the 57.3% 57.3% consisted of production of depicts, although the export animal or vegetable fats and 51.9% 50.7% period from 2003 to 2015. 47.6% 46.4% fruit and vegetables, animal of fruits, vegetables, alcoholic oils, as well as plastics and or vegetable fats and oils, and soft drinks, and sugar articles thereof decreased 35.3% sugar, plastics and articles has increased over the years, by 19.5% and 28.4%, thereof, aluminum and articles export of other non-oil goods respectively.

Chart 4.1.11. 15.1% 8.6% 9.7% SOFAZ transfers as a 8.2% 7.3% percentages of state budget revenues, 2003-2015 Chart 4.1.13. Major non-oil goods export Source: State Statistical Committee of the Republic of Azerbaijan (USD million) 311.9 291.1 250.8

2014 Source: The State Customs Committee 2010 2011 2013 2015 2012 2007 2005 2003 2006 2009 2008 2004 243.6 of the Republic of Azerbaijan 227.9 221.2 212.1 190.3 157.0 153.3 122.1 112.5 96.4 86.8 86.1 82.8

Foreign trade 80.0 76.1 57.2 43.9 31.9 34.9 30.9 25.8 According to the State constituted USD 11.4 billion indicator of the previous year Customs Committee of and the import USD 9.2 billion was observed, while export the Republic of Azerbaijan, thereof. In 2015, a reduction declined by 47.6% and import the foreign trade turnover in the volume of foreign rose by 0.4%. Fruit and Animals and Sugar Plastics Aluminum Base Chemical Alcoholic vegetables vegetable and and metals products and accounted for USD 20.6 trade turnover by 33.4% fats articles articles and articles soft drinks billion, while the export compared to the relevant and oils thereof thereof thereof

2013 2014 2015

36.4 Chart 4.1.12. 33.6 34.7 31.0 Foreign trade turnover 28.0 (billion USD)

26.6 20.6 20.8 24.0 4.2. SOFAZ’S REVENUES 23.9 21.8 21.4 14.7

Source: The State Customs 11.4 10.7 9.2 9.8 9.7 Committee of the Republic of 9.2 Low prices in the global investment portfolio against acreage fees and revenues Azerbaijan 6.1 6.6 oil market brought about AZN. In the reference year from the management of the a downfall in the SOFAZ’s ending on 31 December Fund’s assets recorded a total Import proceeds from hydrocarbon 2015, the SOFAZ’s revenues of AZN 7 721.1 million (USD sales. Simultaneously, the were obtained from the sales 7 670.2 million). In 2015, the Export Fund’s assets, expressed in of the Republic of Azerbaijan’s revenues decreased by 53% AZN terms grew following share of hydrocarbons, the compared to the previous 2014 2010 2011 2013 2015 2012 Trade turnover 2009 the appreciation of exchange fees paid to Azerbaijan for year’s results. rates of the foreign currencies transit of oil and gas through included in the SOFAZ its territory, bonus payments,

24 25 AZƏRBAYCAN RESPUBLİKASI DÖVLƏT NEFT FONDU 04 NATIONAL ECONOMY AND SOFAZ

Proceeds from sales The weighted average price generated from the sales Chart 1. of profit oil sold during 2015 of the oil produced in the Brent prices (USD/barrel) of the Republic of 120 being USD 54.3 and the net Republic of Azerbaijan 2014/2015 Azerbaijan’s share of price after the deduction and offshore fields in the hydrocarbons of the related costs - USD Azerbaijani sector of the 100 Source:IMF, commodity prices 48.06, a total of USD Caspian Sea in accordance 7 229.1 million or AZN with Product Sharing 7 369.6 million was Agreements (PSA). 80

60

40 Chart 4.2.1.

SOFAZ’s revenues (USD 112.2 111.1 109.1 20 million) and oil price (USD) 104.3 dynamics 0 78.0 19 799.9 Jan-2014 Jan-2015

54.3 Apr-2014 Apr-2015 Sep-2014 Feb-2014 Oct-2014 Sep-2015 Feb-2015 Oct-2015 July-2014 Aug-2014 July-2015 Aug-2015 Dec-2014 Nov-2014 Dec-2015 Nov-2015 May-2014 May-2015 June-2014 June-2015 Marc-2014 Marc-2015 17 329.2 17 405.4 16 309.3 16 231.3

7 670.2 Research undertaken by the oil production in politically estimates of the demand world’s leading analytical unstable Iraq and Lybia, this growth. 2010 2011 2012 2013 2014 2015 agencies found out the supply glut - the amount of following factors to be unsold oil daily added into • Aggressive market mainly responsible for this storage currently reaches policies pursued by the Revenues Average weighted price of oil remarkable decrease in the 2 million barrel - is driving by the Organization of prices of crude oil: the prices down. the Petroleum Exporting Countries (OPEC) member • Record-high supply in • Sluggish demand growth. states. Earlier on when the global markets. The The second biggest oil prices dropped down, prolonged period when oil importer and the Saudi Arabia, being the OIL PRICE DYNAMICS IN 2015 the oil prices consistently locomotive of the global key market player, used fluctuated above USD economic growth, China, in to curb its production 100, enabled oil companies 2015 had its lowest growth in order to regulate the Despite optimistic forecasts, average yearly price equalled more dramatic pace since then, to invest in highly risky rate in many years and thus market. However, at their the downward trend in oil prices USD 49/barrel for the WTI justifying the analysts’ claims and costly production positive effects of cheap meeting in December 2015 commenced in the second blend and USD 52/barrel for that the new period of cheap oil of oil from the shale and oil on the global demand the member states failed half of 2014 and accelerated the Brent. In October 2015, would last long, to hold true. tar sands. The USA and turned out to be far weaker to agree on decreasing further in 2015. Consequently, the IMF issued a conservative Canada, have increased than expected. The first the production quota the crude oil prices plummeted projection for 2016, predicting their production by about 5 month of 2016 exposed that now stands at the to USD 36 per barrel by the the oil price to stabilize at the million barrels per day since weaknesses of the Chinese level of 30 million barrel end of the year, the record level of USD 51 per barrel. Yet, 2010. Reinforced by the economy even further, per day. This inaction can low since 2009. In 2015, the the price downfall took even a unexpected increase in the supporting pessimistic be explained by various

26 27 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 04 NATIONAL ECONOMY AND SOFAZ

political and economic oil out of the market. The downward pressure on the Bonus In the reference year, SOFAZ’s revenues from bonuses paid by contradictions between expectations of the ever oil futures prices, too. investors for signing and fulfilling oil and gas contracts amounted the cartel members as more increasing market payments to AZN 2.1 million or USD 2 million. Bonus payments inflows from well as the Gulf states’ share of OPEC due to the companies are represented in the Table 4.2.1. concerted policy aimed at restart of oil exports from squeezing expensive shale Iran contributed to the Table 4.2.1. Bonus proceeds to SOFAZ in 2015

Amount Transferor Oilfield Date USD AZN NICO Shah Deniz 29.01.2015 1 457 1 142.9 LUKOIL (Shah-Deniz Limited) Shah Deniz 29.01.2015 1 457 1 142.9 TPOC Shah Deniz 29.01.2015 2 768 2 171.2 94.9% of all the profit made out of the sales of profit oil and gas, or USD 6 858 million was STATOIL Shah Deniz 29.01.2015 2 258 1 771.2 obtained from the oil and gas produced at the Azeri-Chirag-Guneshli offshore field. BP Exploration (Azerbaijan) Limited Shah Deniz 04.02.2015 4 200 3 294.5 Bahar Energy Bahar 29.05.2015 2 000 000 2 098 800.0 Total 2 012 140 2 108 322.7

Chart 4.2.3. Chart 4.2.2. Distrubution structure of inflows from the Structure of SOFAZ’s sale of profit oil and gas by fields during In 2015, another revenue inflow was generated from transportation revenues, 2015 (USD milion) Transit fees 2015 (USD million) of oil and gas through the territory of Azerbaijan (transit fees). AZN 11.6 million or USD 11.6 million of transit fees were transferred by Azerbaijan International Operating Company (AIOC) to the SOFAZ’s Proceeds from profit oil budget. The issuance date and amount of the SOFAZ’s proceeds from Azeri-Chirag-Guneshli and gas sales 7 229.1 6 858 the transit fees are presented in the Table 4.2.2. Shah Deniz 322.8 Revenues from management 425.4 of the Fund’s assets Binagadi 14.8 Table 4.2.2. Kurovdag 12.9 Transit fees 11.6 SOFAZ’s proceeds from the transit fees in 2015 Balakhani 9.1 Acreage fees 2.1 Bahar 4.6 Amount Transferor Date Surakhani 3.1 Bonus payments 2.0 USD million AZN million Zig-Hovsan 3.0 AIOC 07.01.2015 1.0 0.8 Neftchala 0.8 AIOC 12.02.2015 1.0 0.7 AIOC 12.03.2015 1.0 1.0 AIOC 14.04.2015 1.0 1.1 AIOC 14.05.2015 1.0 1.0 Revenues from the In 2015, SOFAZ’s assets were invested in fixed income, AIOC 11.06.2015 1.0 1.1 asset management equities, real estate and gold. AIOC 14.07.2015 1.0 1.0 The Fund’s revenues from AIOC 02.09.2015 0.6 0.6 asset management totaled AIOC 15.09.2015 1.0 1.1 USD 425.4 million, while AIOC 13.10.2015 1.0 1.0 the average rate of return constituted 1.24%. AIOC 17.11.2015 1.0 1.1 AIOC 08.12.2015 1.0 1.1 Total 11.6 11.6

28 29 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 04 NATIONAL ECONOMY AND SOFAZ

Acreage Proceeds paid by the foreign investors operating hydrocarbon Transfer to the Chart 4.3.2. assets for utilization of the contract areas totaled AZN 2.2 million state budget Structure of SOFAZ’s fees or USD 2.1 million. The acreage fees are represented in the expenditures in 2001-2015 Table 4.2.3. Expenses on the In order to mitigate the projects negative impact of low oil and administrative prices on SOFAZ assets, the needs amount of transfer channeled 9% Table 4.2.3. into the state budget has Proceeds from the acreage fees in 2015 been reduced from AZN 10 388.0 million to Amount Transferor Oilfield Date AZN 8 130.0 million, saving USD million AZN million AZN 2 258 million. BP Exploration (Azerbaijan) Shafag-Asiman 25.06.2015 2.1 2.2 Total 2.1 2.2

Transfer to the state budget 91% 4.3. SOFAZ’S EXPENDITURES

In 2015, SOFAZ’s expenditures (88.5% or AZN funded projects (11.2% or

expenditures were equal 8 130.0 million) accrued from AZN 1 029.9 million) and 11 350

to AZN 9 187.8 million the annual transfer to the SOFAZ’s administrative 9 905 Chart 4.3.3. 9 337 (USD 9 202.0 million). The state budget, followed by the expenses at 0.3% (AZN 000 9 Year-by-year transfers to the 8 130 greatest share of the total expenditures on the SOFAZ 27.9 million) of total. state budget (AZN million)

Chart 4.3.1. 5 915

Structure of SOFAZ’s Transfer to the State budget 8130.0 4 915 expenditures in 2015 3 800 (AZN million) Southern Gas Carridor project 692.9

Improvement of the social condition of 150.0 refugees and internally displaced persons 585 585 150 100 130 Samur-Absheron irrigation system 90.0

Baku-Tbilisi-Kars railway 61.5 construction project

Education of Azerbaijani 2014 2010 2011 2013 2015 2012 2007 2005 2003 2006 2009 2008 35.5 2004 youth abroad

Administrative expences 27.9

30 31 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 04 NATIONAL ECONOMY AND SOFAZ

In 2015, the transfers to the state budget from SOFAZ comprised 46.4% and 45.7% of the state budget Chart 4.3.6. revenues and expenditures, respectively. Expenditures on the improvement of the living conditions of refugees and 300 300 300 internally displaced persons, year-by- Chart 4.3.4. Chart 4.3.5. year (million AZN) 154.1 The share of transfers in the The share of transfers in the state 145 140 150 state budget income budget expenditures 110 89.9 104.9 40.4 37.8 0.7 20 15 2015 45.7% 2015 46.4% 2014 49.9% 2014 50.7% 2013 59.3% 2014 2010 2011 2013 2015 2012 2007 2001 2005 2002 2003 2006 2009 2008 2013 58.2% 2004 2012 56.9% 2012 57.3% 2011 58.5% 2011 57.3% 2010 50.3% 2010 51.9% The aforementioned funds kindergartens, 58 medical transformers of different 2009 46.8% 2009 47.6% were allocated for the centers, and 2 Olympic sport powers were completed 2008 35.6% construction of 94 modern complexes were built, while within these residential 2008 35.3% 2007 9.7% residential blocks providing 718km of highways, 960km blocks. The measures taken 2007 9.7% 2006 15.4% the living space of 2.9 million of water pipelines, 1605km succeeded in decreasing 2006 15.1% square meters, where 49 000 of transmission lines, 442km the poverty rate among 2005 7.0% 2005 7.3% families, or 243 000 persons of gas pipelines, 66km of the refugees and internally 2004 8.7% 2004 8.6% were settled. In addition, 150 communication lines, 26km displaced persons from 75% 2003 8.1% schools, 6 music colleges, 1 of heating lines, 89km of in 2002 to 12% in 2015. 2003 8.2% art school, 1 culture palace, sewerage lines, 163km of 50 cultural centers, 59 drainage network and 830

this project. In the reference Chart 4.3.7. 75% 74% Funding of The improvement 72% year, SOFAZ allocated Poverty rate among the social and of the social and AZN 150 million with the refugees and internally 57% infrastructure economic purpose of ameliorating living displaced persons conditions of the refugees projects conditions of 41% and internally displace Sourse: Social Development Fund refugees and persons (Chart 4.3.6.). of Displaced Persons of the Republic 30% 25% internally displaced of Azerbaijan 23% SOFAZ plays a significant 18% 15% 15% 12% role in financing social and persons 10% infrastructure projects of strategic national importance. This project, one of those financed by SOFAZ in 2015, contributed to poverty reduction efforts taken in Azerbaijan. In total, AZN 1.91 2014 2010 2011 2013 2015 2012 2007 2005 2003 2006 2009 2008 billion were allocated by the 2004 Fund within the framework of

32 33 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 04 NATIONAL ECONOMY AND SOFAZ

Reconstruction of the Samur-Absheron irrigation system INVESTING IN HUMAN CAPITAL

The project on the of 150 thousand hectares Khizi districts, as well Financing the “State Program on Education of Azerbaijani reconstruction of the Samur- of cultivated land and to as consultancy services Absheron irrigation system, make 30 thousand hectares regarding the aforementioned Youth abroad in the years 2007-2015” being part of the current more arable again. This will works. strategy of maintaining create new opportunities for food security in Azerbaijan, agricultural development. As of 1 January 2016, SOFAZ finances the “State million to cover education this project is 3 283. Within aims at creating a reliable Along with that, the AZN 1 239.6 million (USD Program on Education of costs, approximately AZN 0.8 the framework of the State source of water supply Shamkirchay water reservoir 1 527.3 million) have been Azerbaijani Youth Abroad in million for travel expenditures, Program, the majority of for the cities of Baku and which is now being built, transfered from SOFAZ with the years 2007-2015” that AZN 0.5 million for insurance the students are educated Sumgayit, preventing energy is expected to cater for the purpose of financing the aims at fulfilling the idea of costs, AZN 0.1 million for visa in such countries as the losses incurred from water the irrigation of some 75 “Reconstruction of the Samur- transforming black gold into and registration and AZN 0.1 United Kingdom (28.9%), transportation and using this thousand hectares of land Absheron irrigation system” human capital. In 2015, the million for other expenses. Turkey (22.2%), Germany spare capacity to produce more. project, including AZN 90.0 Fund allocated, according to Since 2008, the Fund has (12.5%), Canada (7.2%), the 25 MWT of energy. The million (USD 89.7 million) in the orders of the Ministry spent on this project overall Netherlands (5.3%) and Russia continuation of building The construction of the the reference year. of Education, AZN 35.5 AZN 156.8 million. As of 31 (3.8%). works on the Takhtakorpu Takhtakorpu water reservoir, million in total, including AZN December 2015, the number water reservoir, Velvelichay- Velvelichay-Takhtakorpu and 16.8 million allocated for of students financed by the Takhtakorpu and Takhtakorpu- Takhtakorpu-Jeyranbatan accommodation, AZN 17.2 Fund within the framework of Jeyranbatan water channels channels was fulfilled as part which are parts of the Samur- of the “Reconstruction of the Absheron project, have been Samur-Absheron irrigation Chart 4.3.8. included into the action plan system” project, and these Distribution of the students for the “State Program on facilities were officially financed by the State 0.85% Ensuring Reliable Supply of launched on 28 September 1.25% Program, by the area of study the Food Projects for the 2013 with the participation of 0.79% 0.91% Population of Azerbaijan in the President of the Republic 2.28% the years 2008-2015”. This of Azerbaijan. 5.15% Transport project, since its initiation in 4.66% Education 2006, has been funded by The construction works 32.23% Agriculture SOFAZ. within the framework of the 5.57% Natural sciences second stage of the project 0.43% Construction The Samur-Absheron were initiated in the late 0.03% irrigation system will make 2013. This stage envisaged Culture a significant contribution the construction of water Social sciences to satisfying the growing intake facilities and water Law demand for potable water in 10.27% transmission channels Service Baku, Sumgayit and residential (first of all, at the rivers Science areas of the Absheron Qusarchay, Qudyalchay peninsula. The Takhtakorpu and Jaqajuq), improvement Industry water reservoir, Velvelichay- of water supply for the Information and Takhtakorpu and Takhtakorpu- lands already irrigated and communication 9.14% Jeyranbatan water channels, commissioning of newly technologies once launched, are expected irrigated lands in the Medical science to improve the irrigation Shabran, Siyazan and 26.44% Economy and management

34 35 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 04 NATIONAL ECONOMY AND SOFAZ

Financing the share of the Republic of Azerbaijan in the сharter capital of the “South Gas Corridor” Closed Joint Stock Company Human capital and economic development

In accordance with the “Shah Deniz” gas-condensate 685.9 million) to the Ministry Social changes that higher education the latest achievements of applied Decree of the President of the field, the expansion of the of Economy to finance the brings by more efficient governance, sciences and capable of implementing Republic of Azerbaijan from South Caucasus Pipeline, state-owned shares of the dissemination of entrepreneurial spirit, high technologies; that’s why 25th February of 2014, the the construction of the Company. During the years improvement in healthcare services, these countries are recommended “South Gas Corridor” closed Trans-Anatolian Pipeline and of 2014-2015, the Fund increasing private investment- exert a to preoccupy themselves with joint stock company was the Trans-Adriatic Pipeline. allocated AZN 732.8 million positive impact on the overall quality obtaining specialists in mathematics, established with its charter According to the paragraph (USD 736.9 million) in total to of life, thus triggering sustainable engineering and precise sciences. The capital of USD 100 million, 2.1. of the aforementioned this project. economic development in the long experience of Asian “tiger” economies 51% of which is owned by Decree, SOFAZ is responsible run. The OECD emphasizes the salient serves as the best example for this the Azerbaijani government for the financing of the contribution education makes to the thesis, namely the fact that the and the remaining 49% by company’s state-owned formation of human capital, creation investments these countries made SOCAR. The company’s shares, while their ownership of knowledge bases, preservation in higher education have paid off in purpose is to facilitate and management are vested of various skills and capabilities and the long run even more than in the the management of such to the Ministry of Economy. improvements in their efficiency. shorter timeframe. On the other projects as the second stage In 2015, SOFAZ transferred According to an analysis undertaken side, the primacy of quality over of exploitation works at the AZN 692.9 million (USD among the developed countries, during quantity is stressed as well: even a the period of 1994-2005 progress in limited number of specialists with higher education on average caused exceptional knowledge and skills are 0.1%-0.7% increase in the productivity perfectly capable of improving the of labour per year. Another research efficiency of economic management shows that an increase in the major and accelerating the processes of Funding of Baku-Tbilisi-Kars parameters of higher education technological catch-up. In order to equal to one standard deviation maximize the positive contribution Railway Construction project results on average in 1.3% more of of education, the World Bank annual economic growth, while in recommends building up robust economically open countries this information and communications The main purpose of the project envisages building USD 51.5 million (AZN 61.5 influence is even higher, reaching 2.5%. infrastructure, the system of project is to enhance the a Kars-Akhalkalaki railway million) to finance this project. innovation implemention and, most transit capacity of the region’s line, 76km of which will pass Throughout the years 2007- The investigations conducted by the significantly, sound management countries by building a through Turkey and 26km 2015, SOFAZ spent in total World Bank within the framework of and business frameworks fitting railway line that goes through through Georgia, as well USD 588.1 million (AZN the Knowledge Economy Index (KEI) contemporary standards. Azerbaijan, Georgia and as restoring and rebuilding 485.7 million) on this project. approach demonstrate the dramatic Turkey and connects the the 160km of Georgia’s extent of the role played by higher Trans-European and Trans- Marabda-Akhalkalaki railway. education in accelerating economic Asian railway networks. The In 2015, SOFAZ allocated development. In the developing countries, there is a strong need, above all, in professionals aware of

36 37 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 05

INVESTMENT REPORT

5.1. INVESTMENT STRATEGY

SOFAZ’s investment strategy is aimed at maximizing long-term risk adjusted returns.

Broad diversification among mandate and to ensure the SOFAZ’s asset management the asset classes and across transparency in its investment framework. Along with the the countries, along with decisions. SOFAZ’s other purposes, it outlines monitoring and analysis of investment portfolio is permissible asset classes, macroeconomic environment managed in accordance with currencies, minimum serves this strategic goal the “Rules on managing the requirements for the Fund’s and assures the persistence foreign currency assets of the external managers, and of stable investment State Oil Fund of the Republic defines the credit quality performance. of Azerbaijan” (“Investment limits for the Fund’s Guidelines”), approved by counterparties (custodian Presidential Decree No. 511 banks, correspondent banks, Government has laid down of 19 June 2001 and the etc.). general principles and Investment Policy approved guidelines for the efficient by Presidential Decrees on an management of the Fund’s Investment Policy defines annual basis. assets, in order to set up the objectives, forecasted the legal framework for “Investment Guidelines” sets size, currency composition, the Fund’s investment the general principles of strategic asset allocation,

38 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 05 INVESTMENT REPORT

benchmarks and risk limits • Debt obligations and As of December 2015, Table 5.1.1. for the Fund’s investment money market instruments 82.1% of the investment Investment Forms portfolio. – minimum 80% of the portfolio comprised of fixed investment portfolio; income and money market Global Portfolio securities while 10.2%, 3.1% In line with the long-term • Equity portfolio – up to 10% asset asset Strategy employed Implemenation methods and 4.6% were invested in objectives, asset class of the investment portfolio; classes classes equities, gold, and real composition of the Fund’s • Real estate portfolio – up estate, respectively. Exposure through investment portfolio is to 5% of the investment direct and indirect MSCI World, MSCI Europe ex UK, Public Equity reviewed and approved portfolio; ownership of global S&P 100, strategic stake in VTB Bank annually. 2015 Investment • Gold portfolio – up to 5% of Traditional equities Policy defined the asset class the investment portfolio. Exposure to bonds and Sovereign, supranational, agency and composition as below: Fixed Income money market corporate investment grade bonds and instruments money market instruments Commitments to IFC AMC managed funds Exposure through Private Investment in the charter capital of the fund and project Equity Azerbaijan Rigs LLC, formed with the investments participation of SOFAZ (90%) Graph 5.1.1. and SOCAR (10%). Alternative Target Asset allocation Exposure through Direct property stakes in: Moscow, Real Estate direct commercial London,Paris, Seoul and Tokyo; property stakes Indirect exposure through funds Exposure through Commodity Investments in gold Portfolio as of Portfolio as of Target Portfolio physical purchase 31.12.2014 31.12.2015 31.12.2015 Fixed Income Fixed Income Fixed Income ≥ 87.5% 82.1% 80% Equities 6.5% Equities 10.2% Equities ≤ 10% Real Estate 2.9% Real Estate 4.6% Real Estate ≤ 5% Gold 3.1% Gold 3.1% Gold ≤ 5%

SOFAZ’s investment portfolio “Investment Guidelines”. the benchmark for the public is predominantly allocated to 3-month LIBOR (3-month equity portfolio. assets denominated in USD EURIBOR for assets Table 5.1.1. provides (50%), EUR (35%) and GBP denominated in EUR) is a summary snapshot (5%), whereas the remaining selected as the benchmark for of SOFAZ’s current 10% is allocated to the the fixed income and money investment approach and assets denominated in other market instruments portfolio, its implementation to the currencies specified in the while the MSCI World Index is portfolio.

40 41 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 05 INVESTMENT REPORT

Internal Portfolio Management External managers

One of the unstated missions Fund puts special emphasis the field. At the end of the As of December 2015, 7.1% For fixed income portfolio: For equity portfolio: of SOFAZ is to promote and on bringing all asset classes year under review, 92.9% of of SOFAZ’s investment • World Bank – the World • UBS Asset Management – to enhance asset management under internal management the investment portfolio was portfolio was managed by Bank Treasury manages manages more than USD industry standards in as it builds extensive managed internally. external managers. Benefits over USD 224 million 1 248 million (3.7% of Azerbaijan. Therefore, the knowledge and expertise in brought by external managers (0.7% of assets); assets) include market expertise, specific industry experience • Deutsche Bank Advisors – • State Street Global Advisors and regional presence manages more than USD (SSgA) – manages more Chart 5.1.2. thereby adding value to the 100 million (0.3% of assets). than USD 804 million SOFAZ’s investment portfolio breakdown by investment portfolio. (2.4% of assets). geographic regions

21.58% 43.93% 5.2. SOFAZ INVESTMENT PORTFOLIO

0.76% 26.58% GLOBAL ECONOMY 0.01% REVIEW

0.26%

3.55% Global growth divergence

Consistent fall in commodity at the year-start. However, year, accelerating developed prices including oil prices, economic changes forced countries outperformed the Greek and Chinese crisis, FED to defer the timing of the slowing emerging economies. Europe Australia/Oceania devaluation of the Yuan, first monetary tightening until Falling commodity prices Asia Middle East and European Central Bank December. played a significant role in a North America Africa Quantitative Easing (ECB slowdown of global growth. South America I n t e r n a ti o n a l fi n a n c i a l o r g a n i z a ti o n s 3 . 3% QE) announcement were 2015 was hallmarked The global economy failed to among the prominent events by heterogeneity of the breach the forecasted 3.1% of the last year. FED rate economic growth across the level and expanded only by hike was initially blueprinted world. As in the previous 2.9% (Purchasing Power Parity

42 43 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 05 INVESTMENT REPORT

(PPP)). The GDP growth rate India built up record currency consumer prices increased Chart 5.2.2. for the developed countries, reserve in order to prevent its by 0.7% year-on-year in Inflation rates in major economies including the United States currency from appreciating December of 2015, higher (2010-2015, percentages) (2.4%), Japan (0.5%) and further. than 0.5% in the previous Germany (1.7%), reached month but below the market 2.1% compared to 1.5% in the Global inflation had risen expectations of 0.8%. Source: Bloomberg previous year. For emerging far less than expected. countries, those are net In commodity-importing commodity importers (China, economies in particular, US India, and South Korea), disinflation created favorable E growth rate remained at 6% conditions for consumer U for the previous 3 years. spending. In the given J China and India benefited period, a fall in inflation C from oil price disinflation, rates was observed across despite the fact that China the Eurozone. The German had to use up about 6% of Consumer Price Index (CPI) currency reserve and the resulted in 0.13% inflation Yuan depreciated against for the end of the year. the USD. On the other side, Coming to the United States,

J J J J J S S S S S D D D D Chart 5.2.1. D D GDP growth rate in major economies (2010-2015, percentages) ECB and FED – leading players in shaping Source: Bloomberg global economy of 2015 US E U Monetary easing in most it began full-scale QE, along falling commodity prices. J economies together with with cutting interest rates to Geopolitical tensions, China’s C RHS low unemployment statistics record lows and purchasing slowdown, anticipation of the contributed to the feeling sovereign debt and primary FED rate hike as well as low of future economic growth. papers. In the beginning of oil prices created a stressful Unemployment in the the year ECB launched the climate for investors. Eurozone fell to its lowest Extended Asset Purchase level in three years, hitting Programme (EAPP) with the Political turmoil in Greece

J 10.5% in the year-end. In Q4 aim to acquire 60 billion EUR and economic crisis lasting J J J J S S S S S D D D D D D this indicator for the US and per month. since 2009 raised concerns UK was recorded at 5% and regarding sustainability 5.1%, respectively. However, the second quarter of the government debt. of the year disappointed The crisis also resulted in a In 2015 ECB announced investors with the so called general collapse of the Greek further measures to stimulate Perfect Storm: Greek economy. Debt negotiations the Eurozone economy. Thus and Chinese crisis, and between Greece and its

44 45 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 05 INVESTMENT REPORT

Chart 5.2.3. Economic situation in the most accommodative policies, with the major Unemployment rates in US, Eurozone and UK emerging countries, monetary policy in US history. central banks pursuing their (2007-2015, percentages) particularly Chinese The improved employment monetary easing along with slowdown, made the FED numbers and high growth rate the rate hike in the US, thus, postpone the move in interest created favorable conditions stipulating the divergence in Source: Bloomberg rates from spring to the for FED to implement rate monetary policies. end of the year. Finally, in hike, first time after almost a December 2015 the FED decade. approved a quarter-point Overall, 2015 marked itself increase in its target funds as an eventful year of highly rate, after seven years of accommodative monetary

Chart 5.2.4. Central Banks’ benchmark interest rates (2007-2015, percentages)

Source: Bloomberg J J J J J J J J J S S S S S S S S S D D D D D D D D D FED PBOC US EU U BOE ECB BOJ creditors relieved the tension year deposit rate from 2.75% 30% over the three weeks. as the government agreed to to 1.50%, and finally reserve Later in August on Black a new adjustment programme requirement rate was reduced Monday the Shanghai stock J J J J J J J J S S S S S S S S D D D D D D D in July. to 17.50% at the end of the was down again by 8.5%. D D year compared to 19.50% at Among the emerging the beginning of the year. The year-end was hallmarked economies, devaluation of by announcement of 6-month the Chinese Yuan by nearly A decrease in interest rates extension to ECB QE 2015 was a year full of many currencies. A similar Commodity-dependent 4% was one of the biggest prompted investors to move programme, from September economic and financial situation could be observed emerging economies suffered movements and surprises away from the bond market 2016 to March 2017, and a turbulences, which no with other currencies of the from the decrease in to the markets. In order to making equity market more 10bps cut in deposit rate. ECB wonder created opportunities developed countries, such as commodity prices. Brazilian combat deflationary pressures attractive. On the other also added state, agency and for volatility increase in the appreciation in GBP and Real performed the worst and slowing economy, side, unusual structure of supranational securities, semi- exchange rates as well. CHF which also strengthened falling by 25%. China stepped up monetary China’s stock market is very public securities and local Falling commodity prices against currencies of the easing with several rate cuts vulnerable to large swings. debt to the list of securities greatly contributed to a commodity dependent throughout the year. The Thus, the big sell-off in China that can be bought under the stronger US dollar, leading economies. one-year lending rate changed in July led to the crash in repurchase program. to its appreciation against from 5.6% to 4.35%, the one- Shanghai stock market by

46 47 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 05 INVESTMENT REPORT

Chart 5.2.5. Chart 5.2.6. G10 currency performance Oil prices in 2015 (USD) in 2015 against USD (percentages) Source: Bloomberg

Source: Bloomberg

New Canadian Norwegian Zealand Australian Danish Swedish British Swiss Japanese Dollar Krone Dollar Dollar Krone Euro Krona Pound Franc Yen 0 -2

-4

-6

-8 J J J A O S F A D N -10 B TI -12

-14

-16 FIXED INCOME MARKETS

-18

Historically lowest yields in Germany Oil prices ended the year course of the year have not below USD 40 per barrel, changed oil production quota. marking the lowest level Finally, the end of the Q4 In Europe, bonds showed maturities due to ECB officials’ policies. 5 year Bunds was since 2009. Ongoing fall in was marked by even lower oil mixed performance despite statements throughout at negative rate territory oil prices led to the sustained prices, as consensus in crude the relative size of the Asset the year. Front-end of the consistently during the year, excess of crude oil supply as oil supply was not achieved. Purchase Program (APP). German sovereign yield while 3 month Bill stood at OPEC’s production continued Overall Eurozone markets curve was pushed to record -0.55% at the end of 2015. to increase during the year. experienced heightened negative levels due to ECB’s Meetings of OPEC in the volatility, particularly in long unprecedented expansionary

48 49 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 05 INVESTMENT REPORT

Chart 5.2.7. Difference (bps) Taking just European 10-year to its political stability. It performances of other non- Germany sovereign yield curve (percentages) yields, despite historically is likely that without the core country debts would 01.01.2015 low spreads on periphery turmoil in Greece, the political have been similar to or even 31.12.2015 countries, only Italy agitation in Catalonia and the better than those of BTPs Source: Bloomberg boasted relatively favorable presence of general elections (Italian sovereign bonds). performance last year, due in Portugal and Spain, the

2 60

1.5 40 1 The first rate hike in 20 almost a decade 0.5 1 M 3 M 6 M 1Y 2Y 3Y 4Y 5Y 6Y 0 0 7Y 8Y 9Y 10Y 15Y 20Y 25Y 30Y In the US short dated notes wording, downward revisions they were largely offset by the -0.5 suffered from the first hike to dot plots and growth return of Japanese investors -20 in the FED funds rate since projections also played a role and the renewed appetite -1 2006, while 10 year and 30 in capping the rise in rates. of US investors seeking an -40 -1.5 year yields only gained While the massive UST sales alternative to the overvalued 10 bps and 25 bps despite by the Chinese authorities European market. -2 -60 much higher nominal and oil producing countries growth. US FED’s multiple made investors fear the worst adjustments in terms of for the US market for a while,

Chart 5.2.8. 10 year yield spread against Germany (percentages) Chart 5.2.9. Source: Bloomberg US sovereign yield curve (percentages) Difference 31.12.2015 (bps) 01.01.2015 Source: Bloomberg

F 3.5 I 60 3 S P 50 2.5 40 2

1.5 30 1 20 0.5 10

0 0 J J J J J A A A A A O O O O O F F F F F A A A A A D D D D D D 1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 30Y

50 51 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 05 INVESTMENT REPORT

SOFAZ’s Fixed Income Chart 5.2.11. Breakdown of fixed income portfolio by geographical distribution (percentages) Investments 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Europe 45.75% In 2015, our exposure to reallocating funds into papers was also kept at the State-Supra-Agencies (SSAs) Financial and Corporate same level due to lower 23.15% North America was kept approximately equal bonds offering yield pick-up money-market yield levels and to its level in the previous was continued. Exposure to lack of opportunities. 0.32% South America year and the strategy of the short-term commercial 22.52% Asia

4.20% Australia & Oceania

0.91% Middle East Chart 5.2.10. 0.02% Breakdown of fixed income portfolio by product types (percentages) Africa

International Financial 3.13% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% 45.00% Organizations

Deposit and cash 7.76% 31.12.2015 30.06.2015 31.12.2014 Covered bond 0.94% Short-term commercial paper (money markets) 8.22% The portion of fixed coupon securities was decreased to Chart 5.2.12. Corporate bonds 42.66% 48.71% in 2015 from 53% Breakdown of fixed income in the previous year and the portfolio by security type Financial bonds 19.98% overall fraction of floating 15.97% Agencies and international rate notes and money market organizations 12.75% securities was increased. The aim of this strategy was to 48.71% Sovereign debt securities 7.69% benefit from potential rate hikes, increase in yields and 35.32% 31.12.2014 30.06.2015 31.12.2015 widening spreads in the bond markets. Overall duration of Fixed fixed income portfolio is still considered to be short, for Floating the purpose of protecting Money market it from adverse effects of During the year under review, to Europe (45.75%), whereas 2015. Also, SOFAZ increased movements in the interest SOFAZ pursued the strategy the exposure to North its exposure to emerging rates. Fixed income portfolio is well diversified across different industry of achieving geographical America was maintained countries by introducing a sectors. The sectors receiving highest allocations were the same diversification of the fixed almost the same with a slight new currency to its portfolio as in the previous year: financials, industrials, consumer staples and income portfolio. SOFAZ decrease from approximately – CNY. consumer discretionary. slightly increased its exposure 25% in 2014 to 23.15% in

52 53 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 05 INVESTMENT REPORT

6.08% Chart 5.2.13. 9.91% whereas other sectors Japanese economy was The leading Japanese market Breakdown of fixed income 6.85% benefited from low-oil driven back into another index, Nikkei 225, posted an portfolio by sectors 2.91% condition due to stimulated recession caused by China’s annual return of +0.04%. 10.09% (percentages) consumption (food & slowdown which triggered the 5.87% beverages, luxury goods) or government’s next stimulus due to decrease in operating programme. 2.05% Consumer discreationary costs (construction, airlines). Consumer Staple

Energy 18.58% Financials

Health Care 31.90% Industrials

IT 5.76% Materials

Telecoms

Utilities Chart 5.2.14. MSCI World Index (2005-2015, index points)

Source:Bloomberg

2000 1800 EQUITY INVESTMENTS 1600 1400 1200 Equity market 1000 review 800 600 400 2015 was featured with high were down -3% and -10%, During 2015, DJ EuroStoxx 200 level of volatility. Overall, respectively. Nonetheless, Index returned 8% in local 0 with the ECB’s QE, 2015 was the S&P had its worst cycle currency while FTSE 100 expected to be a good year of volatility since 2011, as oil fell by around -4.9% as UK for European equities and it had not experienced similar markets were particularly hit 31.12.2005 31.12.2006 31.12.2007 31.12.2008 31.12.2009 31.12.2010 31.12.2011 31.12.2012 31.12.2013 31.12.2014 31.12.2015 ended with European stocks price volatility since 2009. due to over-representation outperforming their US peers. During the year household in directly oil related spending had been the main sectors. In terms of size, growth driver while spending midcaps (+8.1%) significantly In 2015, with all indices from corporate investments outperformed large caps generally declining as part of remained stable in US. The (+4.8%). Due to the sharp a downward trend, US market negative level of foreign decline in oil prices, sectors did better than others in trade deteriorated even sensitive to the commodities terms of USD as the S&P 500 further throughout the year trend (basic resources, oil, was down about -0.7% while due to the dollar’s persistent chemicals, energy sector) DJ EuroStoxx and FTSE 100 appreciation. underperformed considerably

54 55 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 05 INVESTMENT REPORT

Private Equity portfolio Equity Dominican Republic, Kenya, • IFC Global Infrastructure Mexico, Nigeria, Trinidad Fund was established in portfolio and Tobago, and Uganda. 2013 and makes equity and By the end of 2015, SOFAZ SOFAZ’s commitment in equity-related investments had a commitment to three ALAC Fund is USD 100 in the infrastructure sector funds managed by IFC Asset million, representing 10% in global emerging markets. By the end of 2015, SOFAZ World accounted for -0.05% In 2015, the local currency Management Company. The stake as a Limited Partner. To date, the fund has had increased its public equity in 2015. denominated return equaled description of each fund is commitments of USD 1.2 portfolio to 7.7% of total 20.17%. outlined below: • IFC Catalyst Fund was AUM, compared to 5.1% in established in 2012 as a billion and SOFAZ’s portion SOFAZ’s internally • IFC African, Latin American, 2014. Throughout the year, fund of funds and makes in it is USD 200 million managed portfolio which is During 2015, SOFAZ and Caribbean Fund public equity investments investments in selected representing 16.67% stake benchmarked to S&P 100 increased its tactical (ALAC) is a USD 1 billion generated a local return of renewable energy and as a Limited Partner. index (comprised of 101 blue allocation to European fund established in 2010 3.64%. resource efficiency-focused In 2015, SOFAZ hired chip stocks of USA) generated equities by investing EUR and makes equity and private equity funds in Neuberger Berman, one of The Fund mitigates portfolio return of +2.66% throughout 800 million into MSCI ex-UK equity-related investments emerging markets. To date, the largest US-based asset volatility by investing the the year. index benchmarked mandate. across all industry sectors the fund has USD 418 managers, to manage USD largest proportion of the Return of the portfolio in Sub-Saharan Africa, million in commitments. 200 million private equity equity portfolio into the well tracking MSCI ex-UK index Latin America, and the SOFAZ continues to hold an SOFAZ’s commitment in IFC separate account. SOFAZ diversified MSCI World index. was -6.44% in Euro terms Caribbean. The fund makes equity stake in VTB bank, a Catalyst Fund is USD 50 will be investing in Buyout, The return of the portfolio in 2015. investments mostly in state-controlled Russian bank. million, representing 12% Mezzanine, Growth funds tracking MSCI Argentina, Brazil, Chile, stake as a Limited Partner. and co-investments in the Colombia, Cote D’Ivoire, Developed Markets, primarily in North America and Western Europe through the Chart 5.2.15. mandate. PRIVATE EQUITY Breakdown by sectors

Private Equity market Cleantech review 2015 and resource Health & Education efficiency 4% 4% Infrastructure excluding power 22% Private Capital markets AUM currently stands at with a record aggregate witnessed another healthy USD 2.4 trillion. Given 1 620 value of USD 136 billion. Dry Other year of capital raising with market exits valued at some powder levels stood at USD 17% USD 288 billion aggregate USD 416 billion, buyout funds 755 billion which led to the Renewable energy capital raised by 689 Private exit value had dropped slightly strengthened competition 2% Equity funds throughout the since 2014. Venture capitalists among funds over deals in the Banking year. Total Private Equity engaged in 9 241 financings market. 3%

Agrobusiness Non-banking 1% financial institution 14%

Power Housing & Hotels 22% Oil & Gas 6% 5%

56 57 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 05 INVESTMENT REPORT

Global China 7% Chart 5.2.16. Middle East & 1% Last year, 14.0 million square the three major commercial the strengthening global real Breakdown by regions North Africa meters of new office space property types (office, estate market. 1% was delivered globally, retail and industrial) grew Africa which is the highest record by 2.8% globally. Capital Chart 5.2.17. 28% since 2009 and represents value appreciation on prime a 29% increase on 2014. assets stood at 8.5% in 2015, Estimated unlevered prime This notwithstanding, the broadly matching the levels property market returns market, successfully absorbed of 2014. In the meantime, (percentages, annually) this additional new space macroeconomic environment and global vacancy rates is expected to keep improving, Source: Cushman & Wakefield, continued to decline. In and it may potentially CoStar, JLL, CBRE, Colliers, Latin America 2015, prime rents across provide a further boost to Pramerica Real Estate Investors. & Caribbean 47% Asia and the 30% Pacific 16% 25% 20% Investment to 15% 10% the new, 5% semi-submersible Real Estate Market 0% drilling rig highlights -5% -10% -15% In 2015, SOFAZ invested For the past three years USD 287.6 million (AZN there has been a period of -20% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 300.6 million) in the charter steady growth in global real capital of the Azerbaijan estate trade volumes around Income Rent Impact Yield Impact Total Return Rigs LLC, formed with the the world. The global real participation of SOFAZ estate market was USD 12.9 (90%) and SOCAR (10%). trillion in size in 2015 and it The maximum budget limit of is projected to be capable of the project is USD 1 116.7 growing to USD 23.9 trillion million. The charter capital by 2020. During 2015, the is formed by periodic capital major global real estate Europe contributions from SOFAZ markets were in better shape and SOCAR in order to fulfil and capital markets were payments to the contractors. supported by improving In Europe, conditions (CRE) investment reached assets drove up in “gateway” According to the Engineering corporate occupier demand for real estate investors EUR 246.3 billion (over EUR cities such as London, Paris, Procurement Construction across all the main global remain attractive, thanks 100 billion was invested into Milan and Berlin. In line with and Management Contract regions and property sectors. to a combination of steady the office sector and nearly expectations, London and dated 24 June, 2013 Caspian Furthermore, asset prices economic growth, extensive EUR 70 billion into the retail Paris filled the top two spots Drilling Company LLC is a have reached all-time high monetary policy support, sector), just surpassing the in the table of the most liquid project contractor, which was which has led to and an abundance of previous record year of 2007. markets in Europe in 2015. founded by SOCAR and is the a reduction in the number capital targeting property Across Europe, in particular, owner of existing drilling rigs of buyers. acquisitions. During 2015 rental growth remained in the Caspian Sea. total Commercial Real Estate elusive and the price of core

58 59 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 05 INVESTMENT REPORT

Chart 5.2.18. 300 An increase in the multitude of transactions in 2015 pushed prices up. Average prime yields for Europe stood at 4.6% in 2015. Capital growth at all the property levels grew by 1.7% with the yield impact once European investment 250 activity (EUR, billion) again being the sole reason behind. 200 Source: Cushman & Chart 5.2.20. 150 Wakefield Research Annual Capital France Germany UK Netherlands Value Change 100 Southern Europe+Ireland CEE Nordic 50 Source: CBRE

0 15%

10% 2014 2010 2012 2002 2006 2008 2004 2000 2016 (f)2016

5%

Chart 5.2.19. 0% 8.0% Real estate average prime yields 7.0% -5% Western Europe 6.10% (14 cities) 6.0% -10%

Source: BNP Paribas 5.0% 4.33% -15% Office 4.0% Q112 Q212 Q312 Q412 Q113 Q213 Q313 Q413 Q114 Q214 Q314 Q414 Q115 Q215 Q315

Retail 3.65% 3.0% Industrial 07 08 09 10 11 12 13 14 15

Asia Pacific (APAC) Among the top three 14% year-on-year growth. comparatively weak Q4 with European markets, there By contrast, the UK saw volumes at USD 10.7 billion, was quite a significant a marked drop in the final which resulted in a full-year Asia Pacific was in a slowdown major investors being more China as foreign investors divergence in performance quarter of 2015 relative 16% fall from the 2014’s total. period, with the total property focused on outbound (rather turned more cautions amid an between the UK, France and to 2014, which pulled full- investment activity in 2015 than domestic) investment increase in market uncertainty Germany over the course of year volumes down by 11% down by about a quarter opportunities. Investors in and the ongoing devaluation 2015. The German market against 2014. In France, 2015 compared to 2014. This Japan and Australia retained of the RMB. was particularly strong, with was also featured with a was due to the all-time high a strong appetite for high asset prices, the economic quality core assets. Market

slowdown in China and some sentiment deteriorated in

60 61 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 05 INVESTMENT REPORT

Chart 5.2.21. The average net effective Chart 5.2.23. Asias Economic performance rental growth across Asia Direct Commercial Real Estate Investment 2007-2015 2015/2016 Pacific accelerated to 3.7% in 2015.The highest rental growth was led by Hong Source: JLL (Real Estate Intelligence Service) Source: Heitman Research Kong (+13.3%) and the strongest uplift was seen 150 2015 in Sydney (+5.4%), followed $123.6 bln. -6% y-o-y Despite relatively high levels by Bangalore (+3.8%) on 125 of new completions in Asia the back of robust tenant demand. Improved business 100 Pacific, improving absorption helped the regional vacancy sentiment also contributed 75 rate to edge down further to the rental growth gathering pace in Tokyo to 10.6% in 2015. Demand USD Billion for office space increased in (+2.8%). 50 2015, with net absorption of 4.6 million square meter. 25 Shenzhen and Tokyo were the most active markets. Growth accelerating 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 Japan China Australia Singapore Hong Kong South Korea Other

Figures refer to transactions over USD 5 million in office, retail, hotels and industrial.

Investment volumes across Asia Pacific’s commercial real Chart 5.2.22. estate markets finished the Aggregate regional yields full-year 2015 slightly down Current Real Estate (by 6% year-on-year) at USD Portfolio 123.6 billion. Source: Heitman Research Acquisitions in 2015 The combination of increased 9.0% international capital and falling policy rates/cost of debt has 8.0% placed downward pressure on the yields of core assets. 7.0% Kirarito Ginza

6.0% Warehouse yields In August 2015, SOFAZ GK John for JPY 52.3 billion. 16 581.94 square meters acquired 98% interest in Mitsubishi UFJ Trust and with 12 floors above and 3 5.0% Office yields Kirarito Ginza, a landmark Banking Corporation, holder floors below the ground. The retail property located in of the remaining 2% stake building is lent to 47 tenants. Retail yields 4.0% Chou Avenue, the most also acts as the manager Weighted average lease term prestigious retail location in for the asset. Kirarito Ginza at the time of the acquisition 3.0% Tokyo. The property was sold was completed in May 2014 was over 7 years.

1999 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 by an SPC vehicle named and has gross floor area of

62 63 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 05 INVESTMENT REPORT

Annual earnings All five assets were fluctuations, the Fund has independently valued at the been implementing a strategy, end of 2015. The valuation according to which the overall 5.3. SOFAZ INVESTMENT PORTFOLIO PERFORMANCE As of the year end, the real results and valuation amount of gold planned to be estate portfolio consisted of companies are as below: purchased will be bought on a five assets located in London, weekly basis in equal amounts Paris, Moscow, Seoul and • 78 St James Street, Knight within two years. Performance measurement SOFAZ rate of Tokyo. Frank LLP, GBP 217 000 000. methodology return in 2015 During 2015, rents mentioned below were collected • 8, Place Vendome, BNP 30 175 kg of gold (970 146 from the five respective Paribas Real Estate, EUR troy ounces) was included Returns on SOFAZ’s assets portfolio. The performance is The total rate of return investments: 164 610 000 into SOFAZ’s investment are calculated in accordance calculated without taking into of SOFAZ’s investment • Tverskaya 16, Cushman portfolio by the end of 2014. • London, 78 St James Street, with the “Performance account currency exchange portfolio was 1.24% in 2015. & Wakefield, The gold purchased by the GBP 9 648 048; measurement methodology fluctuations. The performance Annualized 10-year return RUB 5 400 000 000 Fund is temporarily stored • Paris, 8 Place Vendome, in JP Morgan’s London vault for the investment portfolio of each sub-portfolio is was 2.42%. Annual returns • Pine Avenue Tower A, EUR 5 860 400; considering its experience and sub-portfolios of the measured in the respective since 2006 and cumulative Kyungil Appraisal, KRW • Moscow, 16 Tverskaya, and competitive storage State Oil Fund”, approved (local) currency and in USD monthly returns of SOFAZ’s 492 100 000 000 RUB 349 659 436 RUB; costs. Starting from January by the Internal Resolution selected as the base currency investment portfolio in 2015 • Kirarito Ginza, Daiwa Real • Seoul, Pine Avenue Tower 11 2013, SOFAZ began to No.5 dated April 21, 2009. (provided the impact of are illustrated in charts 5.3.1 Estate Appraisal JPY A, KRW 31 071 645 406; transfer the purchased gold In accordance with this the currency component is and 5.3.2, respectively: 52 600 000 000 to Azerbaijan. By the end methodology, AZN, USD indicated). • Tokyo, Kirarito Ginza, JPY and EUR are taken as the 722 169 920. of 2015, 30 169 kg of gold has been transferred to base currencies when calculating performance In 2015, the initiated Azerbaijan and temporarily stored in the vaults of the of the total investment redevelopment program Gold investments continued in Actor Gallery, CBAR. Moscow. As a result of this program, net operating Chart 5.3.1. income fell compared to According to the “Investment SOFAZ investment portfolio: 2014, associated with the Guidelines”, up to 5% of rate of return loss of rental income and the SOFAZ’s assets can be capital expenditure. In 2015, invested into gold. Starting SOFAZ subsidiary Tverskaya from February 1, 2012, 16 OAO has signed a SOFAZ initiated the purchase of 25 gold bars conforming 5.00% RoR Moving average long-term lease agreement 4.24% 4.49% with a globally established to the requirements of retail company for the London Bullion Market Association (LBMA) per 4.00% 3.79% retail part of Actor Gallery. 3.29% After the completion of the week (10,000 troy ounces) redevelopment works in the from the market-maker 3.00% retail part of the building, member banks of LBMA. the company will move Incorporated in 1987, London 2.16% Bullion Market Association 2.00% 1.77% to Actor Gallery in March 1.52% 1.24% 2017. includes international banks 0.99% 0.83% active in gold and silver 1.00% markets, as well as producers, transportation and refinery companies. In order to reduce 0.0% the risks associated with price 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

64 65 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 05 INVESTMENT REPORT

Chart 5.3.2. Chart 5.3.4. Cumulative monthly performance Contribution to total performance by asset class*

Monthly return Cumulative return

1.60% 1.24% 0.79% 0.32% 0.13% 1.08% 0.99% 0.96% 0.95% 1.10% 0.76% 0.59% 0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 1.20% 1.40% 0.42% 0.44% 0.60% 0.29% 0.24% 0.12% 0.10% Mar-15 Jun-15 Aug-15 Sep-15 Fixed Income Real Estate Equities Jan-15 Feb-15 Apr-15 May-15 Jul-15 Oct-15 Nov-15 Dec-15 -0.40% *Performance of the Gold investments is not included into the total performance results because it is treated as FX effect. -0.90%

In 2015, annual returns for Chart 5.3.3. Chart 5.3.5. fixed income, real estate Performance of asset classes and weights of their contributions Cumulative monthly fixed and equity (public and in total performance (1.24%)* income performance private) investments were Monthly return Cumulative return 0.98%, 8.72% and 3.04%, respectively, while their 10% 70% 1.20% corresponding contributions 0.98% 0.98% to the total performance 1.00% 64% 8.72% 0.86% of the investment portfolio 8% 60% (1.24%) accounted for 0.79%, 0.80% 0.65% 0.61% 0.60% 0.32% and 0.13%. 50% 6% 0.60% 0.52% Individual performances of 40% 0.45% 0.45% the asset classes and weights 0.39% 0.29% 0.40% of their contributions in total 4% 30% 0.22% performance are illustrated in 26% 3.04% 0.20% Chart 5.3.3. 20% 2% June-15 Aug-15 0.98% 10% 10% 0,00% Jan-15 Feb-15 Mar-15 Apr-15 May-15 July-15 Sep-15 Oct-15 Nov-15 Dec-15

0 0% -0.20%

Fixed Income Real Estate Equities

Performance Weight in total performance

*Performance of the Gold investments is not included into the total performance results because it is treated as FX effect.

66 67 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 05 INVESTMENT REPORT

Chart 5.3.6. Public equity performance 5.4. RISK MANAGEMENT

8.43% 9.00% Risk management and risk Chart 5.4.1. 8.00% monitoring procedures of Contribution to total VaR by 7.0 0% 6.51% SOFAZ include analysis across 5.63% asset classes 6.00% risk classes. Market risk and 5.00% 4.06% credit risk indicators, as well 3.64% 4.00% 3.25% 3.34% 3.28% as other relevant measures, 0.73% 3.00% are reported both internally and externally. Market risks 2.00% are analyzed at country, Jan-15 Mar-15 June-15 Aug-15 Sep-15 Dec-15 1.00% position, and risk factor levels. -1.00% Feb-15 Apr-15 May-15 July-15 Oct-15 Nov-15 -0.22% -0.54% Our measures to assess the -2.00% -1.36% market risk include Value at -3.00% Risk, tracking error, scenario -4.00% analysis, stress tests etc. -5.00% -4.04% For the purpose of internal risk management, Value at 0.14% 0.14% -6.00% 0.10% Monthly return Cumulative return Risk (VaR) is a common and -7.0 0% valuable measure of total -8.00% risk. We obtain VaR of the -9.00% portfolio using Monte Carlo Equity Fixed Real Gold and historical simulations. Income Estate

As of 31.12.2015, the Fund’s In 2015 SOFAZ embarked are continually observed. the MSCI Europe ex UK index 20 day horizon 95% VaR Chart 5.4.2. accounted for USD 329 on passive replication of Ex-ante tracking error limits mandate portfolio managed Contribution to total equity VaR MSCI Europe ex UK Index. for the equity portfolios by the UBS. million compared to USD Compared to that of 2014, managed by UBS Global Asset 337 million at the end of the this year’s public equity Management (UBS) and State previous year. portfolio exhibited a more Street Global Advisors (SSGA) modest return of 3.64%. have been established at the 2.12% Cumulative monthly returns level of 30 bps on an annual 1.85% of public equity portfolio are basis. As of 31.12.2015, the 1.72% shown in the Chart 5.3.6. tracking errors on an annual basis were 10 bps and 9 bps To monitor the divergence for the MSCI World index of risks and returns of mandate portfolios managed SOFAZ sub-portfolios from by the SSGA and the UBS benchmarks, tracking errors repectively, and 18 bps for 0.17%

VTB MSCI MSCI S&P 100 World Europe ex UK

68 69 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 05

0.53 Chart 5.4.3.

Contribution to total fixed 0.00 -0.02 -0.05 -0.10 EUR income VaR (bps) TRY USD CNY GBP AUD

-4.33

Chart 5.4.4. Credit risk management Composition of the portfolio by credit ratings is another crucial part of SOFAZ’s risk procedures. 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40,00% The Fund’s “Investment Guidelines” sets restrictions on the credit ratings of issuers BBB 27.63% and securities. The Chart 5.4.4. represents the change A 30.59% in the composition of the AA portfolio by credit rating 27.49% from 2014 to 2015. AAA 14.29%

31.12.2014 30.06.2015 31.12.2015

70 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 06

SOFAZ’S 2015 BUDGET EXECUTION Revenues

In 2015, the revenues Acreage fees paid by the Agreement on exploration, accrued to SOFAZ were foreign investors due to the reconstruction, exploitation In 2015, the revenues of SOFAZ’s formed from the sales of the use of carbohydrate resources works and production sharing Republic of Azerbaijan’s share represented another source at the Bahar and Qum budget constituted AZN 7 721.1 million of hydrocarbons, fees paid to of income for SOFAZ in Deniz field in the Azerbaijani Azerbaijan for the oil and gas 2015. In accordance with sector of the Caspian Sea in or USD 7 670.2 million meaning that the transit through its territory, the terms of the agreement recognition of the compliance bonus payments, acreage concluded between SOCAR, with the contractor’s duty of sum envisaged in the budget plan fees and revenues from BP Exploration Limited and increasing daily production management of the Fund’s a SOCAR-affiliated company volume 1.5 times throughout (AZN 10 246.6 million) was assets. and regulating oil prospecting, 90 consecutive days. exploitation and production sharing at the Shafag-Asiman executed at 75.4%. In 2015, revenues from the The revenues accrued to offshore field situated in the sale of profit oil and gas SOFAZ from the management Azerbaijani sector of the constituted AZN 7 369.6 of its asset portfolio equalled Caspian Sea, USD 2.1 million, million or USD 7 229.1 USD 425.4 million or AZN or AZN 2.2 million of acreage million being executed at 335.6 million in 2015. The fees were paid to SOFAZ. the 75.7% of the estimated average annual profitability of The upsurge in the exchange level of AZN 9 741.2 million. the assets stood at the level rate of the AZN against USD Thus, lower than expected of 1.24%. Thus, the execution resulted in the actual AZN oil prices resulted in the rate of this revenue item value of the fees being 41.4% The actual budget 1 531.8 million. Due to the extra-budgetary expenses 24.3% underfulfilment of the constituted 67.9% only. higher than the estimated one expenditures in 2015 equalled appreciation of currencies were incurred as a result of respective income article. (AZN 1.57 million). to AZN 9 187.8 million or and assets comprising the the fluctuations in exchange While in 2015, SOFAZ budget

USD 9 202.0 million, 77.8% SOFAZ’s portfolio against the rates between the US dollar crude oil production from The revenues obtained (AZN 11 813.9 million) of the Azerbaijan manat, SOFAZ and other foreign currencies. the ACG field was forecasted from the transit of oil and estimated amount. The overall recorded AZN 23 217.8 equal to 30.2 million tons gas through the territory of budget deficit of SOFAZ million of extra-budgetary or 221.0 million barrels, the Azerbaijan amounted to USD amounted to AZN 1 466.7 revenues. On the other hand, actual production volume in 11.6 million, or AZN 11.59 million or USD USD 1 998.2 million of this field amounted to 231.6 million in the reference year. million barrels. Moreover, the The higher than expected SOFAZ’s budget forecasts exchange rate of the AZN predicted the crude oil export resulted in the actual AZN price to constitute of USD value of the fees being 23.2% 90.0 per barrel, while, in higher than the envisioned reality, the weighted average one (AZN 9.41 million). sale price and net price of profit oil sold during the previous year were close to In 2015, SOFAZ received USD 54.3 and USD 48.06, AZN 2.11 million, or USD 2 respectively. million of bonus payments not envisioned in its budget. The fees were paid as part of the

72 73 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 06 SOFAZ’S 2015 BUDGET EXECUTION

Table 6.1. Extrabudgetary internally displaced persons, the Georgian government to SOFAZ’s revenues in 2015 thus the respective budget provide quarries required for revenues item was fully executed at the the land under the project on 100% level. time. Amount of revenues Execution In total, a sum worth AZN № Sources of revenue (million AZN) 1 907.7 million was allocated rate As the devaluation of the The “State Program on the on these purposes between envisioned actual national currency undertaken education abroad of the 2001 and 2015. Net income obtained from the sales of by the Central Bank of Azerbaijani youth in the years hydrocarbons falling into the share of Azerbaijan the Republic of Azerbaijan of 2007-2015” was financed (excluding expenditures on transportation, customs increased the relative The transfer from the SOFAZ by the Fund at AZN 35.5 clearance and banking services, independent value of the currencies and to the state budget in 2015 million, with 80.6% of the 1. 9 741.8 7 369.58 75.7 surveyor services, marketing and insurance, as well assets constituting the Oil constituted AZN 8 130.0 sum initially allocated for as the shareholder incomes received by the SOCAR Fund’s portfolio against the million, 78.3% of the sum the respective budget item in the capacity of investor, shareholder or partner in Azerbaijan manat, AZN envisioned in the budget (AZN 44.1 million). Out of different projects it is a party to) 23 217.8 million of project (AZN 10 388.0 this sum, provided according extrabudgetary revenues million). to the orders from the Acreage fees paid by investors per land they use for accrued to SOFAZ, AZN Ministry of Education of the 2. 1.57 2.22 141.4 the exploitation of hydrocarbon reserves 22 501.0 million thereof Republic of Azerbaijan, AZN The budget for financing the stemming from the rising 16.8 million was allocated to project on the reconstruction exchange rate of the USD, living expenses, AZN 17.2 of the Samur-Absheron Fees from the transit of oil and gas through the EURO, GBP and some other million to the tuition fees, 3. 9.41 11.59 123.2 irrigation system in 2015 was territory of the Republic of Azerbaijan currencies and AZN 716.8 approximately AZN 0.8 million executed at the 100% level million from the increased to transportation costs, (AZN 90 million). Bonus payments made by investors within the value of the gold reserves. AZN 0.5 million to medical 4. framework of signing or executing oil and gas 0.00 2.11 insurance, AZN 0.1 million to contracts AZN 61.5 million or USD cover visa and registration 51.5 million were put into costs and AZN 0.1 million Revenues obtained from the management of the financing of the Baku- for other expenses. As of 31 5. 494.36 335.58 67.9 Expenditures SOFAZ’s assets Tbilisi-Kars- Railway project, December 2015, the number amounting to 55.2% of the of students whose studies initially projected sum of abroad were covered by the The Fund’s budget AZN 111.5 million. Overall, Fund within the framework of 6. Other revenues and incomes under the legislation 0.10 0.00 0 expenditures in 2015, initially the SOFAZ has allocated this program reached 3 283. planned to equal AZN AZN 485.7 million (USD 11 813.9 million, were 588.1 million) for this project In order to ensure the second Total revenues 10 246.62 7 721.08 75.4 executed at the 77.8% level since 2007. According to stage of the exploitation and amounted to AZN the information provided by works at the “Shah Deniz” 9 187.8 million (USD 9 202.0 the Ministry of Transport of Extrabudgetary revenues 23 217.8 gas-condensate field, million). In the reference the Republic of Azerbaijan, enlargement of the South year, the Fund’s expenditures the ordering party to the Caucasus Pipeline as well as structure was as follows: project, the 44.8% lower than the management of Trans- expected execution of the Anatolian and Trans-Adriatic project in 2015 was due to Within the framework pipelines, the “South Gas such factors as unfavourable of the SOFAZ’s 2015 Corridor” Сlosed Joint-Stock weather conditions in the budget execution, AZN Company (SGC CJC) was construction area throughout 150.0 million was spent on established in accordance the considerable part of the financing measures aimed at with the Decree of the year, the harsh relief structure ameliorating social and living President of the Republic of conditions of the refugees and of the land and the failure of

74 75 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 06

Azerbaijan from 25 February (AZN 997 016.2 thousand). In 2015, extrabudgetary 2014. The charter capital The reasons why AZN expenditures of the size of of the company set up by 304.2 million out of the USD 1 998.2 million were SOCAR constitutes 100 initially projected budget formed due to the changes million USD, 51% thereof expenditures on the project in the exchange rates of the is owned directly by the were not ordered, are the currencies constituting the state and 49% by SOCAR. sale of the 30% share of the SOFAZ investment portfolio, According to the paragraph TANAP project to BOTASH against the US dollar, as well 2.1. of the aforementioned and 12% to BP that brought the change in the price Decree, SOFAZ is responsible SGC CJC the profit of the size of gold. for the financing of the of USD 265.6 million invested company’s state-owned into financing the project, as shares, while their ownership well as the shift of the certain and management are vested works’ timing to the next year. to the Ministry of Economy. In 2015, AZN 692.9 million SOFAZ’s administrative (USD 685.9 million) were expenses equalled AZN contributed by SOFAZ into 27.9 million, or 83.8% of the financing the Company’s respective expenses in the assets directly owned by budget plan (AZN the Azerbaijani government, 33.3 million) in 2015. 69.5% of the projected amount

Table 6.2. SOFAZ’s expenditures in 2015

Amount of expenditures Execution № Expenditure items (million AZN) rate Confirmed Actual Financing measures aimed at ameliorating social and living 1. 150.0 150.0 100.0 conditions of the refugees and internally displaced persons 2. Transfer from the State Oil Fund to the state budget in 2015 10 388.0 8 130.0 78.3 Financing the project on the reconstruction of the Samur- 3. 90.0 90.0 100.0 Absheron irrigation system 4. Financing of the Baku-Tbilisi-Kars railway project 111.5 61.5 55.2 State Program on the education abroad of the Azerbaijani 5. 44.1 35.5 80.5 youth in the years of 2007-2015 Financing the share of the Azerbaijan Republic in Southern 6. 997.0 692.9 69.5 Gas Corridor 7. The Fund’s administrative expenses 33.3 27.9 83.8 Total expenses 11 813.9 9 187.8 77.8

76 THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 07

NOTES TO CONSOLIDATED Contents FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Financial Position 82 Consolidated Statement of Profit or Loss and Other Comprehensive Income 83 Consolidated Statement of Changes in Equity 84 31 December 2015 Consolidated Statement of Cash Flows 86

International Financial Reporting Standards Consolidated Financial Statements and NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Introduction 88 Independent Auditor’s Report 2. Presentation of Financial Statements 91 3. Operating Environment of the Fund 91 4. Summary of Significant Accounting Policies 92 5. Critical Accounting Estimates, and Judgements in Applying Accounting Policies 105 6. First-Time Adoption of IFRS 105 7. New Accounting Pronouncements 106 8. Cash and Cash Equivalents 109 9. Trading Securities 113 10. Other Financial Assets at Fair Value through Profit or Loss 117 11. Financial Assets at Amortised Cost 118 12. Gold Bullion 121 13. Investment Properties 121 14. Investments In Joint Ventures 125 15. Capital Contributions 127 16. Non-Current Liabilities 127 17. Interest Income and Other Investment Income 128 18. Foreign Currency Translation Differences 128 19. Net Fair Value Loss on Financial Assets at Fair Value through Profit or Loss 129 20. Operating Expenses 129 21. Transfers by the Fund 130 22. Income Taxes 130 23. Fair Value of Financial Instruments 131 24. Financial Risk Management 136 25. Commitments and Contingencies 149 26. Transactions with Related Parties 150 27. Interests in Structured Entities 152 28. Events after the Reporting Period 153

78 79 Independent Auditor’s Report Auditor’s Responsibility Opinion

To the Supervisory Board 31 December 2015 and the Our responsibility is to to the entity’s preparation In our opinion, the of the State Oil Fund of the consolidated statements express an opinion on and fair presentation of consolidated financial Republic of Azerbaijan: of profit or loss and other these consolidated financial the consolidated financial statements present fairly, comprehensive income, statements based on our statements in order to in all material respects, the consolidated statement audit. We conducted our design audit procedures financial position of the State We have audited the of changes in equity and audit in accordance with that are appropriate in Oil Fund of the Republic of accompanying consolidated consolidated statement of International Standards on the circumstances, but Azerbaijan and its subsidiaries financial statements of cash flows for the year then Auditing. Those standards not for the purpose of as at 31 December 2015, and the State Oil Fund of the ended, and notes comprising require that we comply expressing an opinion on their financial performance Republic of Azerbaijan and its a summary of significant with ethical requirements the effectiveness of the and cash flows for the year subsidiaries, which comprise accounting policies and other and plan and perform the entity’s internal control. An then ended in accordance the consolidated statement explanatory information. audit to obtain reasonable audit also includes evaluating with International Financial of financial position as at assurance about whether the appropriateness of Reporting Standards. the consolidated financial accounting policies used statements are free from and the reasonableness material misstatement. of accounting estimates Management’s Responsibility for made by management, as well as evaluating the An audit involves performing the Financial Statements overall presentation of 01 April 2016 procedures to obtain the consolidated financial Baku, Republic of Azerbaijan audit evidence about the statements. PricewaterhouseCoopers Management is responsible management determines amounts and disclosures in Audit Azerbaijan LLC for the preparation and is necessary to enable the the consolidated financial The Landmark Office Plaza III, fair presentation of these preparation of consolidated statements. The procedures We believe that the audit 12th floor, 90A Nizami Street consolidated financial financial statements that selected depend on the evidence we have obtained is Baku AZ 1010, Azerbaijan statements in accordance are free from material auditor’s judgment, including sufficient and appropriate to T: +994 (12) 497 25 15 with International Financial misstatement, whether due the assessment of the risks provide a basis for our audit F: +994 (12) 497 74 11 Reporting Standards, and to fraud or error. of material misstatement of opinion. www.pwc.com/az for such internal control as the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF PROFIT AND LOSS AND OTHER CONSOLIDATED STATEMENT OF FINANCIAL POSITION COMPREHENSIVE INCOME AS AT 31 DECEMBER 2015 FOR THE YEAR ENDED 31 DECEMBER 2015

In thousands of Azerbaijani Manats Notes 2015 2014 2013

Assets In thousands of Azerbaijani Manats Notes 2015 2014 Non-current assets Interest income and other investment income 17 609,731 548,955

Financial assets at amortised cost 11 4,726,083 2,388,565 428,673 Net gain /(loss) on foreign currency translation 18 22,460,879 (1,616,273) differences Investment properties 13 2,233,689 805,472 509,107 Net fair value loss on financial assets at fair value 19 (280,607) (166,883) Property and equipment, net 145,878 1,472 8,456 through profit or loss

Other non-current and intangible assets 4,288 144,459 106,364 Net fair value gain/(loss) on gold bullions 12 716,751 (22,186)

Investments in joint venture 14 631,895 319,933 168,966 Net fair value gain on revaluation of investment 13 50,380 46,390 properties Total non-current assets 7,741,833 3,659,901 1,221,566 Rental income 61,377 36,187 Current assets Other operating income 706 8,253 Cash and cash equivalents 8 3,361,406 2,271,131 1,276,341 Total operating income/(loss) 23,619,217 (1,165,557) Trading Securities 9 38,823,295 22,226,747 24,487,222 Operating expenses 20 (35,133) (44,750) Other financial assets at fair value through profit or 10 396,969 93,495 61,361 loss Share of after tax results of joint venture 14 11,358 (296)

Financial assets at amortised cost 11 139,828 110,974 313,381 Profit/(loss) before income tax expense 23,595,442 (1,210,603)

Gold bullion 12 1,618,895 902,144 924,331 Income tax expense 22 (1,162) (935)

Other current assets 33,023 18,118 23,254 Net profit/(loss) for the year 23,594,280 (1,211,538)

Total current assets 44,373,416 25,622,609 27,085,890 Items that will not be reclassified subsequently to profit or loss TOTAL ASSETS 52,115,249 29,282,510 28,307,456 Revaluation of premises and equipment - (3,800) Equity Items that may be reclassified subsequently Contributed capital 15 28,292,786 30,067,186 27,794,666 to profit or loss Translation of financial information of foreign Revaluation reserves - - 3,800 970,802 (86,993) operations to presentation currency Foreign currency translation reserve 886,175 (80,176) 6,817 Other comprehensive income / (loss) for the year 970,802 (90,793) TOTAL COMPREHENSIVE INCOME / (LOSS) FOR Accumulated (loss)/profit 22,874,134 (720,036) 494,291 24,565,082 (1,302,331) THE YEAR Equity attributable to the Fund 52,053,095 29,266,974 28,299,574 Profit/(loss) is attributable to: Non-controlling interest 13,809 - - - The Fund 23,594,170 (1,211,537)

Total equity 52,066,904 29,266,974 28,299,574 - Non-controlling interest 110 - Profit/(loss) for the year 23,594,280 (1,211,537) Liabilities Total comprehensive income /(loss) is attributable to: Non-current liabilities 16 32,467 - - - The Fund 24,560,521 (1,302,331) Current liabilities 15,878 15,536 7,882 - Non-controlling interest 4,561 - TOTAL COMPREHENSIVE INCOME / (LOSS) TOTAL LIABILITIES 48,345 15,536 7,882 24,565,082 (1,302,331) FOR THE YEAR TOTAL EQUITY AND LIABILITIES 52,115,249 29,282,510 28,307,456

82 83 The notes set out on pages 88 to 153 form an integral part The notes set out on pages 88 to 153 form an integral part of these consolidated financial statements. of these consolidated financial statements. THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

Total Total 9,248 Equity Equity (2,789) (39,999) (33,494) (89,998) (61,522) (57,0 40) (90,793) (80,221) (35,538) 970,802 (149,998) (299,998) (692,849) (223,538) 7,385,505 (9,337,000) 28,299,574 29,266,974 (1,211,538) 12,343,810 (1,302,331) 23,594,280 (8,130,000) 24,565,082 52,066,904 ------110 4,451 9,248 4,561 13,809 trolling trolling trolling trolling Interest Interest Non-con- Non-con- - Total Total (2,789) (39,999) (33,494) (89,998) (61,522) (57,0 40) (90,793) (80,221) 966,351 (35,538) (149,998) (299,998) (692,849) (223,538) 7,385,505 (9,337,000) (1,211,538) 23,594,170 28,299,574 29,266,974 12,343,810 (1,302,331) (1,302,331) (8,130,000) 24,560,521 52,053,095 ------(2,789) (deficit) (deficit) 494,291 Retained Retained Retained Retained earnings/ earnings/ earnings/ earnings/ (720,036) (1,211,538) 23,594,170 (1,211,538) 23,594,170 22,874,134 ------6,817 reserve reserve (86,993) (80,176) (86,993) 966,351 886,175 966,351 Currency Currency Currency Currency translation translation translation translation ------3,800 (3,800) (3,800) reserve reserve Property Property Attributable to theFund Attributable to theFund revaluation revaluation revaluation revaluation ------capital capital (39,999) (33,494) (89,998) (61,522) (57,0 40) (80,221) (35,538) (149,998) (299,998) (692,849) (223,538) 7,385,505 (9,337,000) 27,794,666 30,067,186 12,343,810 (8,130,000) 28,292,786 Contributed Contributed Contributed Contributed 21 21 21 21 21 21 21 15 21 21 21 21 21 21 15 Note Note

Balance December at 31 2014 Profit / (loss) for the year income comprehensive Total for 2015 Other comprehensive income comprehensive Other Contributions received Contributions Transfers to the State Budget Transfers to the State Refugees Committee and Internally Displaced Peoples’ Social Development Fund Transfers for the reconstruction of Samur- Absheron Irrigation system Establishment of GK001, the subsidiary in Japan Transfers for the construction of new Baku- Tbilisi-Kars railway line Transfers for the State Program on “Education of Azerbaijani youth abroad” Balance December at 31 2015 Transfer for the "Southern Corridor"Gas Transfer for the "Southern Corridor"Gas In thousands of Azerbaijani Manats In thousands of Azerbaijani Manats Transfers for the State Program on “Education of Azerbaijani youth abroad” At 1 January 2014 income comprehensive Other Profit / (loss) for the year Transfers to the State Budget Transfers for the construction of new Baku-Tbilisi-Kars line railway Disposal of building Transfers for construction of "Star" oil refinery complex Total comprehensive comprehensive Total loss for 2014 Transfers to the State Refugees Committee and Internally Displaced Peoples’ Social Development Fund Transfers for the reconstruction of Samur- Absheron Irrigation system Contribution received Contribution The notes set out on pages 88 to 153 form an integral part of these consolidated financial statements. The notes set out on pages 88 to 153 form an integral part of these consolidated financial statements. CONSOLIDATED STATEMENT OF CHANGES EQUITY IN STATEMENT CONSOLIDATED 2015 DECEMBER YEAR THE 31 ENDED FOR

84 85 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2015

In thousands of Azerbaijani Manats Notes 2015 2014 In thousands of Azerbaijani Manats Notes 2015 2014

Cash flows from operating activities: Cash flows from investing activities:

Profit/(loss) before income tax expense 23,595,442 (1,210,603) Purchase of property and equipment - (292)

Adjustments to reconcile result to net cash used in operating activities Purchase of intangible assets (10,522) (63)

Depreciation of property and equipment 5,829 138 Net cash used in investing activities (10,522) (355)

Amortization of intangible assets 458 56 Cash flows from financing activities: Unrealized loss on change in fair value of financial assets at fair value through 347,336 165,039 Contributions received 15 7,385,505 12,343,810 profit or loss Transfers to the State Budget 21 (8,130,000) (9,337,000) Net unrealized (gain)/loss on foreign currency translation differences (21,490,077) 1,589,105 Transfers for the reconstruction of Samur-Absheron Irrigation system 21 (89,998) (80,221) Net (gain)/loss on revaluation of gold bullion 12 (716,751) 22,187 Transfers to the State Refugees Committee and Internally Displaced Peoples’ 21 (149,998) (299,998) Fair value gain on revaluation of investment properties 13 (50,380) (46,390) Social Development Fund Share of after tax results of joint venture 14 (11,358) 296 Transfers for the construction of new Baku-Tbilisi-Kars railway line 21 (61,522) (57,0 40)

Change in interest accruals (143,493) (33,434) Transfers for the State Program on “Education of Azerbaijani youth abroad” 21 (35,538) (33,494)

Changes in operating assets and liabilities: Transfers for construction of "Star" oil refinery complex 21 - (223,538)

(Increase)/decrease in financial assets at fair value through profit or loss 9,10 (270,203) 433,845 Transfer for the "Southern Gas Corridor" 21 (692,849) (39,999)

Increase in financial assets at amortised cost 11 - (1,750,566) Proceeds from non-current liabilities 17,208 (38,088)

Increase in investment properties 13 (450,590) (347,743) Net cash from financing activities (1,757,192) 2,234,432

Increase in investment in joint venture 14 (300,604) (151,263) Effect of exchange rate changes on cash and cash equivalents 2,358,108 86,993

Decrease in tax receivables other than income tax - 3,765 Net increase in cash and cash equivalents 1,090,275 994,790

(Increase)/decrease in other assets (14,908) 2,526 Cash and cash equivalents, beginning of the year 8 2,271,131 1,276,341

Increase/(decrease) in current liabilities 342 (3,238) Cash and cash equivalents, end of the year 8 3,361,406 2,271,131

Net cash used in operating activities before income tax 501,043 (1,326,280) Operating cash flows from interest and dividend received 655,671 515,521

Income tax paid (1,162) -

Net cash used in operating activities after income tax 499,881 (1,326,280)

86 87 The notes set out on pages 88 to 153 form an integral part The notes set out on pages 88 to 153 form an integral part of these consolidated financial statements. of these consolidated financial statements. THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

Subsidiary % interest Country Date of Date of Industry NOTES TO CONSOLIDATED establishment acquisition 2014 2013 2012 Property FINANCIAL STATEMENTS SOFAZ Re Ltd. 100 100 100 Island of Jersey 22-May-12 - management Property SOFAZ Re UK L.P. 100 100 100 Island of Jersey 6-Aug-12 - management Property SOFAZ Re Min Ltd. 100 100 100 Island of Jersey 13-Aug-12 - 1. INTRODUCTION management 78, St James`s Street Property 100 100 100 Island of Jersey 2-Oct-12 - Unit Trust management Russian Property JSC Tverskaya 16 100 100 100 29-Jun-93 21-Dec-12 These consolidated financial statements have been prepared in Federation management SOFAZ RE Europe Property 100 100 100 Luxembourg 31-Oct-12 - accordance with International Financial Reporting Standards for the Holding Sarl management Property SOFAZ RE Europe Sarl 100 100 100 Luxembourg 31-Oct-12 - year ended 31 December 2015 for the State Oil Fund of the Republic management Property of Azerbaijan (the “SOFAZ”) and its subsidiaries (the “Fund”). SCI 8 Place Vendome 100 100 100 France 14-Nov-12 - management SOFAZ was incorporated and is domiciled in the Azerbaijan Republic. Property Pine Avenue Tower A 100 - - South Korea 30-Oct-11 31-Mar-14 management Property GK001 LLC 98 - - Japan 21-Aug-15 26-Aug-15 management Investment SOFAZ RE Fund 100 - - Luxembourg 27-May-15 - management Investment SOFAZ PE Fund 100 - - Luxembourg 28-Sep-15 - management 1. Principal Activity SOFAZ`s subsidiaries are Implementation of the Company of the Republic of entities which own investment Annual Program of Income Azerbaijan (“SOCAR”) or other The State Oil Fund of the generations of the Republic properties located in United and Expenses (“Budget”) authorized state bodies and Republic of Azerbaijan of Azerbaijan. Kingdom, Russia, France, of the Fund” approved by investors, including: (“SOFAZ”) was established by South Korea and Japan as Presidential Decree #579 I. Contributions from In accordance with the described in Note 13. dated 12 September 2001 Decree #240 of the President Decree and the Regulations the sale of hydrocarbons of the Republic of Azerbaijan Contributions into the Fund as amended by Presidential related to the share of the (discussed below), SOFAZ Decrees #849 and #202 on the “Establishment of is an extra-budget state are made in accordance with Republic of Azerbaijan (net The State Oil Fund of the the Regulation of the Fund mentioned earlier. Pursuant to of expenditures incurred for organization, formed as a the Regulations of the Fund, Republic of Azerbaijan” separate legal entity, which is (“Regulation”) approved by hydrocarbons transportation, dated 29 December 1999 Presidential Decree #434 contributions are received customs clearance and bank accountable and responsible from the following sources: (the “Decree”). The purpose to the President of the dated 29 December 2000 costs, marketing, insurance, of SOFAZ is to ensure the Republic of Azerbaijan. as amended by Presidential a) Agreements on exploration, and independent surveyor accumulation, effective Decrees #849 and #202 development and production fees) excluding portion related The consolidated financial management, and use of on “Amending Certain sharing for oil and gas fields in to the participating interest statements include the income and other inflows Legislative Acts Regulating the territory of the Republic or investment of SOCAR in financial statements of SOFAZ generated from agreements the Operations of The State of Azerbaijan including the a project in which SOCAR is and its direct and indirect related to oil and gas Oil Fund of the Republic of Azerbaijan Sector of the an investor, participant or a subsidiaries listed in the exploration and development, Azerbaijan” dated 7 February Caspian Sea, as well as other contracting party; following table and the after as well as, from SOFAZ’s 2003 and 1 March 2005, agreements on oil and gas tax results of it’s joint venture II. Price adjustments under own activities, for the respectively, and Article exploration, development Shah Deniz Phase I; (together the “Fund”): 2.3 of the “Regulations and transportation entered benefit of citizens and future III. Bonus payments - the on Development and into between the State Oil

88 89 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

fees payable by foreign agreements), other non- Management International • IFRS is used in most a further 47% on 21 oil companies to State Oil sale income or revaluation GmbH, the International 2. Presentation of sovereign funds, which December 2015. Following Company of Azerbaijan surplus of the Fund’s assets Bank for Reconstruction and Financial Statements enables benchmarking of the second devaluation, the Republic or other relevant in its reporting currency Development (IBRD – World the Fund with funds in Central Bank of the Republic authorities of the Republic (Azerbaijani manats), etc.; Bank Group), State Street other countries; of Azerbaijan announced of Azerbaijan due to signing c) Grants and other free aids; Global Advisors (SSGA) and Statement of compliance – • Based on developments in transition of manat to a of an oil contract and its Union Bank of Switzerland floating exchange rate. The d) Other revenues and these consolidated financial the financial sector, IFRS is implementation; (UBS). Under the custody exchange rates have not receipts in accordance with statements have been more comprehensive and agreements the financial materially changed since year- IV. Acreage payments due to the legislation of the Republic prepared in accordance subject to more regular institutions hold securities end to 30 March 2016. SOCAR and/or an authorized of Azerbaijan. with International Financial updates than IPSAS. purchased by the Fund, state body of the Republic of Reporting Standards Low prices in the global whereas in accordance with Azerbaijan from investors for Under the provisions of (“IFRS”) issued by the oil market brought about the investment management It should be noted that the use of the contract area the Fund’s Regulations International Accounting a downfall in the SOFAZ’s agreements the financial IFRS transition is limited to in connection with oil and gas approved by the President of Standards Board (“IASB”) proceeds from hydrocarbon institutions manage the technical requirements, and exploration and development; the Republic of Azerbaijan, and Interpretations issued sales. Simultaneously, the Fund’s investments based on with consideration of the fact V. Dividends and profit SOCAR or an authorized by the International Financial Fund’s assets, expressed in general investment policies that IPSAS is based on IFRS, participation portions related state body implements the Reporting Interpretations manat terms, grew following established by the Fund. the transition did not have to the share of the Republic collection of the fees listed Committee (“IFRIC”).These the appreciation of exchange a significant effect on the of Azerbaijan in connection above and transfers them to are the Fund’s first financial rates of the foreign currencies SOFAZ’s registered and Fund’s financial statements. with oil and gas agreements, SOFAZ. statements prepared in included in the SOFAZ actual office address is 111A, Refer to Note 6. excluding portion related to accordance with IFRS and investment portfolio, against Heyder Aliyev Avenue, Baku, a participating interest or The Regulations exclude IFRS 1 First-time Adoption the manat. Azerbaijan, AZ1029. investment of SOCAR in a the following from the list of International Financial The Azerbaijani government

project in which SOCAR is of sources of the Fund’s Reporting Standards has been announced plans to accelerate These consolidated financial 3. Operating an investor, participant or a contribution and assets: applied. Prior to transition reforms and support to the statements as of and for the the consolidated financial contracting party; • The rental fees from the Environment of economy in response to the year ended 31 December statements of the Fund VI. Contibutions generated use of state property under current economic challenges 2015 are authorized for issue were prepared and issued in the Fund from oil and gas transported contracts with foreign with the intention of by the Fund’s Management on accordance with International attracting foreign investment over the territory of the companies; 01 April 2016. Public Sector Accounting Azerbaijan continues and boosting the non-oil Republic of Azerbaijan with • Contributions from the sale Presentation currency. Standards (“IPSAS”) under economic reforms and industry sectors of the the use of the Baku-Supsa, of hydrocarbons related to These consolidated financial the accruals basis and there development of its legal, tax economy. Baku-Tbilisi-Ceyhan (“BTC”) the participating interest statements are presented are no changes on retained and regulatory frameworks and Baku-Tbilisi-Erzerum or investment of SOCAR in The Fund’s Management in thousands of Azerbaijani earnings/(accumulated loss) towards a market economy. export pipelines; any project in which SOCAR is monitoring these Manats (“AZN”), unless on transition. There was a The future stability of VII. Contributions generated is an investor, participant or developments in the current otherwise stated. change in classification of the Azerbaijan economy from transfer of assets from a contracting party; and environment and taking financial assets at fair value is largely dependent investors to SOCAR and/or an precautionary measures as it • Other proceeds generated through profit or loss. upon these reforms and authorized state body within considers necessary in order from joint activities with Based on the following, the developments and the the framework of oil and gas to support the sustainability foreign companies. Fund has adopted a decision effectiveness of economic, agreements. and development of the on appropriateness of IFRS financial and monetary Fund’s business in the In 2015 and 2014, the Fund transition: measures undertaken by the b) Revenues generated from foreseeable future. was a party to a custody government. investment, management, agreement with the Bank sale and other disposal • IFRS is more appropriate for Following a significant drop of New York Mellon, and of the Fund’s assets operational features of the in crude oil prices, the five (2014: four) investment (including financial assets Fund that have significantly Azerbaijani manat devalued by management agreements and assets contributed by been expanded in recent 34% against the US dollar on with financial institutions, investors within oil and gas years; 21 February 2015 and namely Deutsche Asset

90 91 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

4. Summary of Significant Business combinations in accordance with that specified in another IFRS. Acquisitions of businesses Standard. When the consideration Accounting Policies are accounted for using the Goodwill is measured as the transferred by the Fund acquisition method. The excess of the sum of the in a business combination consideration transferred consideration transferred, the includes assets or liabilities Basis of preparation Fund controls because the which control is transferred in a business combination is amount of any non-controlling resulting from a contingent These consolidated financial Fund (i) has power to direct to the Fund, and are measured at fair value, which interest in the acquiree, and consideration arrangement, statements have been relevant activities of the deconsolidated from the date is calculated as the sum of the the fair value of the acquirer’s the contingent consideration prepared in accordance with investees that significantly on which control ceases. acquisition-date fair values previously held equity interest is measured at its acquisition- IFRS under the historical affect their returns, (ii) has The acquisition method of the assets transferred by in the acquiree (if any) over date fair value and included cost convention, as modified exposure, or rights, to variable of accounting is used to the Fund, liabilities incurred the net of the acquisition- as part of the consideration by the initial recognition returns from its involvement account for the acquisition of by the Fund to the former date amounts of the transferred in a business of financial instruments with the investees, and (iii) has subsidiaries. Identifiable assets owners of the acquiree and identifiable assets acquired combination. Changes based on fair value, and by the ability to use its power acquired and liabilities and the equity interests issued and the liabilities assumed. in the fair value of the the revaluation of premises over the investees to affect contingent liabilities assumed by the Fund in exchange If, after reassessment, the contingent consideration and equipment, investment the amount of investor’s in a business combination for control of the acquiree. net of the acquisition-date that qualify as measurement properties, gold bullions, returns. The existence and are measured at their fair Acquisition-related costs are amounts of the identifiable period adjustments are and financial instruments effect of substantive rights, values at the acquisition date, generally recognised in profit assets acquired and liabilities adjusted retrospectively, categorised at fair value including substantive potential irrespective of the extent of or loss as incurred. assumed exceeds the sum of with corresponding through profit or loss. The voting rights, are considered any non-controlling interest. the consideration transferred, adjustments against goodwill. principal accounting policies when assessing whether At the acquisition date, the the amount of any non- Measurement period applied in the preparation of the Fund has power over For subsidiaries acquired and identifiable assets acquired controlling interest in the adjustments are adjustments these consolidated financial another entity. For a right to treated as an asset acquisition, and the liabilities assumed are acquiree and the fair value of that arise from additional statements are set out below. be substantive, the holder no deferred tax is recognized recognised at their fair value, the acquirer’s previously held information obtained during These policies have been must have practical ability by the Fund in respect of the except that: interest in the acquiree (if the ‘measurement period’ consistently applied to all the to exercise that right when asset e.g. investmet property • Deferred tax assets or any), the excess is recognised (which cannot exceed one periods presented, unless decisions about the direction at the time of acquisition. liabilities are recognised and immediately in profit or loss as year from the acquisition date) otherwise stated. of the relevant activities of measured in accordance a bargain purchase gain. about facts and circumstances the investee need to be made. Intercompany transactions, with IAS 12 Income Taxes; that existed at the acquisition The Fund may have power balances and unrealised Non-controlling interest date. The Fund presents its • Liabilities or equity over an investee even when gains on transactions that are present ownership consolidated statement of instruments related to it holds less than majority of between group companies interests and entitle their The subsequent accounting financial position separating share-based payment voting power in an investee. are eliminated; unrealised holders to a proportionate for changes in the fair value of current and non-current arrangements of the In such a case, the Fund losses are also eliminated share of the entity’s equity the contingent consideration assets and liabilities. An acquiree or share-based assesses the size of its voting unless the cost cannot be in the event of liquidation that do not qualify as analysis regarding recovery payment arrangements rights relative to the size recovered. SOFAZ and all of may be initially measured measurement period or settlement within 12 of the Fund entered into and dispersion of holdings its subsidiaries use uniform either at fair value or at the adjustments depends on how months after the statement to replace share-based of the other vote holders to accounting policies consistent non-controlling interest’s the contingent consideration of financial position date payment arrangements of determine if it has de-facto with the Fund’s policies. proportionate share of the is classified. Contingent (current) and more than 12 the acquiree are measured power over the investee. recognised amounts of consideration that is classified months after the statement of in accordance with IFRS 2 Protective rights of other Non-controlling interest the acquiree’s identifiable as equity is not remeasured financial position date (non- Share-based Payment at the investors, such as those that is that part of the net net assets. The choice at subsequent reporting current) is presented. acquisition date; and. relate to fundamental changes results and of the equity of measurement basis is dates and its subsequent of investee’s activities or of a subsidiary attributable • Assets (or disposal groups) made on a transaction-by- settlement is accounted for Consolidated financial apply only in exceptional to interests which are not that are classified as held for transaction basis. Other types within equity. Contingent statements circumstances, do not prevent owned, directly or indirectly, sale in accordance with IFRS of non-controlling interest consideration that is classified Subsidiaries are those the Fund from controlling by SOFAZ. Non-controlling 5 Non-current Assets Held are measured at fair value or, as an asset or a liability is investees, including an investee. Subsidiaries are interest forms a separate for Sale and Discontinued when applicable, on the basis remeasured at subsequent structured entities, that the consolidated from the date on component of the Fund’s Operations are measured reporting dates in accordance equity.

92 93 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

with IAS 39 Financial Goodwill arising on an or loss on disposal. transactions between the If the ownership interest in volume to provide pricing Instruments: Recognition acquisition of a business is Fund and its joint ventures an associate or joint venture information on an ongoing and Measurement, or IAS carried at cost as established The Fund’s policy for goodwill are eliminated to the extent of is reduced but significant basis. 37 Provisions, Contingent at the date of acquisition arising on the acquisition of an the Fund’s interest in the joint influence is retained, only Liabilities and Contingent of the business (see above) associate or joint ventures is ventures. Unrealised losses a proportionate share of Fair value of financial Assets, as appropriate, with less accumulated impairment described below. are also eliminated unless the the amounts previously instruments traded in an the corresponding gain or loss losses, if any. transaction provides evidence recognised in other active market is measured as being recognised in profit or Joint ventures of an impairment of the asset comprehensive income are the product of the quoted loss. For the purposes of transferred. reclassified to profit or loss, price for the individual asset A joint venture is a contractual impairment testing, goodwill where appropriate. or liability and the quantity arrangement whereby two When a business combination is allocated to each of the Financial statements of joint held by the entity. This is or more parties (venturers) is achieved in stages, the Fund’s cash-generating units ventures are prepared for Non-controlling interest the case even if a market’s undertake an economic Fund’s previously held equity (or groups of cash-generating the same reporting period as normal daily trading volume activity that is subject to Non-controlling interest interest in the acquiree is units) that is expected to the Fund. Where necessary, is not sufficient to absorb joint control. Joint control represent the portion of remeasured to its acquisition benefit from the synergies of adjustments are made to the quantity held and placing exists only when the strategic profit or loss and equity date fair value and the the combination. those financial statements to orders to sell the position in a financial and operating of subsidiaries not owned, resulting gain or loss, if any, bring the accounting policies single transaction might affect decisions relating to the directly or indirectly, by the is recognised in profit or A cash-generating unit used into line with those of the quoted price. activity require the unanimous Fund. loss. Amounts arising from to which goodwill has the Fund. consent of the venturers. A Non-controlling interest interests in the acquiree been allocated is tested Valuation techniques such as joint venture that involves the are presented separately in prior to the acquisition for impairment annually, discounted cash flow models establishment of a company, Disposals of subsidiaries, the consolidated statement date that have previously or more frequently when or models based on recent partnership or other entity to associates or joint ventures of profit or loss and within been recognised in other there is indication that the arm’s length transactions or engage in economic activity equity in the consolidated comprehensive income are unit may be impaired. If the When the Fund ceases to consideration of financial data that the Fund jointly controls statement of financial reclassified to profit or loss recoverable amount of the have control or significant of the investees, are used to with its fellow venturers. position, separately from where such treatment would cash-generating unit is less influence, any retained measure fair value of certain Fund’s equity. be appropriate if that interest than its carrying amount, the interest in the entity is financial instruments for Under the equity method were disposed of. impairment loss is allocated remeasured to its fair value, which external market pricing of accounting, interests in first to reduce the carrying with the change in carrying Financial instruments - key information is not available. joint ventures are initially If the initial accounting for amount of any goodwill amount recognised in profit measurement terms Fair value measurements are recognised at cost and a business combination is allocated to the unit and then or loss. The fair value is the analysed by level in the fair adjusted thereafter to Depending on their incomplete by the end of the to the other assets of the initial carrying amount for value hierarchy as follows: (i) recognise the Fund’s share of classification financial reporting period in which the unit pro rata based on the the purposes of subsequently level one are measurements the post-acquisition profits instruments are carried at fair combination occurs, the Fund carrying amount of each asset accounting for the retained at quoted prices (unadjusted) or losses and movements in value or amortised cost as reports provisional amounts in the unit. Any impairment interest as an associate, joint in active markets for identical other comprehensive income. described below. for the items for which the loss for goodwill is recognised venture or financial asset. assets or liabilities, (ii) level When the Fund’s share of accounting is incomplete. directly in profit or loss in In addition, any amounts two measurements are losses in a joint venture equals Fair value is the price that Those provisional amounts the consolidated statement previously recognised in valuations techniques with or exceeds its interests in the would be received to sell are adjusted during the of profit or loss and other other comprehensive income all material inputs observable joint ventures (which includes an asset or paid to transfer measurement period (see comprehensive income. An in respect of that entity, are for the asset or liability, either any long-term interests that, a liability in an orderly above), or additional assets impairment loss recognised accounted for as if the Fund directly (that is, as prices) or in substance, form part of transaction between or liabilities are recognised, for goodwill is not reversed in had directly disposed of the indirectly (that is, derived the Fund’s net investment market participants at the to reflect new information subsequent periods. related assets or liabilities. from prices), and (iii) level in the joint ventures), the measurement date. The obtained about facts and This may mean that amounts three measurements are Fund does not recognise best evidence of fair value circumstances that existed at On disposal of the relevant previously recognised in other valuations not based on solely further losses, unless it has is price in an active market. the acquisition date that, if cash-generating unit, the comprehensive income are observable market data (that incurred obligations or made An active market is one in known, would have affected attributable amount of recycled to profit or loss. is, the measurement requires payments on behalf of the which transactions for the the amounts recognised at goodwill is included in the significant unobservable joint ventures. asset or liability take place that date. determination of the profit inputs). Transfers between Unrealised gains on with sufficient frequency and

94 95 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

levels of the fair value origination, if any), are not Initial recognition of amount determined at initial Cash and cash equivalents unusual and highly unlikely hierarchy are deemed to have presented separately and financial instruments recognition using a valuation Cash and cash equivalents to reoccur in the near term. occurred at the end of the are included in the carrying Trading securities and other technique with level 3 inputs. include cash on hand, Financial assets that would reporting period. Refer to values of related items in financial instruments at fair Any such differences are deposits with original meet the definition of loans Note 23. the statement of financial value through profit or loss initially recognised within maturity of three months, and receivables may be position. are initially recorded at fair assets or liabilities and are and short-term, highly liquid reclassified if the Fund has the Transaction costs are value. All other financial subsequently amortised on investments i.e. money market intention and ability to hold incremental costs that are The effective interest method instruments are initially a straight line basis over the funds, readily convertible to these financial assets for the directly attributable to the is a method of allocating recorded at fair value plus term of the investments. The known amounts of cash and foreseeable future, or until acquisition, issue or disposal interest income or interest transaction costs. Fair value differences are immediately subject to low risk of changes maturity. of a financial instrument. An expense over the relevant at initial recognition is best recognised in profit or loss if in value, with an original incremental cost is one that period, so as to achieve a evidenced by the transaction the valuation uses only level 1 maturity of three months A financial asset other than a would not have been incurred constant periodic rate of price. A gain or loss on initial or level 2 inputs. or less. Cash on hand, cash financial asset held for trading if the transaction had not interest (effective interest recognition is only recorded if in banks and deposits are may be designated at fair taken place. Transaction costs rate) on the carrying amount. there is a difference between Derecognition of carried at amortised cost plus value through profit or loss include fees and commissions fair value and transaction financial assets interest, if any. upon initial recognition if: The effective interest rate paid to agents (including price which can be evidenced The Fund derecognises a) Such designation is the rate that exactly employees acting as selling by other observable current financial assets when (a) the eliminates or significantly discounts estimated future Trading securities agents), advisors, brokers and market transactions in the assets are redeemed or the reduces a measurement or cash payments or receipts Trading securities are dealers, levies by regulatory same instrument or by a rights to cash flows from the recognition inconsistency (excluding future credit losses) financial assets which agencies and securities valuation technique whose assets otherwise expired or that would otherwise arise through the expected life of are either acquired for exchanges, and transfer taxes inputs include only data from (b) the Fund has transferred from measuring assets or the financial instrument or a generating a profit from and duties. Transaction costs observable markets. the rights to the cash flows recognizing the gains and shorter period, if appropriate, short-term fluctuations in do not include debt premiums from the financial assets or losses on them on different to the net carrying amount price or trader’s margin, or or discounts, financing costs All purchases and sales of entered into a qualifying pass- bases; or of the financial instrument. are securities included in a or internal administrative or financial assets that require through arrangement while (i) b) The financial asset forms The effective interest rate portfolio in which a pattern of holding costs. delivery within the time frame also transferring substantially part of a group of financial discounts cash flows of short-term trading exists. The established by regulation or all risks and rewards of assets or liabilities or both, variable interest instruments Fund classifies securities into Amortised cost is the amount market convention (“regular ownership of the assets or which is managed and its to the next interest repricing trading securities if it has an at which the financial way” purchases and sales) are (ii) neither transferring nor performance is evaluated date, except for the premium intention to sell them within instrument was recognised recorded at trade date, which retaining substantially all risks on a fair value basis, in or discount which reflects a short period after purchase, at initial recognition less is the date on which the Fund and rewards of ownership, but accordance with the Fund’s the credit spread over the i.e. within 3-6 months. any principal repayments, commits to deliver a financial not retaining control. Control documented risk management floating rate specified in the plus accrued interest, and asset. All other purchases is retained if the counterparty or investment strategy, instrument, or other variables The Fund may choose to for financial assets less any are recognised when the does not have the practical and information about the that are not reset to market reclassify a non-derivative write-down for incurred entity becomes a party to the ability to sell the asset in its grouping is provided internally rates. Such premiums or trading financial asset out impairment losses. Accrued contractual provisions of the entirety to an unrelated third on that basis the entity’s key discounts are amortised over of the fair value through interest includes amortisation instrument. party without needing to management personnel. the whole expected life of the profit or loss category if of transaction costs deferred impose restrictions on the the instrument. The present the asset is no longer held at initial recognition and of The Fund uses discounted sale. Trading securities are carried value calculation includes all for the purpose of selling it any premium or discount to cash flow valuation at fair value. The Fund uses fees paid or received between in the near term. Financial maturity amount using the techniques to determine the quoted market prices and parties to the contract that Derecognition of financial assets other than loans and effective interest method. fair value of investments valuation model to determine are an integral part of the liabilities receivables are permitted Accrued interest income and that are not traded in an fair value for financial assets effective interest rate. to be reclassified out of fair accrued interest expense, active market. Differences A financial liability is at fair value through profit or value through the profit including both accrued may arise between the fair derecognized when the loss. The fair value adjustment or loss category only in coupon and amortised value at initial recognition, obligation is discharged, on trading securities is rare circumstances arising discount or premium which is considered to be the cancelled, or expires. recognized in the statement from a single event that is (including fees deferred at transaction price, and the of profit or loss for the period

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as part of net gain or loss on Investment securities who hold a recognised recorded separately in profit with the expenditure will flow value is estimated using an financial assets at fair value held to maturity and relevant professional or loss for the year within to the Fund, and the cost can income approach. through profit or loss. Interest This classification includes qualification, and who have realised gains or losses on be measured reliably. All other earned and dividend income quoted non-derivative had recent experience of disposal of the investment repairs and maintenance costs Costs of minor repairs and on trading securities are financial assets with fixed or the valuation of property in property. are expensed when incurred. day-to-day maintenance are included in interest income determinable payments and similar locations and of similar expensed when incurred. and other investment income category. If an investment property Costs of replacing major parts fixed maturities that the Fund Premises and equipment in profit or loss and disclosed has both the intention and becomes owner-occupied, or components of premises The Fund’s premises and separately in the notes to the ability to hold to maturity. An Earned rental income is it is reclassified as property, and equipment items are equipment are tangible financial statements. investment is not classified as recorded in profit or loss plant and equipment, and its capitalised, and the replaced assets held for administrative a held-to-maturity investment for the year within other carrying amount at the date part is retired. purposes with an expected Other securities at fair value if the Fund has the right to operating income. Gains and of reclassification becomes its useful life of more than one through profit or loss require that the issuer repay losses resulting from changes deemed cost for accounting At the end of each reporting in the fair value of investment purposes. accounting period. Premises period management assesses Other securities at fair or redeem the investment property are recorded in and equipment are stated whether there is any value through profit or before its maturity, because profit or loss for the year If an item of owner-occupied at cost less accumulated indication of impairment of loss are financial assets paying for such a feature is and presented separately. property becomes an depreciation and provision for premises and equipment. If designated irrevocably, at inconsistent with expressing Gains or losses on disposal investment property because impairment, where required. any such indication exists, initial recognition, into this an intention to hold the asset of investment property are its use has changed, any Premises are subject to management estimates the category. Management until maturity. Management calculated as proceeds less difference resulting between revaluation with sufficient recoverable amount, which designates securities into determines the classification carrying amount. Where the the carrying amount and regularity to ensure that is determined as the higher this category only if (a) such of investment securities held Fund disposes of a property the fair value of this item the carrying amount does of an asset’s fair value less classification eliminates to maturity at their initial at fair value in an arm’s length at the date of transfer is not differ materially from costs to sell and its value in or significantly reduces recognition and reassesses transaction, the carrying value treated in the same way as that which would be use. The carrying amount is an accounting mismatch the appropriateness of that immediately prior to the sale a revaluation under IAS 16. determined using fair value reduced to the recoverable that would otherwise arise classification at the end is adjusted to the transaction Any resulting increase in at the end of the reporting amount and the impairment from measuring assets or of each reporting period. price, and the adjustment the carrying amount of the period. Increases in the loss is recognised in profit liabilities or recognising the Investment securities held is recorded in profit or loss property is recognised in carrying amount arising on or loss for the year to gains and losses on them to maturity are carried at for the year within net gain profit or loss for the year to revaluation are credited the extent it exceeds the on different bases; or (b) a amortised cost. from fair value adjustment on the extent that it reverses to other comprehensive previous revaluation surplus group of financial assets, investment property. a previous impairment loss, income and increase the in equity. An impairment loss financial liabilities or both is Gold bullion with any remaining increase revaluation surplus in equity. recognised for an asset in managed and its performance The Fund is involved in In certain circumstances credited directly to other Decreases that offset prior years is reversed if there is evaluated on a fair value purchase of gold bullion for the Fund may dispose of comprehensive income. previous increases of the has been a change in the basis, in accordance with a investment purposes with the a property other than at Any resulting decrease in same asset are recognised in estimates used to determine documented risk management intention of diversification of fair value, such as when the carrying amount of the other comprehensive income the asset’s value in use or fair or investment strategy, and the investment portfolio with there are special terms or property is initially charged and decrease the previously value less costs to sell. information on that basis is the ability to sell the gold in circumstances allowing the against any revaluation recognised revaluation surplus regularly provided to and the future. The gold bullion parties to the transaction to surplus previously recognised in equity; all other decreases Gains and losses on disposals reviewed by the Fund’s key is initially recognized and obtain a benefit which would in other comprehensive are charged to profit or loss determined by comparing management personnel. subsequently measured at not generally be available to income, with any remaining for the year. The revaluation proceeds with carrying Recognition and measurement fair value with gains or losses other market participants. decrease charged to profit or reserve for premises included amount are recognised in of this category of financial recognised in profit or loss. In such circumstances, the loss for the year. in equity is transferred profit or loss for the year assets is consistent with carrying value immediately directly to retained earnings (within other operating the above policy for trading prior to the sale is adjusted Subsequent expenditure when the revaluation surplus income or expenses). securities. Investment properties to the estimated fair value is capitalised to the asset’s is realised on the retirement

The fair value of the Fund’s at the disposal date, and any carrying amount only when or disposal of the asset. If investment property is difference between proceeds it is probable that future there is no market based determined based on reports and the carrying amount is economic benefits associated evidence of fair value, fair of independent appraisers,

98 99 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

Depreciation with finite lives are amortized have been enacted during the to items charged or credited Provisions Equity reserves Land and construction in over their useful economic reporting period. directly to the equity, in which Provisions are recognised The reserves recorded in progress are not depreciated. lives (10 years) and assessed case the deferred tax is also when the Fund has a equity (other comprehensive Depreciation on other items for impairment whenever Deferred tax is the tax dealt with the equity. present obligation (legal or income) on the Fund’s of premises and equipment is there is an indication that expected to be payable or constructive) as a result of consolidated statement of calculated using the straight- the intangible asset may recoverable on differences No deferred tax is recognized a past event, it is probable financial position include: be impaired. Amortization between the carrying and the initial recognition line method to allocate their that the Fund will be required • ‘Foreign currency periods and methods for amounts of assets and exception applies if the cost or revalued amounts to to settle the obligation, and translation reserve’ which intangible assets with definite liabilities in the financial temporary difference arises their residual values over their a reliable estimate can be is used to record exchange useful lives are reviewed statements and the from the initial recognition estimated useful lives: made of the amount of the differences arising from at least at each financial corresponding tax bases used of an asset or liability in a obligation. the translation of the net year-end. in the computation of taxable transaction that: investment in foreign Years profit, and is accounted for (a) is not a business The amount recognised operations; Buildings 50 using the balance sheet combination; and as a provision is the best Derecognition of • ‘Property revaluation Vehicles 7 liability method. Deferred estimate of the consideration intangible assets (b) at the time of the reserve’ which comprises tax liabilities are generally required to settle the present Office equipment 4 An intangible asset is transaction, affects neither revaluation reserve of recognized for all taxable obligation at the end of the Furniture 5 derecognised on disposal, or accounting profit nor taxable land and building; temporary differences and reporting period, taking Other property and when no future economic profit (tax loss). 3 deferred tax assets are into account the risks and • ‘Other capital reserve’. equipment benefits are expected recognized to the extent that uncertainties surrounding the from use or disposal. Gains Deferred income tax assets it is probable that taxable obligation. When a provision As discussed in Note 15 and or losses arising from and deferred income tax profits will be available against is measured using the cash 21, in accordance with the The residual value of an asset derecognition of an intangible liabilities are offset and which deductible temporary flows estimated to settle the Decrees and the Regulations, is the estimated amount that asset, measured as the reported net in the statement differences can be utilized. present obligation, its carrying the Fund is an extra- the Fund would currently difference between the of financial position if: Such assets and liabilities amount is the present value budget state organization. obtain from disposal of the net disposal proceeds and • The Fund has a legally are not recognized if the of those cash flows (when the All decisions regarding asset less the estimated the carrying amount of the enforceable right to set off temporary difference arises effect of the time value of contributions to and transfers costs of disposal, if the asset asset, are recognised in profit current income tax assets were already of the age and from the initial recognition money is material) from the Fund are made and or loss when the asset is of other assets and liabilities against current income tax in the condition expected at approved by the Decrees of derecognised. in a transaction that affects liabilities; and the end of its useful life. The Trade and other payables the President of the Republic neither the tax profit nor the • Deferred income tax assets of Azerbaijan. assets’ residual values and Trade payables are accrued useful lives are reviewed, and Income tax accounting profit. and the deferred income tax liabilities relate to income when the counterparty has adjusted if appropriate, at the Income tax expense Contributions/transfers The carrying amount of taxes levied by the same performed its obligations end of each reporting period. comprises current and received/made by the Fund deferred tax assets is taxation authority on the under the contract and are deferred tax expense. represent contributions/ reviewed at each reporting same taxable entity. carried at amortised cost. withdrawals and, accordingly, Intangible assets date and reduced to the The current tax expense is are recognized through net extent that it is no longer Intangible assets acquired based on taxable profit for The Republic of Azerbaijan Contingencies equity at the fair value of the probable that sufficient separately are measured on the year. Taxable profit differs also has various other taxes, Contingent liabilities are not consideration received/paid. taxable profits will be available initial recognition at cost. from net profit before tax as which are assessed on the recognized in the statement to allow all or part of the asset Following initial recognition, reported in the statement of Fund’s activities. These taxes of financial position but are Transfers to the State Budget, to be recovered. Deferred intangible assets are carried profit or loss as it excludes are included as a component disclosed unless the possibility as well as state institutions, tax is calculated at the tax at cost less any accumulated items of income or expense of operating expenses in the of any outflow in settlement state-owned entities and rates that are expected to amortization and any that are taxable or deductible statement of profit or loss and is remote. A contingent asset companies are recognized apply in the period when the accumulated impairment in other years and it further other comprehensive income. is not recognized in the on the date of payment. All liability is settled or the asset losses. The useful lives excludes items that are never statement of financial position transfers are made within is realized. Deferred tax is of intangible assets are taxable or deductible. The but disclosed when an inflow the approved budget of charged or credited to profit assessed to be either finite or Fund’s current tax expense is of economic benefits is the Fund and transferred or loss, except when it relates indefinite. Intangible assets calculated using tax rates that probable. to the State Treasury of

100 101 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

the Republic of Azerbaijan result of an impairment loss, differences. Non-monetary associate whose functional evaluates its estimates and or liquidation sale. If a quoted for payments to eligible interest income is thereafter items that are measured currency is different from the judgments on an ongoing market price is available for budgetary beneficiaries (state recognized using the rate in terms of historical cost presentation currency of the basis. Management bases its an instrument, the fair value institutions, state-owned of interest used to discount in a foreign currency are Fund, the deferred cumulative estimates and judgments on is calculated based on the entities and companies) the future cash flows for the translated using the exchange amount is recognized in profit historical experience and on market price. When valuation based on their requests for purpose of measuring the rates as at the dates of the or loss in the consolidated various other factors that are parameters are not observable payments. impairment loss. initial transactions. Non- statement of profit or loss and believed to be reasonable in the market or cannot be monetary items measured other comprehensive income. under the circumstances. derived from observable Interest earned on assets at at fair value in a foreign market prices, the fair value Recognition of income fair value is classified within currency are translated using is derived through analysis of and expense Rates of exchange Accounting for Cash Inflows interest income. the exchange rates at the other observable market data and Outflows Interest income is recognized date when the fair value was The exchange rates used by appropriate for each product on an accrual basis using the Expenses are recognized on determined. the Fund in the preparation of As described in Note 1, the and pricing models which use effective interest method. The accrual basis, i.e. when they the financial statements as at Fund receives cash inflows a mathematical methodology effective interest method is are incurred. Differences between the the year-end are as follows: from revenues generated based on accepted financial a method of calculating the from various oil and gas contractual exchange rate theories. Pricing models take amortized cost of a financial Offsetting activities carried out in Foreign currency translation of a transaction in a foreign into account the contract asset or a financial liability currency and the Central Bank Financial assets and liabilities the Republic of Azerbaijan. terms of the securities as well The consolidated financial (or a group of financial assets exchange rate on the date of are offset and the net amount These cash inflows are as market-based valuation statements are presented in or financial liabilities) and of the transaction are included in reported in the consolidated made according to certain parameters, such as interest AZN, which is the SOFAZ’s allocating the interest income gains less losses from dealing statement of financial position decrees of the President of rates, volatility, exchange functional and presentation over the relevant period. The in foreign currencies. only when there is a legally the Republic of Azerbaijan. rates and the credit rating of currency. Transactions in effective interest rate is the enforceable right to offset Cash outflows for major the counterparty. foreign currencies are initially rate that exactly discounts As at the reporting date, the the recognised amounts, and projects and contributions recorded in the functional estimated future cash assets and liabilities of the there is an intention to either to the State budget are Where market-based currency, converted at the payments or receipts through entities whose functional settle on a net basis, or to also made according to valuation parameters are rate of exchange ruling at the expected life of the currency is different from the realise the asset and settle decrees of the President of absent, management will the date of the transaction. financial instrument or, when presentation currency of the the liability simultaneously. the Republic of Azerbaijan. make a judgment as to its best Monetary assets and liabilities appropriate, a shorter period Fund are translated into AZN Such a right of set off (a) SOFAZ believes these estimate of that parameter denominated in foreign to the net carrying amount of at the rate of exchange ruling must not be contingent on a inflows and outflows of funds in order to determine a currencies are retranslated the financial asset. at the reporting date and, future event and (b) must be represent contributed capital reasonable reflection of how at the functional currency their statements of financial legally enforceable in all of the and withdrawals of capital, the market would be expected rate of exchange ruling at Dividend income from performance are translated following circumstances: (i) in respectively. Accordingly, to price the instrument. In the reporting date. Gains financial assets at fair value at the weighted average the normal course of business, SOFAZ recognises them as exercising this judgment, and losses resulting from through profit or loss is exchange rates for the year. (ii) the event of default and movements in equity in the a variety of tools are used the translation of foreign recognized in the statement The exchange differences (iii) the event of insolvency or consolidated statement of including proxy observable currency transactions are of profit or loss when the arising on the translation bankruptcy. changes in equity. data, historical data, and recognized in the consolidated Fund’s right to receive are taken to the separate extrapolation techniques. The payment is established. statement of performance as component of equity. On The preparation of the Valuation of financial best evidence of fair value of foreign currency translation disposal of a subsidiary or an Fund’s consolidated financial instruments a financial instrument at initial Other operating income statements requires recognition is the transaction Financial instruments that are including rental income is management to make price unless the instrument is 2015 2014 2013 classified at fair value through recognized on accruals basis, estimates and judgments that evidenced by comparison with AZN/1 US Dollar 1.5594 0.7844 0.7845 profit or loss are stated at i.e. when these are earned. affect the reported amounts data from observable markets. fair value. The fair value of AZN/1 Euro 1.7046 0.9522 1.0780 of assets and liabilities at Any difference between the such financial instruments Once a financial asset or AZN/1 GB Pound 2.3133 1.2173 1.2927 the reporting date and the transaction price and the is the estimated amount at a group of similar financial AZN/1 Russian Ruble 0.0216 0.0133 0.0241 reported amount of income value based on a valuation which the instrument could assets has been written down and expenses during the technique is not recognized AZN/100 Korean (South) Won 0.1328 0.0714 0.0743 be exchanged between willing (or partly written down) as a year ended. Management in the statement of profit or AZN/100 Japanese Yen 1.2946 0.6515 0.7449 parties, other than in a forced

102 103 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

loss and other comprehensive Impairment of investments Staff costs and related 5. Critical Accounting Estimates, and income on initial recognition. held to maturity contributions Judgements in Applying Accounting Policies Subsequent gains or losses The Fund holds investments Wages, salaries, contributions are only recognized to the in companies, including those to the Azerbaijan State extent that it arises from a that do not trade in an active Social Insurance Fund, paid The Fund makes estimates statements and estimates considered together make change in a factor that market market. Future adverse annual leave and sick leave, and assumptions that affect that can cause a significant it difficult to reach a clear participants would consider in changes in market conditions bonuses, and non-monetary the amounts recognised in adjustment to the carrying conclusion. In cases where setting a price. or poor operating results benefits are accrued in the the consolidated financial amount of assets and liabilities more arguments are in place could result in losses that year in which the associated statements, and the carrying within the next financial year towards existence of control, The Fund considers that may not be reflected in an services are rendered by amounts of assets and include: the structured entity is the accounting estimates investment’s current carrying the employees of the Fund. liabilities within the next consolidated. Were the Fund related to valuation of value, thereby requiring an The Fund has no legal or financial year. Estimates and The Fund does not not to consolidate the assets, financial instruments where impairment charge in the constructive obligation to judgements are continually consolidate structured entities liabilities and the results of quoted markets prices are future. The Fund regularly make pension or similar evaluated and are based on that it does not control. As it these consolidated structured not available are a key source reviews its investments to benefit payments beyond the management’s experience can sometimes be difficult to entities, the net effect on of estimating uncertainty determine if there have been payments to the statutory and other factors, including determine whether the Fund the statement of financial because: (i) they are highly any indicators that the value defined contribution scheme. expectations of future does control a structured position would be a decrease susceptible to change from may be impaired. These events that are believed to entity, management makes in net assets of AZN 234,919 period to period because it reviews require estimating the be reasonable under the judgements about its thousand (31 December requires management to make outcome of future events and circumstances. Management exposure to the risks and 2014: nil; 31 December 2013: assumptions about interest determining whether factors also makes certain rewards, as well as about its nil) and decrease in profit by rates, volatility, exchange exist that indicate impairment judgements, apart from ability to make operational AZN 2,992 thousand (2014: rates, the credit rating of has occurred. the counterparty, valuation those involving estimations, decisions for the structured nil; 2013: nil). Refer to Note adjustments and specific in the process of applying entity in question. In many 27 for further information feature of the transactions Measurement of fair value the accounting policies. instances, elements are about the Fund’s exposure to and (ii) the impact that of investment properties Judgements that have the present that, considered in structured entities. recognizing a change in the and property and equipment most significant effect on isolation, indicate control valuations would have on (building) the amounts recognised in or lack of control over a the assets reported in the Fair value of investment the consolidated financial structured entity, but when statement of financial position properties as well as at the as well as its profit/(loss) could property and equipment be material. (building) is determined by independent professionally Management uses different qualified appraisers. Fair assumptions regarding the value is determined using interest rates, volatility, the combination of internal 6. First-time Adoption of IFRS exchange rates, the credit capitalization method (also rating of the counterparty and known as discounted future These consolidated financial as of 31 December 2015 exceptions and has elected to valuation adjustments where cash flow method), sales statements are the Fund’s first in preparing the opening apply the following optional quoted market prices are comparison method and also annual consolidated financial IFRS statement of financial exemptions: not available using their own based on the highest and best statements that comply position at 1 January 2014 knowledge and capabilities, use method. with IFRS. The Fund’s IFRS and in subsequent periods Exceptions from retrospective as well as, data obtained from transition date is 1 January up to the end of the first application, which are it’s custodians (mainly Bank 2014. Subject to certain IFRS reporting period. In mandatory under IFRS 1 are: of New York Mellon) and exceptions, IFRS 1 requires preparing these consolidated Bloomberg. (a) Derecognition of financial retrospective application financial statements, the Fund assets and liabilities of the version of IFRS valid has applied the mandatory exception. Financial assets

104 105 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

and liabilities derecognised December 2014 should be 2014 and for the year ended required to present the The Fund is currently separate elements. When the before the transition to IFRS consistent with estimates 31 December 2014. effects of changes in own assessing the impact of consideration varies for any are not re-recognised under made for the same dates Trading securities are carried credit risk of financial the new standard on its reason, minimum amounts IFRS. Management did not under previous accounting at fair values determined liabilities designated at fair consolidated financial must be recognised if they choose to apply the IAS 39 framework, unless there is based on quoted market value through profit or loss statements. are not at significant risk derecognition criteria from an evidence that those estimates prices. There is no change on in other comprehensive of reversal. Costs incurred earlier date. were in error. income. to secure contracts with consolidation of subsidiaries Clarification of Acceptable customers have to be (b) Hedge accounting and joint venture from IPSAS • IFRS 9 introduces a new Methods of Depreciation and There are no effects of the capitalised and amortised exception.The Fund does not to IFRS. The Fund’s operating, model for the recognition Amortisation - Amendments transition from International over the period when the apply hedge accounting. investing and financing cash of impairment losses – the to IAS 16 and IAS 38 Public Sector Accounting benefits of the contract (c) Estimates exception. flows reported under IPSAS expected credit losses (issued on 12 May 2014 and Standards (“IPSAS”) to IFRS at are consumed. The Fund is Estimates under IFRS at did not significantly differ (ECL) model. There is a effective for the periods 1 January 2014, 31 December currently assessing the impact 1 January 2014 and 31 from IFRS. ‘three stage’ approach beginning on or after 1 of the new standard on its which is based on the January 2016). change in credit quality of financial statements. In this amendment, the IASB financial assets since initial has clarified that the use of recognition. In practice, revenue-based methods to Sale or Contribution of the new rules mean that calculate the depreciation of Assets between an Investor entities will have to record an asset is not appropriate and its Associate or Joint 7. New Accounting an immediate loss equal to because revenue generated Venture - Amendments to Pronouncements the 12-month ECL on initial by an activity that includes IFRS 10 and IAS 28 (issued recognition of financial the use of an asset generally on 11 September 2014 and assets that are not credit reflects factors other than the effective for annual periods impaired (or lifetime ECL for Certain new standards and fair value through profit or Embedded derivatives are consumption of the economic beginning on or after 1 trade receivables). Where interpretations have been loss (FVPL). no longer separated from benefits embodied in the January 2016). there has been a significant issued that are mandatory for • Classification for debt financial assets but will be asset. The Fund is currently These amendments address increase in credit risk, the annual periods beginning instruments is driven by included in assessing the assessing the impact of the an inconsistency between impairment is measured on or after 1 January 2016 or the entity’s business model SPPI condition. new standard on its financial the requirements in IFRS using lifetime ECL rather later, and which the Fund has for managing the financial • Investments in equity statements. 10 and those in IAS 28 than 12-month ECL. The not early adopted. assets and whether the instruments are always in dealing with the sale model includes operational IFRS 9 “Financial contractual cash flows measured at fair value. or contribution of assets simplifications for lease and IFRS 15, Revenue from Instruments: Classification represent solely payments However, management between an investor and its trade receivables. Contracts with Customers and Measurement” (amended of principal and interest can make an irrevocable associate or joint venture. (issued on 28 May 2014 and in July 2014 and effective for (SPPI). If a debt instrument election to present changes • Hedge accounting The main consequence of effective for the periods annual periods beginning on is held to collect, it may in fair value in other requirements were the amendments is that a beginning on or after 1 or after 1 January 2018). be carried at amortised comprehensive income, amended to align full gain or loss is recognised January 2018). Key features of the new cost if it also meets the provided the instrument is accounting more closely when a transaction involves standard are: SPPI requirement. Debt not held for trading. If the with risk management. The The new standard introduces a business. A partial gain or the core principle that • Financial assets are instruments that meet the equity instrument is held for standard provides entities loss is recognised when a revenue must be recognised required to be classified SPPI requirement that are trading, changes in fair value with an accounting policy transaction involves assets when the goods or services into three measurement held in a portfolio where an are presented in profit or choice between applying that do not constitute a are transferred to the categories: those to be entity both holds to collect loss. the hedge accounting business, even if these assets customer, at the transaction measured subsequently at assets’ cash flows and sells • Most of the requirements requirements of IFRS 9 and are held by a subsidiary. The price. Any bundled goods or amortised cost, those to assets may be classified as in IAS 39 for classification continuing to apply IAS 39 Fund is currently assessing services that are distinct must be measured subsequently FVOCI. Financial assets and measurement of to all hedges because the the impact of the new be separately recognised, at fair value through other that do not contain cash financial liabilities were standard currently does standard on its financial and any discounts or rebates comprehensive income flows that are SPPI must carried forward unchanged not address accounting for statements. on the contract price must (FVOCI) and those to be be measured at FVPL to IFRS 9. The key change macro hedging. generally be allocated to the measured subsequently at (for example, derivatives). is that an entity will be

106 107 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

Annual Improvements interim financial report”. The effective for annual periods for annual periods beginning in the income statement. unrealised losses that arise as to IFRSs 2014 (issued Fund is currently assessing beginning on or after 1 on or after 1 January 2019). IFRS 16 substantially a result of discounting cash on 25 September 2014 the impact of the new January 2017). The new standard sets carries forward the lessor flows of debt instruments and effective for annual standard on its financial The amended IAS 7 will out the principles for the accounting requirements in at market interest rates, periods beginning on or statements. require disclosure of a recognition, measurement, IAS 17. Accordingly, a lessor even if it expects to hold after 1 January 2016). reconciliation of movements presentation and disclosure continues to classify its leases the instrument to maturity The amendments impact of leases. All leases result as operating leases or finance and no tax will be payable Disclosure Initiative in liabilities arising from 4 standards. IFRS 5 was in the lessee obtaining the leases, and to account for upon collecting the principal Amendments to IAS 1 (issued financing activities. The Fund amended to clarify that right to use an asset at the those two types of leases amount. The economic in December 2014 and is expecting an impact of the change in the manner of start of the lease and, if differently. The Fund is benefit embodied in the effective for annual periods amendment on its financial disposal (reclassification lease payments are made currently assessing the impact deferred tax asset arises from on or after 1 January 2016). statements. from “held for sale” to “held over time, also obtaining of the new standard on its the ability of the holder of the The Standard was amended for distribution” or vice financing. Accordingly, IFRS financial statements. debt instrument to achieve to clarify the concept of versa) does not constitute a Investment Entities: Applying 16 eliminates the classification future gains (unwinding of materiality and explains that change to a plan of sale or the Consolidation Exception of leases as either operating the effects of discounting) an entity need not provide a Recognition of Deferred distribution, and does not Amendment to IFRS 10, leases or finance leases as without paying taxes on those specific disclosure required Tax Assets for Unrealised have to be accounted for IFRS 12 and IAS 28 (issued is required by IAS 17 and, gains. The Fund is currently by an IFRS if the information Losses - Amendments to IAS as such. The amendment in December 2014 and instead, introduces a single assessing the impact of the resulting from that disclosure 12 (issued in January 2016 to IFRS 7 adds guidance to effective for annual periods lessee accounting model. new standard on its financial is not material, even if and effective for annual help management determine on or after 1 January 2016). Lessees will be required to statements. the IFRS contains a list of periods beginning on or after whether the terms of an The Standard was amended recognise: (a) assets and specific requirements or 1 January 2017). arrangement to service a to clarify that an investment liabilities for all leases with Unless otherwise described describes them as minimum The amendment has clarified financial asset which has entity should measure at fair a term of more than 12 above, the new standards requirements. The Standard the requirements on been transferred constitute value through profit or loss months, unless the underlying and interpretations are also provides new guidance recognition of deferred tax continuing involvement, for all of its subsidiaries that asset is of low value; and not expected to affect on subtotals in financial assets for unrealised losses the purposes of disclosures are themselves investment (b) depreciation of lease significantly the Fund’s statements, in particular, on debt instruments. The required by IFRS 7. The entities. In addition, the assets separately from consolidated financial such subtotals (a) should be entity will have to recognise amendment also clarifies that exemption from preparing interest on lease liabilities statements. comprised of line items made deferred tax asset for the offsetting disclosures of consolidated financial up of amounts recognised IFRS 7 are not specifically statements if the entity’s and measured in accordance required for all interim ultimate or any intermediate with IFRS; (b) be presented periods, unless required by parent produces consolidated and labelled in a manner IAS 34. The amendment financial statements that makes the line items to IAS 19 clarifies that for available for public use was that constitute the subtotal 8. Cash and Cash Equivalents post-employment benefit amended to clarify that the clear and understandable; obligations, the decisions exemption applies regardless (c) be consistent from regarding discount rate, whether the subsidiaries are Cash and cash equivalents comprise: period to period; and (d) existence of deep market in consolidated or are measured not be displayed with more high-quality corporate bonds, at fair value through profit or In thousands of Azerbaijani Manats 2015 2014 2013 prominence than the subtotals or which government bonds loss in accordance with IFRS Short-term deposits 1 , 7 9 3 , 4 8 8 1,019,569 841,559 and totals required by IFRS to use as a basis, should be 10 in such ultimate or any standards. The Fund is Money market funds 1 , 1 6 2 , 2 1 6 816,305 84,012 based on the currency that intermediate parent’s financial currently assessing the impact Bank accounts 4 0 5 , 7 0 1 435,256 350,770 the liabilities are denominated statements. The Fund is of the new standard on its Cash on hand 1 1 - in, and not the country where currently assessing the impact financial statements. they arise. IAS 34 will require of the new standard on its Total cash and cash equivalents 3,361,406 2,271,131 1,276,341 a cross reference from the financial statements. interim financial statements to Disclosure Initiative – the location of “information Amendments to IAS 7 (issued IFRS 16 “Leases” (issued in disclosed elsewhere in the on 29 January 2016 and January 2016 and effective

108 109 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

Money market funds funds invest their assets in dividends payable to the Fund At 31 December 2015 the 30 thousand) held at bank Other accounts originated Investments in money short-term debt and debt are reinvested. Fund had AZN 198,371 accounts in the Central Bank in foreign currencies were market funds represent share related instruments, such as thousand and AZN 47 of the Republic of Azerbaijan opened with non-resident ownership in funds, payable commercial paper, certificates The Fund had the following thousand (2014: AZN and the International Bank of banks with long-term ratings on demand. Investments of deposit, bonds bearing investments in the money 319,951 thousand and AZN Azerbaijan, respectively. BB/Ba3 (Standard & Poor’s/ in money market funds are floating interests, US treasury market funds with AAA 42 thousand; 2013: AZN Fitch/Moody’s) and above. highly liquid. Money market bonds, Eurobonds and asset- credit ratings: 169,534 thousand and AZN backed securities. Interest and

In thousands of Azerbaijani Manats 2015 2014 2013 Deposits BNP Paribas Global Liquidity Funds plc - 266,204 - The Fund’s investments in deposits comprise: BlackRock ICS-Institution Liquidity Funds plc 1 , 1 4 7 , 0 7 9 550,101 84,012 The Goldman Sachs Group, Inc 15,137 - - In thousands of Azerbaijani Manats 2015 2014 2013 Total money market funds 1,162,216 816,305 84,012 T.C. Ziraat Bankasi A.S. 3 8 8 , 3 9 6 3 0 9 , 1 5 8 131,238 Akbank T.A.S, Istanbul 2 3 3 , 7 4 4 2 6 3 , 2 8 6 109,338 Turkiye Is Bankasi A.S. Istanbul 5 8 4 , 1 6 5 3 5 5 , 0 3 6 313,009 Bank accounts IBA, Moscow - 7 , 8 4 6 - Bank accounts were denominated in the following currencies: Turkiye Garanti Bankasi AS 5 8 7 , 1 8 3 8 4 , 2 4 3 209,095 Gazprombank, Moscow - - 78,817 In thousands of Azerbaijani Manats 2015 2014 2013 BNP Paribas, London - - 13 AZN 1 9 8 , 4 1 8 3 1 9 , 9 9 3 169,564 VTB Bank JSC - - 49 USD 1 5 6 , 5 5 9 9 1 , 6 3 2 171,848 Total deposits 1,793,488 1,019,569 841,559 GBP 6 , 2 9 8 5 , 6 6 5 3,384 CNY 2 , 4 2 1 - - CHF 1 , 3 8 6 82 63 As at 31 December 2015, the with non-resident banks The credit quality of cash and AUD 1 , 0 6 2 308 297 Fund placed AZN 1,793,488 maturing in January and cash equivalents balances EUR 3 , 5 7 9 540 4,074 thousand (31 December 2014: February 2016 with credit may be summarised (based on RUB 8 , 3 4 5 4 , 7 1 4 776 AZN 1,019,569 thousand; ratings of BB/Ba3 (Standard Standard and Poor’s/Fitch/ KRW 1 , 5 1 3 1 0 , 5 6 4 - 31 December 2013: AZN & Poor’s/ Fitch/Moody’s) and Moody’s ratings) as follows at 841,559 thousand) in deposits above. 31 December 2015: CAD 355 446 109 HKD 225 67 107 NOK 158 7 10 Money Cash on Bank Short term In thousands of Azerbaijani Manats Market Total DKK 164 18 7 Hand Account Deposit Funds NZD 95 40 4 Neither past due nor impaired (at fair value) JPY 2 4 , 9 5 6 1 , 0 0 6 333 AAA - - - 1 , 1 6 2 , 2 1 6 1 , 1 6 2 , 2 1 6 SGD 63 68 100 AA - 2 6 , 3 4 2 - - 2 6 , 3 4 2 SEK 53 45 34 A - 1 7 0 , 9 2 4 - - 1 7 0 , 9 2 4 ILS 45 60 52 BBB - 1 9 9 , 7 9 5 6 2 2 , 1 4 1 - 8 2 1 , 9 3 6 TRY 6 1 8 BB - 8,640 1 , 1 7 1 , 3 4 7 - 1 , 1 7 9 , 9 8 7 Total bank accounts 405,701 435,256 350,770 Securities without rating 1 - - - 1 Total cash and cash equivalents 1 405,701 1,793,488 1,162,216 3,361,406

110 111 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

The credit quality of cash and Standard and Poor’s/Fitch/ cash equivalents balances Moody’s ratings) as follows at may be summarised (based on 31 December 2014: 9. Trading Securities

Money Trading securities comprise: Cash on Bank Short term In thousands of Azerbaijani Manats Market Total Hand Account Deposit Funds Neither past due nor impaired (at fair value) AAA - 1 8 , 9 6 4 - 8 1 6 , 3 0 5 8 3 5 , 2 6 9 A - 9 6 , 2 9 6 - - 9 6 , 2 9 6 In thousands of Azerbaijani Manats 2015 2014 2013

BBB - 3 1 9 , 9 5 3 1,011,723 - 1 , 3 3 1 , 6 7 6 Agency/Supranational bonds 5,485,835 3,503,719 5,449,196 BB - 43 7,846 - 7 , 8 8 9 Corporate bonds 22,084,832 12,646,013 10,493,842 Securities without rating 1 - - - 1 Sovereign bonds 3,310,346 1,549,124 2,575,694 Total cash and cash equivalents 1 435,256 1,019,569 816,305 2,271,131 Equity securities 4,002,867 1,451,680 1,069,158

Money Market 3,534,182 1,874,413 3,481,968 The credit quality of cash and Standard and Poor’s/Fitch/ cash equivalents balances Moody’s ratings) as follows at Covered Bond 405,233 1,188,182 1,405,137 may be summarised (based on 31 December 2013: SPDR Trust - 13,616 12,227

Total trading securities 38,823,295 22,226,747 24,487,222

Money Cash on Bank Short term In thousands of Azerbaijani Manats Market Total Hand Account Deposit Funds As at 31 December 2015 the Development (IBRD – World 2013: from 0.5% p.a. to Neither past due nor impaired (at fair value) Fund held AZN 3,708,059 Bank Group), State Street 8.125% p.a. and USD LIBOR, AAA - 1,190 - 84,012 85,202 thousand (USD 2,377,875 Global Advisors (SSGA) and EURIBOR, GBP LIBOR with thousand), (2014: AZN UBS. the spread ranging from AA - 1,091 13 - 1,104 1,293,510 thousand (USD +0% p.a. to +1.2% p.a) and A - 165,831 - - 165,831 1,649,043 thousand); 2013: mature during the period from Agency/Supranational AZN 869,884 thousand January 2016 to June 2020 BBB - 182,628 841,546 - 1,024,174 bonds (USD 1,108,839 thousand)) (2014: from January 2015 BB - 30 - - 30 under asset management These bonds are represented to June 2019; 2013: from agreements with financial by investments in debt January 2014 to November Total cash and cash equivalents - 350,770 841,559 84,012 1,276,341 institutions (“external securities issued by 2018). managers”) including cash international organizations of Europe, Asia and America. Interest rate analysis of cash and cash equivalents is disclosed in Note 24. and cash equivalents. The As at 31 December 2015 These securities bear fixed Information on related party balances is disclosed in Note 26. management fees in 2015 total accrued interest on to the external managers interest ranging from 0.5% these securities amounted were AZN 1,357 thousand p.a. to 8.75% p.a. and USD AZN 20,344 thousand (2014: (2014: AZN 651 thousand; LIBOR, EURIBOR, GBP LIBOR AZN 9,092 thousand; 2013: 2013: AZN 669 thousand). with the spread ranging from AZN 7,743 thousand). These During 2015, 2014 and +0.01% p.a. to +1.2% p.a. securities were held in the 2013 the Fund’s external (2014: from 0.25% p.a. to portfolio managed both managers were Deutsche 9.875% p.a. and USD LIBOR, directly by the Fund as well as Bank AG, the International EURIBOR, GBP LIBOR with the Fund’s external managers, Bank for Reconstruction and the spread ranging from Deutsche Bank AG and IBRD. +0.03% p.a. to +0.75% p.a;

112 113 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

Corporate bonds interest on these securities 0.125% p.a. to 9.875% p.a. These securities were held in Trading securities are observable market data using Corporate bonds are amounted AZN 264,260 and USD LIBOR, GBP LIBOR, the portfolio managed both carried at fair value which bid prices from Bloomberg represented by investments thousand (2014: AZN EURIBOR and Australian directly by the Fund as well as also reflects any credit risk and BONYM, the Fund in debt securities issued by 155,520 thousand; 2013: Bank Bill Short Term Rate the Fund’s external managers, related write-downs. As does not analyse or monitor corporations of Europe, Asia, AZN 162,817 thousand). with the spread ranging from SSGA and UBS. trading securities are carried impairment indicators. Australia and America. As at These securities were held in +0.03% p.a. to +0.4% p.a) at their fair values based on 31 December 2015 these the portfolio managed both and mature during the period securities bear fixed interest directly by the Fund as well as from January 2016 to July ranging from 0.06% p.a. to the Fund’s external manager 2020,(2014: from January 8.625% p.a. and USD LIBOR, Deutsche Bank AG and IBRD. 2015 to January 2020; 2013: GBP Libor,EURIBOR and from January 2014 to June Analysis by credit quality of debt trading securities is as follows Australian Bank Bill Short Sovereign bonds 2017). As at 31 December at 31 December 2015: 2015 total accrued interest Term Rate with the spread Sovereign bonds are on these securities amounted ranging from +0.17% p.a. represented by investments to +2.02% p.a.,(2014: from AZN 35,537 thousand (2014: Agency/ in debt securities issued by In thousands of Corporate Sovereign Money Covered AZN 31,537 thousand; 2013: Supranational Total 0.45% p.a. to 8.75% p.a. and various European, Asian, Azerbaijani Manats bonds bonds Market Bond AZN 35,693 thousand). bonds USD LIBOR and EURIBOR Australian, Africa and These securities were held in with the spread ranging from American institutions. As at Neither past due nor impaired (at fair value) the portfolio managed both +0.20% p.a. to +1.75% p.a; 31 December 2015 these directly by the Fund as well as AAA 827,077 4,582 106,570 - 46,233 984,462 2013: from 0.45% p.a. to securities bear fixed interest the Fund’s external managers, 9.875% p.a. and USD LIBOR ranging from 0.25% p.a. to AA 1,677,155 1,595,104 706,115 371,369 255,643 4,605,386 and EURIBOR with the spread Deutsche Bank AG and IBRD. 10.7% p.a. and USD and A 1,923,103 11,726,284 759,155 1,336,831 103,357 15,848,730 ranging from +0.14% p.a. GBP LIBOR with the spread to +2.5% p.a) and mature ranging from +0.05% p.a. Equity securities BBB 1,058,500 8,758,862 1,708,902 1,825,982 - 13,352,246 during the period from to +0.63% p.a.( 2014: from The carrying value of equity BB - - 29,604 - - 29,604 January 2016 to December 0.80% p.a. to 7% p.a. and investments consists of 2020, (2014: from January Total neither past due USD LIBOR, GBP LIBOR, investments in the following 5,485,835 22,084,832 3,310,346 3,534,182 405,233 34,820,428 2015 to November 2020; nor impaired EURIBOR and Australian Bank sectors at 31 December 2013: from January 2014 Total debt trading Bill Short Term Rate with the 2015, 2014 and 2013: 5,485,835 22,084,832 3,310,346 3,534,182 405,233 34,820,428 to August 2017). As at 31 spread ranging from +0.19% securities December 2015 total accrued p.a. to +1.28% p.a; 2013: from

In thousands of Azerbaijani Manats 2015 2014 2013

Finance 1,352,269 567,027 584,129

Consumer 804,190 243,836 135,119

Telecommunication and information technologies 512,123 197,538 98,881

Industrial 392,007 124,600 71,630

Healthcare 483,772 139,783 68,549

Energy 171,518 88,176 57,672

Materials 176,381 54,460 34,654

Utilities 109,869 35,886 18,524

Transportation 738 374 -

Total equity securities 4,002,867 1,451,680 1,069,158

114 115 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

Analysis by credit quality of debt trading securities is as follows at 31 December 2014: 10. Other Financial Assets at Fair Value through Profit or Loss In thousands of Agency/ Corporate Sovereign Money Covered Total Azerbaijani Manats Supranational bonds bonds Market Bond bonds In thousands of Azerbaijani Manats 2015 2014 2013 Neither past due nor impaired (at fair value) IFC Funds 238,590 93,495 61,361 AAA 1,806,193 - 330,508 - 902,021 3,038,722 Real Estate Funds 158,379 - - AA 1,289,647 1,535,050 360,597 78,402 286,161 3,549,857 Total other financial assets at fair value through profit or loss 396,969 93,495 61,361 A 247,366 6,258,166 33,989 979,472 - 7,518,993

BBB 160,513 4,774,254 822,159 816,539 - 6,573,465 The Fund irrevocably in a portfolio of limited AXA Real Estate Investment BB - 78,543 1,871 - - 80,414 designated the above financial partnerships or equivalent Manager Pan European Value assets, which are not part interests of investment funds Added Venture (PEVAV) and Total neither past 3,503,719 12,646,013 1,549,124 1,874,413 1,188,182 20,761,451 of its trading book, as at fair or other pooled investment Pramerica European Value due nor impaired value through profit or loss. vehicles (“Investee Funds”), Partners Ltd Partnership S.C.S Total debt trading 3,503,719 12,646,013 1,549,124 1,874,413 1,188,182 20,761,451 The financial assets meet the and direct co-investments (EVP). The Fund has invested securities criteria for classification at primarily focused on resource into these funds through fair value through profit or efficiency and developing its Luxembourg subsidiary, loss because key management low-emission products and Sofaz Re Fund. The PEVAV Analysis by credit quality of debt trading securities is as personnel assess performance services in emerging markets. fund has been established follows at 31 December 2013: of the investments based on As of 31 December 2015 to implement value-added their fair values in accordance the fair value of Fund’s real estate strategies with a strategy documented investment in IFC CF was within targeted European In thousands of Agency/ Corporate Sovereign Money Covered Total Azerbaijani Manats Supranational bonds bonds Market Bond in the investment strategy. AZN 16,696 thousand (2014: countries including the UK, bonds AZN 3,766 thousand; 2013: Germany, France, Spain, AZN 1,386 thousand). IFC Italy, Netherlands, Poland Neither past due nor impaired (at fair value) The IFC Funds are comprised of three independent ALAC is formed with the and the Nordic/Scandinavian AAA 4,000,527 136,424 983,595 - 1,405,137 6,525,683 investment funds: IFC Global purpose of identifying, region. As of 31 December Infrastructure Fund (IFC acquiring, holding and 2015 the fair value of Fund’s AA 1,071,604 1,387,402 39,206 1,033,020 - 3,531,232 GIF), IFC Catalsyt Fund (IFC disposing a portfolio of equity investment in PEVAV was or equity related investments AZN 88,070 thousand (2014: A 3,700 5,498,164 407,660 1,650,577 - 7,560,101 CF) and IFC African, Latin American and Caribbean in the African, Latin American nil). EVP is a real estate BBB 373,365 3,457,287 1,069,278 798,371 - 5,698,301 Fund (IFC ALAC). IFC GIF is and Caribbean regions. As of fund formed to acquire real formed with the purpose of 31 December 2015 the fair estate assets in the Eurozone, BB - 14,565 75,955 - - 90,520 identifying, acquiring, holding value of Fund’s investment in targeting mainly France, Total neither past due IFC ALAC was AZN 109,020 Germany, Italy and Spain, 5,449,196 10,493,842 2,575,694 3,481,968 1,405,137 23,405,837 and disposing of a portfolio nor impaired of equity or equity related thousand (2014: AZN 58,224 with a value-add investment Total debt trading thousand; 2013: AZN 48,897 profile. As of 31 December 5,449,196 10,493,842 2,575,694 3,481,968 1,405,137 23,405,837 infrastructure investments securities in emerging markets. As of thousand). All declared 2015 the fair value of Fund’s 31 December 2015 the fair dividends are reinvested in investment in EVP was AZN value of Fund’s investment above mentioned funds by 70,309 thousand (2014: nil). The credit ratings are based Standard & Poor’s rating scale. in IFC GIF was AZN 112,874 SOFAZ. on Standard & Poor’s ratings The debt securities are not thousand (2014: AZN 31,505 where available, or Moody’s collateralised. thousand; 2013: AZN 14,077 Real estate Funds are or Fitch rating converted to thousand). IFC CF was formed comprised of investments the nearest equivalent on the with the purpose of investing into two real estate funds:

116 117 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

accordance with the decree made under the framework of 300,939 thousand; 2013: 11. Financial Assets at #519 of the President of the “The framework (program) AZN 298,951 thousand). The Amortised Cost Azerbaijan Republic dated of the main directions of maturity date of the bonds is 27 October 2011 on “Rules utilization of Oil Fund’s assets 31 December 2024 and the on management of foreign for 2011” approved by the coupon rate is 6-month USD Financial assets at amortised cost comprise: currency assets of the State Decree of the President of LIBOR + 1%. Oil Fund of the Republic of the Republic of Azerbaijan Azerbaijan”. Main aim of the dated 28 December 2010. The custodian service for In thousands of Azerbaijani Manats 2015 2014 2013 bond issuance is to improve According to the program holding securities is provided Current portion of financial assets at amortised cost 139,828 110,974 313,381 and reconstruct the Ship SOFAZ may invest in the by the National Depository Construction Plant of the securities of oil and gas Center of the Republic of Non-current portion of financial assets at amortised cost 4,726,083 2,388,565 428,673 Republic of Azerbaijan. companies operating in Azerbaijan. The management Total financial assets at amortised cost 4,865,911 2,499,539 742,054 the Caspian Sea basin. The of the Fund has intention and On 5 July 2011 the Fund issuer of these securities or ability to hold the bonds until purchased bonds of AzACG its parent company should the scheduled maturity date Ltd. (which is a 100% have a long-term investment for the purpose of earning These are comprised of corporate bonds of: owned subsidiary of State grade credit rating. As of of interest income over the Oil Company of Azerbaijan 31 December 2015 the holding period. In thousands of Azerbaijani Manats 2015 2014 2013 Republic) at face value of carrying amount of these bonds equaled to AZN JSC Cenub Qaz Dehlizi (Southern Gas Corridor) 4,006,976 1,987,120 - USD 485,000 thousand. The purchase of the bonds was 559,529 thousand (2014: AZN Azerbaijan (ACG) Ltd (AzACG Ltd) 544,214 300,939 328,489

Mercury Investments and Holdings Ltd. 314,721 211,480 413,565

Total financial assets at amortised cost 4,865,911 2,499,539 742,054 Analysis by credit quality of financial assets at amortised cost at 31 December 2015 is as follows:

On 1 May 2014, 23 July 2014, respectively). The maturity 2014: AZN 54,600 thousand). In thousands of Azerbaijani Manats Corporate bonds Total 25 September 2014 and 28 dates of these bonds are 1 The coupon rate is 2% p.a. November 2014 the Fund May 2024, 23 July 2024, Neither past due nor impaired purchased bonds of Southern 25 September 2024 and 28 On 26 September 2012 the BBB 4,006,977 4,006,977 Gas Corridor at face values November 2024 and coupons Fund purchased bonds of BB 858,934 858,934 of USD 917,321 thousand, are 6-month USD LIBOR +1%. Mercury Investments and USD 1,246,355 thousand, Holdings Ltd. at face value Total neither past due nor impaired 4,865,911 4,865,911 USD 101,120 thousand and On 28 February 2014 the of USD 200,000 thousand. Total financial assets at amortised cost 4,865,911 4,865,911 USD 252,200 thousand Fund purchased bonds of As of 31 December 2015, respectively. As of 31 Mercury Investments and 2014 and 2013 the carrying December 2015 the carrying Holdings Ltd. (which is a amount of these bonds amount of these bonds 100% owned subsidiary equaled to AZN 299,405 equaled AZN 1,463,963 of the State Oil Company thousand, AZN 156,880 thousand, AZN 1,983,079 of Azerbaijan Republic) at thousand and AZN 160,588 thousand, AZN 160,530 face values of USD 69,492 thousand, respectively. The thousand, AZN 399,403 thousand. The financial asset maturity date of the bonds thousand, respectively (2014: matured during the year 2015 is 31 December 2027 and AZN 726,005 thousand, and as of 31 December 2015, the coupon rate is 6-month AZN 983,445 thousand, the carrying amount of the USD LIBOR + 1.335%. AZN 79,603 thousand and bond is nil (31 December The purchase was made in AZN 198,067 thousand,

118 119 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

Analysis by credit quality of financial assets at amortised cost at 31 December 2014 is as follows: 12. Gold Bullion

In thousands of Azerbaijani Manats Corporate bonds Total In accordance with the “Rules Republic of Azerbaijan dated gold bars conforming to the Neither past due nor impaired on Holding, Placement and 19 June 2001 as amended requirements of the London Management of Foreign by Decrees #607 dated 21 Bullion Market Association BBB 1,987,120 1,987,120 Assets of The State Oil Fund December 2001, #202 dated may be included in the BB 512,419 512,419 of the Republic of Azerbaijan” 1 March 2005, #216 dated Investment Portfolio of the Total neither past due nor impaired 2,499,539 2,499,539 approved by Decree #511 10 February 2010 and #519 Fund. of the President of the dated 27 October 2011, Total financial assets at amortised cost 2,499,539 2,499,539

Movements of gold bullion:

Analysis by credit quality of financial assets at amortised cost In thousands of Azerbaijani Manats 2015 2014 2013 at 31 December 2013 is as follows: Opening balance at 1 January 902,144 924,331 624,735

Total purchase during the year - - 542,782 In thousands of Azerbaijani Manats Corporate bonds Total Net fair value gain/(loss) on gold bullions 716,751 (22,187) (243,186) Neither past due nor impaired Closing balance at 31 December 1,618,895 902,144 924,331 BBB 742,054 742,054

Total neither past due nor impaired 742,054 742,054

Total financial assets at amortised cost 742,054 742,054

13. Investment Properties

The credit ratings are based Refer to Note 23 for the Movement of investment properties: on Standard & Poor’s ratings disclosure of the fair value where available, or Moody’s of each class of investment or Fitch rating converted to securities at amortised cost. In thousands of Azerbaijani Manats 2015 2014 2013 the nearest equivalent on the Information on related party Standard & Poor’s rating scale. investments at amortised cost Investment properties at fair value at 1 January 805,472 509,107 338,057 is disclosed in Note 26. Additions 459,837 351,443 145,578

Fair value gains/(losses) 50,380 46,390 11,465

Effect of translation to presentation currency 918,000 (101,468) 14,007

Investment properties at fair value at 31 December 2,233,689 805,472 509,107

Investment properties 16 Tverskaya Street, “78 in Paris, “Pine Avenue Tower consist of “Gallery Actor”, St James’s Street” an office A” office complex located mixed-use office and retail complex in London, “8 Place in Seoul, South Korea and complex located in Moscow Vendome” office, retail and “Kirarito Ginza” retail complex central business district at residential building located located in Tokyo, Japan. All

120 121 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

properties are leased out on a appraisers are recognized valuation. The fair values of Establishment of SCI commercial basis. industry specialists in valuing the properties have been these types of investment primarily derived using prices 8 Place Vendome As at 31 December 2015 properties. The fair value for comparable properties, investment properties are represents the amount market information, stated at fair value, which at which the assets could discounted cash flow method On 19 March 2013, the Fund holding companies (the 8 Place Vendome. During has been determined based be exchanged between a (income approach) and the acquired via a special purpose Luxcos): SOFAZ RE Europe 2015, SCI 8 Place Vendome on valuations performed knowledgeable, willing buyer expert opinion of independent vehicle, a mixed use office, Holding S.a.r.l. - a private has contributed AZN 6,682 by professional valuation and a knowledgeable, willing accredited valuators who have retail and residential complex limited company with a thousand (2014: AZN 5,276 companies, the accredited seller in an arm’s length advised on current market SCI 8 Place Vendome located share capital of EUR 12,500 thousand; 2013: AZN 3,533 independent appraisers. The transaction at the date of levels. on Place Vendome 8, Paris, having its registered office in thousand) of rental income France from AXA Real Estate Luxembourg which is 100% and AZN 11,116 thousand for EUR 135,000 thousand. held by the Fund and holds profit (2014: AZN 18,571 SCI 8 Place Vendome is an 0.1% of SCI 8 Place Vendome thousand; 2013: AZN 4,651 Detailed disclosure on fair value increase of indirect subsidiary of the Fund and SOFAZ RE Europe S.a.r.l. thousand) to the net profit/ investment properties: incorporated in France as a - a private limited company (loss) before tax of the Fund civil partnership with share with a share capital of EUR (Net profit figure includes fair capital of EUR 1,000 having 12,500 having its registered value increase of AZN 7,366 its registered office in Paris, office in Luxembourg which thousand (2014: AZN 13,828 6 place de Madeleine. SCI 8 is 100% held by SOFAZ thousand; 2013: AZN 1,424 Place Vendome is held by the RE Europe Holding S.a.r.l. thousand)). Investment property Fair value Change in fair Effect of Additions Fair value Fund via two Luxembourg and holding 99.9% of SCI 2015 value translation to 2014 presentation currency "Gallery Actor", Tverskaya 16, 116,640 (4,866) 45,962 - 75,544 Moscow Acquisition of JSC Tverskaya 16 "St James Street" UT, London 501,986 37,196 229,425 - 235,365

"SCI 8 Palace Vendome", Paris 280,594 7,366 122,617 124 150,487 On 21 December 2012, the Tverskaya 16 contributed before tax of the Fund (Net Fund acquired 100% of voting AZN 4,846 thousand (2014: profit figure includes fair "Kirarito Ginza" , Tokyo 680,960 1,505 219,822 459,633 - shares of JSC Tverskaya AZN 6,638 thousand; 2013: value decrease of AZN 4,866 "Pine Avenue Tower A", Seoul 653,509 9,179 300,174 80 344,076 16. Its main activity is AZN 8,524 thousand) of thousand (2014: increase AZN management of business and rental income and AZN 27,538 thousand; 2013: AZN 2,233,689 50,380 918,000 459,837 805,472 retail centre called “Gallery 2,903 thousand loss (2014: 1,967 thousand)). Actor” located in the Central AZN 31,003 thousand profit; Business District of Moscow, 2013: AZN 6,228 thousand Investment property Fair value Change in fair Effect of Additions Fair value Russia. During 2015, JSC profit) to the net profit/(loss) 2014 value translation to 2013 presentation currency "Gallery Actor", Tverskaya 16, 75,544 27,538 (57,090) - 105,096 Moscow

"St James Street" UT, London 235,365 1,745 (14,578) - 248,198

"SCI 8 Palace Vendome", Paris 150,487 13,828 (19,154) - 155,813

"Pine Avenue Tower A", Seoul 344,076 3,279 (10,646) 351,443 -

805,472 46,390 (101,468) 351,443 509,107

122 123 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

Establishment of 78 St James’s Street Unit Trust (the “Unit Trust”) Establishment of Kirarito Ginza

The Unit Trust was in the United Kingdom and value increase of AZN 37,196 SOFAZ made an investment to sell this investment(right Since acquisition, “Kirarito established by the Fund owns the office complex thousand (2014: AZN 1,745 in the amount of 51,989 to cashflows) in the OE at Ginza” has contributed AZN on 22 November 2012 “78 St James’s Street”. The thousand; 2013: AZN 8,074 million JPY (AZN 455,736 any time. The OE invested 6,533 thousand (2014: nil) of under the provision of the Unit Trust is established, thousand)). The Fund has no thousand) to an operator proceeds from investors rental income and AZN 5,520 Trust Instrument. SOFAZ resident and domiciled in restrictions on the realizability entity (“OE”) under a Tokumei in an investment property, thousand profit (2014: nil) to Re Limited in its capacity Jersey, Channel Islands. of its investment properties Kumiai (“TK”) agreement a retail complex in Ginza, the net profit/(loss) before tax as general partner of the During 2015, the Unit Trust and no contractual obligations on 21 August 2015. This Tokyo, for 52,434 million JPY of the Fund (Net profit figure SOFAZ RE UK L.P. has a 99% has contributed AZN 15,174 to purchase, construct or investment formed 98% of (AZN 459,633 thousand), includes fair value increase of holding of the Unit Trust. thousand (2014: AZN 12,474 develop investment properties the capital of the OE. 2% is including investment-related AZN 1,505 thousand SOFAZ Re Min Limited has a thousand; 2013: AZN 11,842 or for repairs, maintenance held by the Asset Managers acquisition costs. For detailed (2014: nil)). 1% holding of the Unit Trust. thousand) of rental income and enhancements. (“AM”), AM-Mitsubishi information, refer to the SOFAZ Re Limited, SOFAZ and AZN 50,246 thousand UFJ Trust and Banking Note 24. Re UK L.P. and SOFAZ RE profit (2014: AZN 12,442 Corporation. SOFAZ is free Min Limited are ultimately thousand; 2013: AZN 18,241 owned by the State Oil Fund thousand) to the net profit/ of Azerbaijan. The Unit Trust (loss) before tax of the Fund invests in real estate located (Net profit figure includes fair

Acquisition of “Pine Avenue Tower A” office complex 14. Investments in Joint Ventures

On 31 March 2014 SOFAZ Seoul CBD area. The purchase 32,366 thousand profit (2014: The table below summarises the movements in the carrying finalised the acquisition of of the property has been AZN 3,693 thousand loss) to amount of the Fund’s investments in joint ventures. prime office complex, Pine realized through a competitive the net profit/(loss) before tax Avenue Tower A in Seoul, auction process organized of the Fund (Net profit figure South Korea via acquisition of by Mirae Asset Management includes fair value increase of In thousands of Azerbaijani Manats 2015 2014 2013 100% interest in Beneficiary on behalf of the four owners AZN 9,179 thousand (2014: Carrying amount at 1 January 319,933 168,966 - Certificates (“BCs”) in Real (NongHyup Bank, NongHyup AZN 3,279 thousand)). Estate Fund from Mirae Life insurance, Woori Bank Additions to investments in joint venture 300,604 151,263 169,136 Asset Management for and KDB Life Insurance). The Share of after tax results of joint venture 11,358 (296) (170) KRW 469,007 million (AZN gross floor area (GFA) of the 346,250 thousand). SOFAZ’s property is approximately Carrying amount at 31 December 631,895 319,933 168,966 team consisted of Cushman 65,000 m2. The asset is solely & Wakefield as commercial, leased to S&K Group, one of Shin & Kim as legal, Kyobo the largest conglomerates of as technical and KPMG as South Korea. During the year taxation advisers. ended 2015, “Pine Avenue Pine Avenue Tower A was Tower A” has contributed built in 2011 and is one of AZN 28,142 thousand (2014: the very few trophy assets AZN 11,799 thousand) of recently completed in the rental income and AZN

124 125 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

On 21 June 2013, Caspian acquired all of the shares of unanimous consent of both Drilling Company (90% share) Caspian Drilling Company for shareholding parties. The and State Oil Company of their nominal value. “SOCAR results of this joint venture 15. Capital Contributions Azerbaijan Republic (10% Rig Assets” LLC did not are incorporated in these The movements in capital contributions to share) jointly established have any operations prior consolidated financial the Fund were as follows: “SOCAR Rig Assets” LLC with to acquisition by the Fund. statements using the equity the share capital of AZN 1000 After acquisition “SOCAR Rig method of accounting. (100 shares, nominal value of Assets” LLC was renamed At 31 December 2015, the AZN 10 for each share). The “Azerbaijan Rigs” LLC. Fund’s interests in its joint In thousands of Azerbaijani Manats 2015 2014 2013 main activity of the entity is The Fund has contributed venture and its summarised financing the construction additional paid-in capital of aggregate financial Contributions received from sales of oil and gas 7,369,582 12,319,849 13,108,016 of a new sixth generation AZN 300,604 thousand in information, including total semi-submersible drilling rig 2015 (2014: AZN 151,263 assets, liabilities, revenues and Bonuses 2,108 13,345 1,850 for operations in the Caspian thousand; 2013: AZN 169,136 profit or loss, were as follows: Sea through funding from the thousand) directly to the Pipeline transit tariffs 11,595 8,911 8,064 shareholders’ proportion of entity. All strategic financial their respective shares. On and operating decisions Acreage fees 2,220 1,662 1,832 5 July 2013, State Oil Fund relating to the activity of of the Republic of Azerbaijan the acquiree require the Other - 43 112

Total capital contributions 7,385,505 12,343,810 13,119,874

Name Current Non- Current Non- Revenue Other Expenses Profit/ % Country of assets current liabilities current income (loss) interest incorporation assets liabilities held “Azerbaijan 169,770 536,392 (4,052) - - 16,010 (3,391) 12,619 90% Azerbaijan Rigs” LLC 16. Non-Current Liabilities

At 31 December 2014, the information, including total Fund’s interests in its joint assets, liabilities, revenues and In thousands of Azerbaijani Manats 2015 2014 2013 venture and its summarised profit or loss, were as follows: aggregate financial Tenancy deposits 30,934 - -

Other 1,533 - -

Name Current Non- Current Non- Revenue Other Expenses Profit/ % Country of Total non-current liabilities 32,467 - - assets current liabilities current income (loss) interest incorporation assets liabilities held “Azerbaijan 46,863 306,394 (375) - - - (329) (329) 90% Azerbaijan Tenancy deposits comprise Tokyo with the amount of with the amount of Rigs” LLC of prepayments made by AZN 16,164 thousand and AZN 14,770 thousand. tenants for Kirarito Ginza, Pine Avenue Tower A, the the investment property in investment property in Seoul

126 127 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

19. Net Fair Value Loss on Financial 17. Interest Income and Other Investment Income Assets at Fair Value Through Profit or Loss

In thousands of Azerbaijani Manats 2015 2014 Net loss on financial assets at fair value through Interest income on financial assets at fair value through profit or loss 432,953 442,306 profit or loss comprises:

Interest income on assets carried at amortized cost:

Interest on term deposits 72,202 53,312 In thousands of Azerbaijani Manats 2015 2014

Income from financial assets at amortised cost 46,545 24,402 Unrealized loss on change in fair value adjustment (347,336) (165,039)

Income from money market funds 2,884 1,544 Realized gain/(loss) on trading operations 66,729 (1,844)

Interest on demand deposits 104 54 Net loss on financial assets at fair value through profit or loss (280,607) (166,883)

Other investment income

Dividend income 55,043 27,337

Total interest and other investment income 609,731 548,955 20. Operating Expenses Operating expenses are comprised of:

In thousands of Azerbaijani Manats 2015 2014

18. Foreign Currency Translation Differences Asset management fee (6,682) (20,323)

Professional fees (2,138) (6,511) Net foreign currency translation differences comprise of: Wages, salaries and employee benefits (5,306) (4,150)

Bank commissions (1,508) (2,861)

In thousands of Azerbaijani Manats 2015 2014 Rental expenses (2,118) (2,663)

Net unrealized gain/(loss) on foreign currency translation differences 22,505,807 (1,589,105) Repair expenses (3,520) (2,499)

Net realized loss on foreign currency translation differences (44,928) (27,168) Other service expenses (1,989) (613)

Total net gain /(loss) on foreign currency translation differences 22,460,879 (1,616,273) Communication expenses (604) (495)

Depreciation and amortization (6,403) (326)

Other operating expenses (4,865) (4,309)

Total operating expenses (35,133) (44,750)

128 129 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

21. Transfers by the Fund

23. Fair Value of Financial Instruments During 2015 transfers to the Oil Fund of the Republic of directions of management State Budget, as well as to Azerbaijan for 2015. of the funds of The State the state institutions, state- Oil Fund of the Republic of owned entities and companies Azerbaijan for 2014 and; Fair value measurements are either directly (that is, as a fair value measurement During 2014 transfers to the analysed by level in the fair prices) or indirectly (that is, uses observable inputs that were made in accordance State Budget, as well as to • Decree #134 of the with: value hierarchy as follows: (i) derived from prices), and (iii) require significant adjustment, the state institutions, state- President of the Republic level one are measurements level three measurements that measurement is a owned entities and companies of Azerbaijan “On at quoted prices (unadjusted) are valuations not based Level 3 measurement. The • Decree #443 of the were made in accordance Amendments and changes in active markets for identical on observable market significance of a valuation President of the Republic with: to the Budget o The State assets or liabilities, (ii) level data (that is, unobservable input is assessed against the of Azerbaijan “On Ratifying • Decree #57 of the Oil Fund of the Republic of two measurements are inputs). Management applies fair value measurement in its the Budget of The State President of the Republic Azerbaijan for 2014” dated valuations techniques with judgement in categorising entirety. Oil Fund of the Republic of Azerbaijan “On Ratifying 10 April 2014. all material inputs observable financial instruments using of Azerbaijan for the year the Budget of The State for the asset or liability, the fair value hierarchy. If 2015” dated 19 January Oil Fund of the Republic 2015, “Program on main of Azerbaijan for the year directions of management 2014” dated 19 December of the funds of The State 2013, “Program on main

(a) Recurring fair value period. The level in the fair measurements value hierarchy into which 22. Income Taxes Recurring fair value the recurring fair value measurements are those that measurements are categorised the accounting standards are as follows: The Fund provides for virtue of being International Deferred taxes reflect the require or permit in the income taxes based on the Service Entities. As a result net tax effects of temporary statement of financial position tax accounts maintained and there are no temporary differences between the at the end of each reporting prepared in accordance with differences in respect of carrying amounts of assets the tax regulations of Russian SOFAZ’s Azerbaijani and and liabilities for financial Federation, Luxembourg and UK operations. According to reporting purposes and France. double taxation treaty with the amounts used for Japan, gains from Tokumei tax purposes. Temporary According to the Presidential Kumiai investments is exempt differences relate mostly to decree № 509-IVQD dated from taxation in this country. different methods of income 21 December 2012, and and expense recognition as law of State Parliament Standard corporate income well as to recorded values of regarding changes to the Tax tax rates for companies certain assets. Code of Azerbaijan Republic operating in the Russian dated 29 December 2012 Federation comprised 20% starting from 1 January 2013 for 2015 and 2014. Whereas SOFAZ is exempted from Luxembourg and French corporate income tax. All the subsidiaries are subject to Jersey companies are zero income tax at a rate of 33.3% corporate income tax rated by (2014: 33.3%).

130 131 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS - - Total 61,361 61,361 12,227 509,107 924,331 5,449,196 1,069,158 2,575,694 1,405,137 3,481,968

1,433,438 The valuation technique, used as significant inputs for of 2.7% derived through 24,487,222 10,493,842 25,982,021 ------inputs used in the fair value valuation. analysis of comparable data measurement for investment and adding risk premiums 61,361 61,361 61,361 Level 3 properties and private equity For the valuation of Place associated with the property investments are as follows: Vendome property, both to the yield on financial ------income and market approach assets. 31-Dec-13 75,955 Level 2 509,107 509,107 Income and sales comparison was used. 3%-3.9% discount 801,536 1,287,569 4,115,567 1,441,400 3,606,460 method were used during rate and prices per square Private equities are valued - - - - - the valuation of the office meter of the comparative using discounting cash-flow and retail complex “Actor real estates were included in method or market approach Level 1 12,227 924,331 924,331 603,601 4,161,627 2,499,739 1,069,158 Gallery” with the 10% and calculations. method. For the IFC Funds, 9,052,442 3,481,968 20,880,762 21,805,093 90% weights, respectively. discounting cash-flow method - The significant input was used Market and income approach is used for revaluation, where Total - - 1 3 , 6 1 6

93,495 is a discount rate in a range with the weight of 50% was discount rate is considered 93,495 9 0 2 , 1 4 4 1 , 8 7 4 , 4 1 3 1 , 5 4 9 , 1 2 4 1,707,616 1,707,616 1 , 1 8 8 , 1 8 2 1 , 4 5 1 , 6 8 0 3 , 5 0 3 , 7 1 9 between 12%-14%. For the used for the valuation of as a significant input for 805,472 805,472 24,027,858 1 2 , 6 4 6 , 0 1 3 22,226,747 sales comparison method, the Pine Avenue. The maximum valuation. For the purposes of ------significant input was adjusted and minimum value for both valuation 12% discount rate 93,495 93,495 93,495 Level 3 sale price in RUR per square valuation was calculated. The was applied. meter in a range between significant input in the market ------RUR 456,184 - RUR 949,342 approach was the estimated For equity securities, (AZN 9,854 - AZN 20,506), unit price per square meter increases in the EBITDA Level 2 31-Dec-14 7 2 4 , 9 8 1 7 8 7 , 7 3 3 6 3 9 , 2 4 9 805,472 805,472

2,957,435 which is adjusted based on in the range between KRW multiple would each lead 2,151,963 805,472 805,472 the location and area of the 7,000,000 - KRW 7,700,000 to an increase in estimated - - - - - similar real estate properties. (AZN 9,296 - AZN 10,226). value. However, an increase For the income approach, in the discount for lack of 1 3 , 6 1 6 Level 1 9 0 2 , 1 4 4 902,144 902,144

4 6 3 , 2 0 1 St James Street real estate the significant input was marketability would lead 1 , 5 4 9 , 1 2 4 1 , 4 5 1 , 6 8 0 2 , 8 6 4 , 4 7 0 1 , 8 7 4 , 4 1 3 20,976,928 1 1 , 8 5 8 , 2 8 0 20,074,784 has been valuated using the discount rate in a range to a decrease in value. No income and market approach. between 5.2%-5.7%. interrelationships between - The discount rate of 3.75% unobservable inputs used in Total and price per square feet Income approach method the Fund’s valuation of its 396,969 158,379 238,590 4 0 5 , 2 3 3 1 , 6 1 8 , 8 9 5 3 , 5 3 4 , 1 8 2 3,989,388 5 , 4 8 5 , 8 3 5 3 , 3 1 0 , 3 4 6 4 , 0 0 2 , 8 6 7 2 , 2 3 3 , 6 8 9

136,804 136,804 in a range between GBP was also used in the valuation Level 3 equity investments 43,209,652 2 2 , 0 8 4 , 8 3 2 38,823,295 1,344 – GBP 2,309 (AZN of Kirarito Ginza property. have been identified. ------3,139 – AZN 5,341) was The estimated discount rate Level 3 158,379 238,590 533,773 136,804 396,969 1 3 6 , 8 0 4 ------31-Dec-15 Level 2 2 , 2 3 3 , 6 8 9 2,233,689 2,233,689 ------Level 1 4 0 5 , 2 3 3 1 , 6 1 8 , 8 9 5 3 , 5 3 4 , 1 8 2 3 , 3 1 0 , 3 4 6 4 , 0 0 2 , 8 6 7 1,618,895 5 , 4 8 5 , 8 3 5 40,442,190 38,823,295 2 2 , 0 8 4 , 8 3 2 - Corporate bonds - Sovereign - SPDR Trust In thousands of Azerbaijani Manats Assets at fair value Financial Assets Trading securities - Money Market - Covered Bond - Agency/Supranational Agency/Supranational - bonds - Equity securities Other financial assets at fair value through profit or loss - IFC Funds - Gold bullions - Property and net equipment, - Real Estate Funds - Investment properties Total assets recurring fair value measurements Non-financial Assets Non-financial Level 3 financialLevel assetsconsist of investments in International Finance Corporation EquityPrivate funds ALAC,(IFC IFC GIF and IFC CF) and Real Estate and Pramerica). 10. to Note funds Refer (PEVAV

132 133 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS - value A reconciliation of movements in Level 3 of the fair value hierarchy by class of instruments for the year 7,882 749,936 742,054 742,054 ended 31 December 2015 is as follows: Carrying - - - - -

Other securities at fair value through profit or loss In thousands of Azerbaijani Manats Corporate shares Level 3

Fair value at 1 January 2015 93,495 - 31-Dec-13

Gains recognised in profit or loss for the year 97,243 7,882 Level 2 749,936 742,054 742,054 Purchases 206,231 - - - - - Fair value at 31 December 2015 396,969 Level 1

A reconciliation of movements in Level 3 of the fair value hierarchy by class of instruments for the - 251 year ended 31 December 2014 is as follows: 251 value Carrying 2,499,539 2,499,539 - - - - Other securities at fair value through profit or loss - In thousands of Azerbaijani Manats Corporate shares Level 3 Fair value at 1 January 2014 61,361 - Losses recognised in profit or loss for the year (759) 251 251

Purchases 32,893 31-Dec-14 Level 2 2,499,539 2,499,539 Fair value at 31 December 2014 93,495 - - - - - Level 1

A reconciliation of movements in Level 3 of the fair value hierarchy by class of instruments 673 9,181 value

for the year ended 31 December 2013 is as follows: 9,181 Carrying 4,865,911 4,866,584 Other securities at fair value through profit or loss In thousands of Azerbaijani Manats - - - - Corporate shares - Fair value at 1 January 2013 33,798 Level 3 Losses recognised in profit or loss for the year (1,282) 31-Dec-15 Purchases 28,845 673 9,181 9,181

Fair value at 31 December 2013 61,361 Level 2 4,865,911 4,866,584 - - - - - Level 1 In thousands of Azerbaijani Manats Assets Financial assets at amortised cost - Corporate bonds Other financial assets - Trade receivables Total AssetsTotal LIABILITIES Other financial liabilities - Trade payables Total LIABILITIES b) Assetsb) and liabilities not measuredat fair value but for which fair value is disclosed values analysedFair level in the by fair value hierarchy and carrying value assets of not measured fair at value are as follows:

134 135 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

The fair values in level 2 quoted in an active market to be received discounted at Non- Securities and level 3 of fair value was estimated to be equal to current interest rates for new 2015 AAA AA A BBB investment without Total hierarchy were estimated their carrying amount. The instruments with similar credit rating rating using the discounted cash fair value of unquoted fixed risk and remaining maturity. Cash and cash 1,162,216 26,342 170,924 821,936 1,179,987 1 3,361,406 flows valuation technique. interest rate instruments was equivalents The fair value of floating estimated based on estimated Trading securities 984,462 4,605,386 15,848,730 13,352,246 29,604 4,002,867 38,823,295 rate instruments that are not future cash flows expected Financial assets - - - 4,006,977 858,934 - 4,865,911 at amortised cost Non- Securities 2014 AAA AA A BBB investment without Total rating rating Cash and cash 835,269 - 96,296 1,331,676 7,889 1 2,271,131 24. Financial Risk Management equivalents Trading securities 3,038,722 3,645,482 7,532,609 6,573,465 80,414 1,356,055 22,226,747 Financial assets - - - 1,987,120 512,419 - 2,499,539 Management of risk is an Currency Assets of The State invested in debt obligations at amortised cost essential element of the Oil Fund of the Republic with investment grade credit Non- Securities Fund’s operations. Risks of Azerbaijan” approved by rating not less than Baa3 2013 AAA AA A BBB investment without Total inherent to the Fund’s Decree #511 of the President (Moody’s) or BBB- (Standard rating rating Cash and cash operations are those related of the Republic of Azerbaijan & Poor’s, Fitch) and up to 5% 85,202 1,104 165,831 1,024,174 30 - 1,276,341 to credit exposures, liquidity, dated 19 June 2001 as of foreign currency assets of equivalents market and operational risks. amended by Decree #607 the Fund could be placed into Trading securities 6,525,683 3,531,232 7,560,101 5,698,302 90,520 1,081,384 24,487,222 A summary description of dated 21 December 2001, debt obligations that have Financial assets - - - 742,054 - - 742,054 the Fund’s risk management Decree #202 dated 1 March credit rating not less than Ba3 at amortised cost policies in relation to those 2005, Decree #216 dated (Moody’s) or BB- (Standard & risks is discussed below. 10 February 2010, Decree Poor’s, Fitch). #519 dated 27 October 2011 (hereinafter collectively Credit risk The following table details referred to as the “Rules”). the credit ratings of financial The Fund is exposed to credit instruments held by the risk which is the risk that one Credit risk is managed and Fund. The credit rating is party to a financial instrument controlled through proper issued by internationally will cause a financial loss for selection of investment regarded agencies Standard the other party by failing to assets, credit quality of & Poor’s, Fitch and Moody’s. discharge an obligation. The investment assets and setting If the agencies have assigned Fund is subject to credit risk limits on the amount of different credit ratings to an from its portfolio of cash investment per investment asset, the lowest one was and cash equivalents and asset. its investments. The Fund used. manages its credit risk in accordance with the “Rules In accordance with the on Holding, Placement and “Rules”, foreign currency Management of Foreign assets of the Fund could be

136 137 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

Bank accounts External managers 2015. In accordance with In accordance with the In accordance with the these requirements, 50% “Rules”, currency settlement “Rules”, when an external of the total amount of the

accounts of the Fund may be manager is engaged in investment portfolio of 673 Total 9,181 the Fund invests in assets 9,181

held in banks with long-term management of the Fund’s 396,969 4,865,911 denominated in USD, 35% in 3,361,406

credit ratings not lower than currency assets, the external 47,439,073 47,448,254 38,823,295 AA- (Standard & Poor’s, Fitch) manager or its principal assets denominated in EUR, - - or Aa3 (Moody’s). founder should have 5% in assets denominated - 295 in GBP, whereas 10% of 295 investment credit ratings (not Other The Fund is allowed to lower than Baa3 (Moody’s) the total amount of the 31,434 1,567,729 1,567,434 1,536,295 maintain funds in the or BBB- (Standard & Poor’s, investment portfolio can - - - Republic of Azerbaijan only Fitch)) or have at least five be invested in currencies RUB

specified in an article 2.2.1 8,345

in the Central Bank of the years of positive history of 922 663,177 654,832 662,255 Republic of Azerbaijan and management of assets, or of Presidential decree #511 922 - - - - the International Bank of be experienced in managing dated 19 June, 2001. In - case of noncompliance the

Azerbaijan. assets with a value not less AUD Fund is to rebalance the 1,062 299,710 299,710

than one billion USD. 298,648 portfolio during 10 business Depository services days subsequent to the end - - - - In accordance with the Currency risk of each quarter. As at 31 - “Rules”, the Fund’s depository Currency risk is defined as TRY

December 2015, 50.16% 27,790 567,024 594,814 services may be provided the risk that the value of of the Fund’s investment 594,814 - - by commercial banks and a financial instrument will portfolio was denominated -

other financial institutions fluctuate due to changes in USD (2014: 55.97%; 2013: GBP with long-term credit ratings in foreign exchange rates. 6,253 6,253 49.45%), 38.18% in EUR 109,557 2,100,069 2,209,626 not lower than A- (Standard The Fund is exposed to the (2014: 35.49%; 2013: 41,60%) 2,203,373 & Poor’s), A- (Fitch) or A3 effects of fluctuations in the and 4.66% in GBP (2014: - - (Moody’s). prevailing foreign currency 4.35%; 2013: 4.47%). exchange rates on its financial EUR 158,379

position and cash flows. 1,245,187 1,103 1,103 1,103 16,729,904 18,133,470 Financial market 18,132,367

counterparties - “Rules on Management of 608 608

In accordance with USD Foreign Currency Assets

the “Rules”, the Fund’s 238,590

of the State Oil Fund of 4,865,911 1,200,378 17,475,757 23,780,028 counterparties at international 23,780,636 the Republic of Azerbaijan” - - - financial markets may involve - specified requirements for -

commercial banks and other 673 Investment Policy (investment AZN financial institutions with 198,419 199,092 trend) of the Fund for 2015 199,092 long-term investment credit and the currency basket ratings (Standard & Poor’s, of the Fund’s portfolio for Fitch or Moody’s). 2015 Open position Trading Securities Trading Total financialTotal assets Other financial assets Through Profit or Loss Other financial liabilities Total financial liabilities financial Total Cash and cash equivalents Other SecuritiesFairValue at Financial assets at amortised cost Financial assets Financial liabilities The table below summarizes exposure the Fund’s to foreign currency exchange rate risk for the year ended December 31 2015:

138 139 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS Total 7,882 7,882 61,361 251 251 742,054 1,276,341 93,495 24,487,222 26,559,096 26,566,978 Total 2,271,131 2,499,539 22,226,747 27,090,912 27,090,661 ------12,402 1,004 Other Other 200,969 213,371 213,371 127,144 127,144 126,140 - - - - 4,714 - - RUB 340,018 344,732 344,732 RUB 1,387 1,387 79,593 - - - - 471,365 549,571 550,958 308 AUD 166,125 166,433 166,433 ------297 AUD 163,203 163,500 163,500 TRY 336,304 336,304 336,304

------7,934 TRY GBP 1,255,077 1,263,011 1,263,011 327,497 327,497 327,497 ------GBP EUR 4,412 3,466 3,466 942,808 9,731,211 9,731,211 8,788,403 1,247,810 1,243,398 1,244,344 251 251 - - 93,495 EUR USD 646,667 2,723 2,723 2,499,539 11,476,155 499,752 14,715,856 14,715,605 10,628,470 11,125,499 11,128,222 - - - - - AZN 231 231 USD 319,994 319,994 319,994 61,361 742,054 194,222 11,854,646 12,852,052 12,852,283 - - - 75 75 AZN 169,564 169,489 169,564 2014 Profit or Loss Open position Trading Securities Trading Total financialTotal assets Other financial liabilities Total financial liabilities financial Total 2013 assets Cash and cash equivalents liabilities liabilities equivalents Profit or Loss Financial assets at amortised cost Cash and cash Total financialTotal Total financialTotal Open position Other financial amortised cost Trading Securities Trading Financial assets at Other Securities at Fair Value Through Other SecuritiesFairValue at Through Financial liabilities Financial assets Financial assets Financial liabilities The table below summarizes exposure the Fund’s to foreign currency exchange rate risk for the year ended December 31 2014: The table below summarizes exposure the Fund’s to foreign currency exchange rate risk for the year ended December 31 2013:

140 141 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

Currency risk sensitivity The analysis calculates the income. The effect on equity The tables below indicate the effect of a reasonably possible does not differ from the effect currencies to which the Fund movement of the currency on the statement of profit or had significant exposure at 31 rate against the AZN, with all loss and other comprehensive

other variables held constant income. 673

December 2015, 2014 and Total 9,181 on the statement of profit or 9,181 2013 on its monetary assets 396,969 4,865,911 3,361,406

loss and other comprehensive 47,439,073 47,448,254 and its forecast cash flows. 38,823,295 - - - - -

Impact on profit/ (loss) for the Impact on profit/ (loss) for the Impact on profit/ (loss) for the

year year year 238,590 1,348,235 1,586,825 1,586,825 31-Dec-15 31-Dec-14 31-Dec-13 International International organizations 20.00% 4,756,005 20.00% 2,940,121 20.00% 2,570,410 - - - - AZN/USD - - 20.00% (4,756,005) 20.00% (2,940,121) 20.00% (2,570,410) 20.00% 3,626,473 20.00% 1,949,269 20.00% 2,225,100

AZN/EUR Oceania 1,860,070 1,860,070 20.00% (3,626,473) 20.00% (1,949,269) 20.00% (2,225,100) 1,860,070

20.00% 440,675 20.00% 252,592 20.00% 248,869 Australia and AZN/GBP - - - - 20.00% (440,675) 20.00% (252,592) 20.00% (248,869) - - 20.00% 118,963 20.00% 67,261 20.00% 65,499 6,895 6,895 6,895 AZN/TRY Africa 20.00% (118,963) 20.00% (67,261) 20.00% (65,499) 20.00% 59,942 20.00% 33,286 20.00% 32,700 AZN/AUD 20.00% (59,942) 20.00% (33,286) 20.00% (32,700) - - - 295 20.00% 132,451 20.00% 68,946 20.00% 109,914 295 AZN/RUB Asia

20.00% (132,451) 20.00% (68,946) 20.00% (109,914) 28,762 5,291,953 5,320,715 5,320,420 - - - - -

Commodity price risk 155,985 The Fund is affected by the America 11,207,265 11,363,250 volatility of gold prices. The 11,363,250

following table shows the -

effect of price changes in 673 8,873 8,873 Europe

gold: 158,379 2,978,239 19,108,877 22,237,295 22,246,168 - - 31-Dec-15 31-Dec-14 31-Dec-13 - 13 13

AZN/XAU 20% -20% 20% -20% 20% -20% 198,420 4,865,911 5,064,318 Impact on 5,064,331 Azerbaijan profit/(loss) for 323,779 (323,779) 180,429 (180,429) 184,866 (184,866) the year Loss 2015 equivalents Net position Cash and cash amortised cost Trading Securities Trading Financial assets at Total financialTotal assets Other financial assets Other SecuritiesFair at Value Through Profit or Other financial liabilities Total financial liabilities financial Total Financial liabilities Financial assets Geographical concentration concentration Geographical The geographical concentration financialof Fund’s theassets 31liabilities and is2015 December at set out below:

142 143 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS 251 251 Total 7,882 7,882 Total 61,361 93,495 742,054 1,276,341 2,271,131 2,499,539 24,487,222 26,559,096 26,566,978 22,226,747 27,090,912 27,090,661 ------61,361 93,495 737,681 831,176 831,176 1,211,653 1,273,014 1,273,014 International International organizations International International organizations ------811,502 Oceania 811,502 811,502 Oceania 1,208,048 1,208,048 1,208,048 Australia and Australia and ------2,824 2,824 2,824 Africa 2,848 2,848 2,848 Africa ------Asia Asia 10,563 2,258,552 2,258,552 2,258,552 2,702,377 2,712,940 2,712,940 ------165,811 America 121,122 America 5,898,159 6,063,970 6,063,970 7,301,781 7,422,903 7,422,903 - - - - 206 206 7,784 7,784 Europe Europe 940,966 1,819,451 15,237,714 15,245,498 14,304,532 10,274,012 12,093,257 12,093,463 - - - 98 98 45 45 - - 169,564 911,618 742,054 911,520 319,995 2,499,539 Azerbaijan 2,819,489 2,819,534 Azerbaijan cost Loss 2013 2014 Net position Net position amortised cost Trading Securities Trading Trading Securities Trading Financial assets at Total financialTotal assets Total financialTotal assets Other SecuritiesFair at Other financial liabilities Other SecuritiesFair at Total financial liabilities financial Total Value Through Profit or Other financial liabilities Total financial liabilities financial Total Cash and cash equivalents Cash and cash equivalents Value Through Profit or Loss Financial assets at amortised Financial liabilities Financial liabilities Financial assets Financial assets The geographical concentration financialof Fund’s theassets is2014 set out 31liabilities and below: December at The geographical concentration financialof Fund’s theassets is2013 31liabilities and setDecember out at below:

144 145 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

Other risk concentrations Interest rate sensitivity The following table presents a net impact of change of Up to 1 month to 3 months 1 year to Over Maturity Management monitors and At 31 December 2015 and 2015 Total discloses concentrations 2014 deposits and debt the fair value of securities, 1 month 3 months to 1 year 5 years 5 years undefined of credit risk by comparing securities were interest- when market interest rate Financial assets reports from portfolios with bearing and, therefore, were changed by 1%. Sensitivity Cash and cash equivalents 2,925,899 435,507 - - - - 3,361,406 investment policy of the Fund exposed to the interest analysis of interest rate risk approved by the President of rate risk. Depending on the has been determined based Trading Securities 1,035,337 2,721,717 9,065,160 21,998,214 - 4,002,867 38,823,295 the Azerbaijan Republic. The market conditions the Fund is on “reasonably possible Other Securities at Fair Value - - - - 396,969 - 396,969 Fund did not have any such managing this risk by gradually changes in the risk variable”. Through Profit or Loss significant risk concentrations increasing or decreasing The level of these changes is Financial assets at amortised 73,332 - - - 4,792,579 - 4,865,911 at 31 December 2015, 2014 the duration of assets in determined by management cost and is contained within the and 2013. the investment portfolio. Other financial assets 673 - - - - - 673 Daily risk management and risk reports provided to key monitoring is performed management personnel. Total financial assets 4,035,241 3,157,224 9,065,160 21,998,214 5,189,548 4,002,867 47,448,254 within above set limits Financial liabilities by the Risk Management Other financial liabilities (9,181) - - - - - (9,181) Department. Total financial liabilities (9,181) - - - - - (9,181)

Liquidity gap 4,044,422 3,157,224 9,065,160 21,998,214 5,189,548 4,002,867 47,457,435 Impact on profit/(loss) before tax:

31-Dec-15 31-Dec-14 31-Dec-13 Interest Interest Interest Interest Interest Interest Assets: rate rate rate rate rate rate Up to 1 month to 3 months to 1 year to 5 Over Maturity 2014 Total 1% -1% 1% -1% 1% -1% 1 month 3 months 1 year years 5 years undefined Cash and cash equivalents 81 (81) 62 (62) - - Financial assets Financial assets at fair value Cash and cash equivalents 2,263,285 7,846 - - - - 2,271,131 (390,559) 390,559 (190,941) 190,941 (132,532) 132,532 through profit or loss Trading Securities 1,945,410 1,893,882 6,142,616 10,574,417 205,102 1,465,320 22,226,747 Net impact on profit/(loss) Other Securities at Fair Value (390,478) 390,478 (190,879) 190,879 (132,532) 132,532 - - - - - 93,495 93,495 before tax Through Profit or Loss Financial assets at amortised 29,200 54,885 33,633 5,803 2,376,018 - 2,499,539 cost Total financial assets 4,237,895 1,956,613 6,176,249 10,580,220 2,581,120 1,558,815 27,090,912 Financial liabilities Liquidity Risk An analysis of the liquidity Other financial liabilities (251) - - - - - (251) Management’s guiding policies risk of financial position items Total financial liabilities (251) - - - - - (251) are to maintain conservative is presented in the following Liquidity gap 4,237,644 1,956,613 6,176,249 10,580,220 2,581,120 1,558,815 27,090,661 levels of liquidity to ensure tables: that the Fund has the ability to meet its obligations under all conceivable circumstances.

146 147 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

1 month Operational risk implications, or lead to effective segregation of Up to 3 months 1 year to 5 Over Maturity 2013 to 3 Total to 1 year years undefined Operational risk is the risk financial loss. The Fund duties, access, authorization 1 month months 5 years of loss arising from systems cannot expect to eliminate and reconciliation Financial assets failure, human error, fraud all operational risks, but procedures, staff education Cash and cash equivalents 1,189,735 86,606 - - - - 1,276,341 or external events. When a control framework and and assessment processes, controls fail to perform, monitoring and responding including the use of internal Trading Securities 1,184,691 2,407,007 9,268,211 10,546,499 - 1,080,814 24,487,222 operational risks can cause to potential risks could be audit. Other Securities at Fair effective tools to manage the - - - - - 61,361 61,361 damage to reputation, Value Through Profit or Loss have legal or regulatory risks. Controls should include Financial assets at amortised 29,539 - 283,842 108,709 319,964 - 742,054 cost Total financial assets 2,403,965 2,493,613 9,552,053 10,655,208 319,964 1,142,175 26,566,978

Financial liabilities

Other financial liabilities (7,882) - - - - - (7,882) 25. Commitments and Contingencies Total financial liabilities (7,882) - - - - - (7,882)

Liquidity gap 2,396,083 2,493,613 9,552,053 10,655,208 319,964 1,142,175 26,559,096 Off-balance sheet 31 December 2015 assets (the “Court”), the Netherlands. transactions received under the above In a verdict dated 17 February On 11 August 2006 the Fund agreement were AZN 659,405 2010 (the “Verdict”), the signed an Asset Management thousand (31 December Court has rejected the claims Agreement on “Granting free 2014: AZN 278,274 thousand; of the Claimant Bank. After, Price risk to the individual security Daily risk management is budget (balance) Funds to 31 December 2013: AZN the Claimant Bank has filed 284,824 thousand) including an appeal against the Verdict, Price risk is the risk that the or its issuer or factors performed by the Risk trustworthy management” accrued interest. and currently, the claim is value of a financial instrument affecting all securities traded Management Department. with the Ministry of Finance at the court of appellate will fluctuate as a result of in the market. The Fund is of the Republic of Azerbaijan. jurisdiction. On 22 September changes in market prices exposed to price risks of its According to this agreement Legal proceedings products which are subject to free budget Funds of the 2015 oral pleadings took whether those changes are In 2004, a legal action totaling general market and specific Ministry of Finance of the place at the court of appeal, caused by factors specific approximately six million fluctuations. Republic of Azerbaijan are and after the oral pleadings USD was brought against to be transferred to and the court of appeal has the State of Azerbaijan managed by the Fund within announced that it will render represented by the Ministry 31-Dec-15 31-Dec-14 31-Dec-13 the asset management rules a verdict on 29 December of Communications and High set in the agreement with 2015. Further, the date for 1% increase in 1% decrease in 1% increase in 1% decrease in 1% increase in 1% decrease in Technologies of the Republic the Ministry of Finance of rendering a verdict has been securities price securities price securities price securities price securities price securities price of Azerbaijan, along with the Republic of Azerbaijan. postponed for several times. Impact on the State Oil Company of The Fund manages these The Management of the Fund profit/(loss) 385,797 (385,797) 220,555 (220,555) 243,376 (243,376) the Republic of Azerbaijan before tax assets free of charge, on believes that there is very low and the Fund. This legal Impact on net behalf of the Ministry of possibility of any outflow in 385,797 (385,797) 220,555 (220,555) 243,376 (243,376) action was brought by First assets/equity Finance and in favor, at the the settlement and there is International Merchant Bank expense and at the risks of no need for provision in these (the “Claimant Bank”) in the the Ministry of Finance of financial statements. District Court of Rotterdam the Republic of Azerbaijan. At

148 149 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

Transactions with such entities are disclosed below as related party transactions:

Carrying Interest Contributions value of income Bank received Transfers bonds on bonds accounts Precious Off-balance Year from related to related acquired acquired with metals sheet 26. Transactions with Related Parties parties parties from related from related related transactions parties parties parties 2015 6,969,789 ------State Oil Company of the Parties are generally parties are described in Notes 2014 1 1 , 8 5 8 , 4 7 5 ------Republic of Azerbaijan considered to be related if the 8, 11, 14, 15, 16 and 18. 2013 12,757,672 ------parties are under common 2015 348,399 ------Azerbaijan Gas Supply 2014 4 1 0 , 3 3 2 ------control, or one party has Transactions between the Company the ability to control the Fund and its subsidiaries, 2013 301,136 ------other party or can exercise which are related parties 2015 67,318 ------significant influence over the of the Fund, have been Operating Companies 2014 7 4 , 9 5 5 ------2013 60,954 ------other party in making financial eliminated on consolidation or operational decisions. In and are not disclosed in this 2015 - 8,130,000 - - - - - The State Budget 2014 - 9 , 3 3 7 , 0 0 0 - - - - - considering each possible note. All government entities 2013 - 11,350,000 - - - - - related party relationship, and their subsidiaries are 2015 ------659,405 Ministry of Finance of the attention is directed to the considered to be entities 2014 ------2 7 8 , 2 7 4 Republic of Azerbaijan substance of the relationship, under common control with 2013 ------284,824 not merely the legal form. the Fund. Azerbaijan Melioration 2015 - 89,998 - - - - - Transactions with related and Water-sludge system 2014 - 8 0 , 2 2 1 - - - - - OSC 2013 - 173,934 - - - - -

2015 - 61,522 - - - - - The Ministry of 2014 - 5 7 , 0 4 0 - - - - - Transportation 2013 - 25,672 - - - - -

The State Refugees 2015 - 149,998 - - - - - Committee and Internally 2014 - 2 9 9 , 9 9 8 - - - - - Displaced People’s Social Development Fund 2013 - 299,990 - - - - -

Central Bank of the 2015 - - - - 198,372 1,618,591 - Republic 2014 - - - - 3 1 9 , 9 5 1 9 0 1 , 9 7 4 - of Azerbaijan 2013 - - - - 169,534 613,064 -

2015 ------Star oil refinery complex 2014 - 2 2 3 , 5 3 8 - - - - - (SOCAR) 2013 - 372,590 - - - - -

Ministry of Education 2015 - 35,538 - - - - - of the Republic of 2014 - 3 3 , 4 9 4 - - - - - Azerbaijan 2013 - 33,008 - - - - -

2015 - - - - 47 - - International Bank of 2014 - - - - 42 - - Azerbaijan 2013 - - - - 30 - -

2015 - - 4,006,976 2,364 - - - Azerbaijan (ACG) Ltd 2014 - - 271,739 4 , 0 5 3 - - - (AzACG Ltd) 2013 - - 328,489 4,838 - - -

2015 - - 314,720 1,702 - - - Mercury Investments and 2014 - - 2 1 1 , 4 8 0 8,376 - - - Holdings Ltd. 2013 - - 413,565 4,797 - - -

2015 - - 544,214 - - - - JSC Cenub Qaz Dehlizi 2014 - - 1 , 9 8 7 , 1 2 0 - - - - (Southern Gas Corridor) 2013 ------

Ministry of Economy 2015 - 692,849 - - - - - of the Republic of 2014 - 3 9 , 9 9 9 - - - - - Azerbaijan 2013 ------

150 151 THE STATE OIL FUND OF THE NOTES TO CONSOLIDATED REPUBLIC OF AZERBAIJAN 07 FINANCIAL STATEMENTS

Key management personnel The aggregate remuneration equivalent basis receiving 28. Events after the of members of the senior remuneration within this The senior management Reporting Period group consists of the Fund’s management group and category are: Executive Director and the number of managers heads of administrations. determined on a full-time In accordance with the internally displaced people – The Fund has invested Amendment dated 18 March AZN 90,000 thousand; USD 500,000 thousand 2015 2014 2013 2016 to the “Decree #719 of • Construction of new Baku- (AZN 798,550 thousand) Aggregate remuneration 106 97 109 the President of the Republic Tbilisi-Kars railway line – to the International Bank of of Azerbaijan on the Approval Azerbaijan in the form of a Number of persons 3 3 3 AZN 137,622 thousand; of the Budget of the State deposit with the interest rate • Reconstruction of Samur- Oil Fund of the Republic of of 4%. The deposit is effective Absheron irrigation system Azerbaijan for 2016” dated 29 from the signing date of the – AZN 70,000 thousand; December 2015, the Fund’s deposit agreement, 18 March 27. Interests in Structured budgeted contributions and • Financing the State Program 2016 and will mature on 16 Entities distributions for the year of on Education of Azerbaijan March 2017. 2016 are estimated at AZN youth in foreign countries 4,578.475 thousand and during 2007-2015 – AZN 36,558 thousand; Consolidated structured and the OE (or AM ) shall Based on the specific AZN 10,668,934 thousand, entities conduct and operate the characteristics of the TK respectively. • Financing of the share of Azerbaijan Republic in the SOFAZ made an investment business of the OE only Agreement, the management The following main types of construction of Cenub in the amount of 51,989 mln according to Agreement (AM concluded that a principal/ distributions for 2016 are Gaz Dehlizi project– AZN JPY (AZN 455,736 thousand) Agreement) and Strategic Plan. agent relationship exists budgeted: 2,355,318 thousand; to an operator entity (“OE”) between SOFAZ and OE. under a Tokumei Kumiai (“TK”) TK agreement provides According to IFRS 10, the • Financing of the share of agreement. This investment SOFAZ, with limited rights investor should treat the • Transfer to the State Azerbaijan Republic in the formed 98% of the capital with respect to management decision making powers Budget of the Republic of construction of the STAR oil of the OE. 2% are held by and development of delegated to the agent as Azerbaijan – AZN 7,615,000 refinery project in Turkey – the Asset Managers (“AM”), investment properties. As held by the investor/principal thousand; AZN 331,776 thousand; AM-Mitsunishi UFJ Trust and such SOFAZ’s involvement himself. The management • Financing of the measures • Expenses related to Banking Corporation. in the management of the performed analysis based for improvement of social managing the Fund – AZN OE is limited to passive on paragraph B60 of IFRS conditions of refugees and 32,660 thousand The OE invested proceeds ownership rights. This makes 10 and given the limited 2% from investors in an the OE entity similar to investment by the AM, the investment property a retail unconsolidated structured OE is an agent of SOFAZ complex in Ginza, Tokyo, entities category under IFRS and hence, SOFAZ should for 52,300 mln JPY (AZN 12, where structured entity consolidate the investee. 458,462 thousand). The is an entity that has been building meets the definition designed so that voting or of an investment property similar rights are not the under IAS 40. SOFAZ has dominant factor in deciding signed an Agreement with who controls the entity, such the OE and developed a as when any voting rights Strategic Plan, which is part relate to the administrative of the Agreement (also part tasks only and the relevant of the Asset Management activities are directed Agreement with AM) and by means of contractual reflects SOFAZ’s interests, arrangements.

152 153 SOVEREIGN WEALTH FUNDS

Generally Accepted Principles and Practices “Santiago Principles” Self-Assessment

April, 2016

Narration of Principles / Sub-Principles Responses

A. Legal Framework, Objectives, and Coordination with Macroeconomic Policies

GAPP 1. Principle

The legal framework for the SWF Legal framework of SOFAZ is clearly defined should be sound and support its effective in the “Statute of the State Oil Fund of the operation and the achievement of its Republic of Azerbaijan” (hereinafter “Statute stated objective(s). of SOFAZ”) approved by the decree of the President of the Republic of Azerbaijan.

GAPP 1.1. Subprinciple

The legal framework for the SWF SOFAZ is a legal entity separate from the should ensure legal soundness of the government or central bank. The Fund’s SWF and its transactions. operation is guided by the Constitution and laws of the Republic of Azerbaijan, Presidential Decrees and resolutions, and the Fund’s Regulations.

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GAPP 1.2. Subprinciple GAPP 3. Principle

All relevant documents related to the legal The key features of the SWF’s legal basis and Where the SWF’s activities have According to its bylaws, SOFAZ is basis and structure and the legal relationships structure, as well as the legal relationship significant direct domestic macroeconomic not permitted to invest domestically. between SOFAZ and the other government between the SWF and other state bodies, implications, those activities should be Expenditures of SOFAZ constitute part of agencies are publicly disclosed and they are should be publicly disclosed. closely coordinated with the domestic fiscal the consolidated state budget approved available on the Fund’s website. and monetary authorities, so as to ensure by the Parliament. According to Budget consistency with the overall macroeconomic System Law the consolidated state budget For further information: policies. is being prepared in close consultation with http://www.oilfund.az/en/content/25 all relevant government entities (Ministry of Finance, Ministry of Economy, etc.) and involvement of SOFAZ. GAPP 2. Principle For further information: The policy purpose of the SWF should be SOFAZ was established for the purpose http://www.oilfund.az/en/content/25/154 clearly defined and publicly disclosed. of accumulation and management of the http://www.oilfund.az/en/content/25/156 http://www.oilfund.az/uploads/budget%20system-1_ revenues generated from implementation of eng.pdf oil and gas agreements.

SOFAZ’s primary objectives are to help maintain macroeconomic stability in the GAPP 4. Principle country (neutralize negative impact of the currency inflows) and to generate wealth for present and future generations. There should be clear and publicly disclosed SOFAZ’s Funding and Withdrawal rules policies, rules, procedures, or arrangements are clearly defined by the “Statute of

in relation to the SWF’s general approach SOFAZ” and “Rules on the preparation Above discussed purpose of establishment, to funding, withdrawal, and spending and execution of the annual program as well as the primary objectives are operations. of revenues and expenditures (budget) publicly disclosed on the Funds website. of the State Oil Fund of the Republic of Azerbaijan” (hereinafter “Rules on the GAPP 4.1. Subprinciple For further information: budget of SOFAZ”) which are publicly http://www.oilfund.az/en/content/25/9 disclosed on the Fund’s website. http://www.oilfund.az/en/content/3 The source of SWF funding should be publicly disclosed. For further information: http://www.oilfund.az/en/content/25/154` GAPP 4.2. Subprinciple http://www.oilfund.az/en/content/25/156 http://www.oilfund.az/uploads/budget%20system-1_ eng.pdf The general approach to withdrawals from the SWF and spending on behalf of the government should be publicly disclosed.

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GAPP 5. Principle The operational management of SOFAZ The relevant statistical data pertaining SOFAZ submits monthly statistical reports is vested in the Executive Director. The to the SWF should be reported on a to the President and Ministry of Finance, as relevant duties and responsibilities of the timely basis to the owner, or as otherwise well as quarterly and yearly reports to the President of the country, Supervisory Board required, for inclusion where appropriate in State Statistical Committee. SOFAZ also and Executive Director are clearly defined macroeconomic data sets. reports on its revenues and expenditures in the “Statute of SOFAZ”. to the Parliamentary Chamber of Accounts and on other relevant information to the For further information: Ministry of Taxes, State Social Protection http://www.oilfund.az/en/content/25/154 Fund and other relevant government agencies. Additionally, SOFAZ regularly provides the relevant information on its activities to the World Bank and GAPP 7. Principle International Monetary Fund.

The owner should set the objectives of the The objectives of SOFAZ are clearly defined All the relevant statistical data pertaining to SWF, appoint the members of its governing in “Statute of SOFAZ” approved by the the fund, is publicly disclosed on the Fund’s body(ies) in accordance with clearly defined President of the Republic of Azerbaijan. website (audited annual reports, quarterly procedures, and exercise oversight over the Please see also the response statements, etc.). SWF’s operations. on GAPP 5 and 6.

For further information: For further information: http://www.oilfund.az/en/content/25/154 http://www.oilfund.az/en/content/25/154 http://www.oilfund.az/en/content/25/156 http://www.oilfund.az/uploads/budget%20system-1_ eng.pdf GAPP 8. Principle

B. Institutional Framework and Governance Structure The governing body(ies) should act in the The Supervisory Board of the Fund, best interests of the SWF, and have a which is headed by the Prime Minister clear mandate and adequate authority and and consists of the Minister of Finance, GAPP 6. Principle competency to carry out its functions. Governor of the Central Bank, Minister of Economy, Vice-Speaker of Parliament and

the Economic Advisor to the President, The governance framework for the SOFAZ has a three-tier governance have a clear mandate and adequate SWF should be sound and establish structure, with the President of the country authority and competency to fulfil its a clear and effective division of being a supreme governing and reporting functions. roles and responsibilities in order to authority for the Fund.

facilitate accountability and operational All roles and responsibilities of the independence in the management of the SOFAZ’s activities are overseen by a Supervisory Board are clearly defined in the SWF to pursue its objectives. Supervisory Board which is headed by the relevant legislation. Prime Minister and consists of the Vice- For further information: Speaker of Parliament, Minister of Finance, http://www.oilfund.az/en/content/25/154 Minister of Economy, Governor of the Central Bank and the Economic Advisor to the President.

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GAPP 9. Principle GAPP 11. Principle

The operational management of the “Statute of SOFAZ”, “Rules on management of An annual report and accompanying Since the start of its operations, SOFAZ has SWF should implement the SWF’s foreign currency assets of the State Oil Fund financial statements on the SWF’s prepared annual reports and accompanying strategies in an independent manner of the Republic of Azerbaijan” (hereinafter operations and performance should financial statements. and in accordance with clearly defined “Investment guidelines”) and “Rules on the be prepared in a timely fashion and in responsibilities. accordance with recognized international budget of SOFAZ” clearly define the role and All financial statements are prepared or national accounting standards in a responsibilities of the Executive Director. In in accordance with International Public consistent manner. accordance with these role and responsibilities Sector Accounting Standards (“IPSAS”) Executive Director has independence in issued by the International Public Sector operational management. Accounting Standards Board (“IPSASB”) of the International Federation of Accountants For further information: (“IFAC”). IPSAS are developed by adopting http://www.oilfund.az/en/content/25/154 International Financial Reporting Standards http://www.oilfund.az/pub/tiny_upload/Inv_guide.pdf (“IFRS”) to the public sector context. http://www.oilfund.az/en/content/25/156

All annual reports and accompanying financial statements are published on the Fund’s website. GAPP 10. Principle For further information: http://www.oilfund.az/en/content/25/154 The accountability framework for the Accountability framework of SOFAZ is clearly http://www.oilfund.az/en/account SWF’s operations should be clearly defined in the “Statute of SOFAZ”, “Investment defined in the relevant legislation, charter, guidelines”, “Rules on the budget of SOFAZ” other constitutive documents, and Budget System Law all of which are or management agreement. available on the Fund’s website. Fund GAPP 12. Principle produces and publicly discloses audited annual reports and quarterly reports. Information about Fund’s activities is also disseminated The SWF’s operations and financial Since the start of its operations SOFAZ has through regular press conferences and statements should be audited annually in been audited by reputable international published on the Fund’s website. accordance with recognized international or audit firms. In line with the Public national auditing standards in a consistent Procurement Law, the Fund conducts manner. open market tender processes to select See also response on GAPP 5. its auditor. Price Waterhouse Coopers has For further information: been appointed to audit SOFAZ financial http://www.oilfund.az/en/content/25/154 http://www.oilfund.az/pub/tiny_upload/Inv_guide.pdf statements for years 2013-2015. http://www.oilfund.az/en/content/25/156 http://www.oilfund.az/uploads/budget%20system-1_eng. pdf All annual reports and accompanying financial statements are available on the Fund’s website. SOFAZ also has an internal auditor who prepares periodic internal audit reports.

For further information: http://www.oilfund.az/en/content/25/154 http://tender.gov.az/new/docs/tlotroa.doc

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GAPP 13. Principle GAPP 15. Principle

Professional and ethical standards should Professional and ethical standards SWF operations and activities in host Fund conducts its operations and activities be clearly defined and made known to the are clearly defined in the “Investment countries should be conducted in in host countries in compliance with members of the SWF’s governing body, Guidelines”. compliance with all applicable regulatory all applicable regulatory and disclosure management and staff. and disclosure requirements of the requirements of those host countries. countries in which they operate. Management and staff of the Fund have to comply with ethical norms and rules of the International Financial Markets Association (ACI, Paris) and “Rules of Ethical Conduct GAPP 16. Principle for the Employees of SOFAZ”. The governance framework and objectives, Fund’s governance framework, objectives For further information: as well as the manner in which the SWF’s and its operational independence are clearly http://www.oilfund.az/pub/tiny_upload/Inv_guide.pdf management is operationally independent defined in the relevant legislation. http://www.oilfund.az/en_US/about_found/etik- from the owner, should be publicly davranis-qaydalari.asp disclosed. For further information: http://www.oilfund.az/en/content/25/154

GAPP 14. Principle GAPP 17. Principle Dealing with third parties for the purpose Fund’s activities related to third parties of the SWF’s operational management are based on economic and financial Relevant financial information regarding Audited financial statements are published should be based on economic and financial grounds. Fund’s “Investment Guidelines” the SWF should be publicly disclosed to in Fund’s annual report, which is publicly grounds, and follow clear rules and and “Investment Policy” regulate SOFAZ’s demonstrate its economic and financial available. Quarterly reports and all other procedures. dealing with third parties. orientation, so as to contribute to stability relevant financial information about the in international financial markets and Fund’s activities are published on the Fund’s All aspects of dealing with external enhance trust in recipient countries. website. Disclosed financial information managers are clearly defined in relevant includes AUM, asset allocation, benchmark, documentation about Fund’s activity. annual rates of return, etc. Appointment of external managers is carried out in compliance with the current For further information: legislation of Azerbaijan Republic on “State http://www.oilfund.az/en/account Procurement”. External managers are http://www.oilfund.az/en/content/20/249 selected on the basis of the criteria, such as credit rating of manager, assets under management, experience in the asset management industry, proposed rate of return and risk, proposed fees schedule etc. Compliance of the external managers’ investments to their mandate is monitored daily. Performance of external managers’ portfolios is monitored monthly.

For further information: http://www.oilfund.az/pub/tiny_upload/Inv_guide.pdf http://www.oilfund.az/uploads/Inv_policy1.pdf

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C. Investment and Risk Management Framework GAPP 19. Principle

The SWF’s investment decisions should aim According to its “Investment Policy”, Fund’s investment decisions should aim at GAPP 18. Principle to maximize risk-adjusted financial returns maximizing the risk adjusted returns. Fund’s in a manner consistent with its investment policy, and based on economic and financial all investment decisions are made purely on The SWF’s investment policy should “Investment Guidelines” and “Investment grounds. an economic and financial basis according to be clear and consistent with its defined Policy” set up SOFAZ’s asset management the sound asset management principles. objectives, risk tolerance, and investment framework and ensure the transparency in

strategy, as set by the owner or the its investment decisions. Among the others,

governing body(ies), and be based on sound they define strategic asset allocation,

portfolio management principles. currency composition, benchmarks, risk limits, minimum requirements for the Fund’s external managers and limitations on the investment directions, as well as the credit GAPP 19.1. Subprinciple quality limits for Fund’s counterparties See also response on GAPP 18. (custodian banks, correspondent banks, If investment decisions are subject to other etc.). than economic and financial considerations,

GAPP 18.1. Subprinciple these should be clearly set out in the investment policy and be publicly disclosed. Derivatives (i.e. swaps, forwards, futures, The investment policy should guide the etc.) may only be used for hedging or SWF’s financial risk exposures and the optimizing the currency composition and possible use of leverage. asset allocation of the Investment Portfolio.

GAPP 19.2. Subprinciple GAPP 18.2. Subprinciple For further information: The management of an SWF’s assets http://www.oilfund.az/uploads/Inv_policy1.pdf The investment policy should address the For policies and procedures related to the should be consistent with what is generally extent to which internal and/or external Fund’s external managers please see our accepted as sound asset management investment managers are used, the range response on GAPP 14. principles. of their activities and authority, and the process by which they are selected and their performance monitored.

GAPP 18.3. Subprinciple

A description of the investment policy of Fund’s “Investment guidelines” and the SWF should be publicly disclosed. “Investment Policy” are available on its website.

For further information: http://www.oilfund.az/pub/tiny_upload/Inv_guide.pdf http://www.oilfund.az/uploads/Inv_policy1.pdf

164 165 THE STATE OIL FUND OF THE SANTIAGO PRINCIPLES REPUBLIC OF AZERBAIJAN

GAPP 20. Principle GAPP 22. Principle

The SWF should not seek or take advantage According to its bylaws, SOFAZ is not The SWF should have a framework that Identification, assessment and management of privileged information or inappropriate permitted to invest domestically. In line identifies, assesses and manages the risks of of the risks of the Fund’s operations influence by the broader government in with the “Investment guidelines”, SOFAZ its operations. play crucial role in the Fund’s overall competing with private entities. makes investment decisions independently management framework. SOFAZ’s risk of the government. Institutional and legal management system is supported with framework of SOFAZ has been designed appropriate legal framework (“Investment in a way that the Fund cannot seek or take Guidelines”, “Investment Policy”, etc), a advantage of any privileged information. specialized risk unit (Risk Management Department), internal and external audit For further information: functions and tools like RiskManager 4 by http://www.oilfund.az/pub/tiny_upload/Inv_guide.pdf RiskMetrics and proprietary models. http://www.oilfund.az/en/content/25/154

GAPP 22.1. Subprinciple

The risk management framework should “Investment Guidelines” and “Investment include reliable information and timely Policy” set the main principles of risk reporting systems, which should enable management framework and clearly define the adequate monitoring and management limits on major factors for market, credit, of relevant risks within acceptable concentration and liquidity risks. Certain GAPP 21. Principle parameters and levels, control and incentive pre-trade limits are set based on these

mechanisms, codes of conduct, business factors. Furthermore, these risk factors are SOFAZ started to invest in equities in SWFs view shareholder ownership rights continuity planning, and an independent monitored on a daily basis via regular risk 2012 and has chosen not to exercise its as a fundamental element of their equity audit function. and performance reports. In addition to the ownership rights at this stage. investments’ value. If an SWF chooses to factors set in the “Investment Guidelines” exercise its ownership rights, it should do and “Investment Policy”, a more in-depth so in a manner that is consistent with its analysis and monitoring of the market risk investment policy and protects the financial is performed on a regular basis through: value of its investments. The SWF should interest rate sensitivity analysis (key rate publicly disclose its general approach to durations, PV01, etc.), risk concentration voting securities of listed entities, including analysis (duration by groups, VaR by groups, the key factors guiding its exercise of marginal VaR, etc.), tail events (conditional ownership rights. VaR, stress tests) and scenario analyses.

GAPP 22.2. Subprinciple

Operational risk is managed in accordance The general approach to the SWF’s risk with Fund’s Operational Manual and management framework should be publicly business continuity planning. disclosed.

For further information: http://www.oilfund.az/pub/tiny_upload/Inv_guide.pdf http://www.oilfund.az/uploads/Inv_policy1.pdf

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GAPP 23. Principle

The assets and investment performance Comprehensive reports on assets of SOFAZ (absolute and relative to benchmarks, if (including information on breakdown of any) of the SWF should be measured and investment portfolio by foreign currencies, reported to the owner according to clearly asset class, credit ratings, maturities and defined principles or standards. geographic regions) are disseminated through the quarterly press releases. The performance of the Fund’s investments is measured according to best industry standards and reported on an annual basis. Annual reports and quarterly statements are posted on the Fund’s website.

For further information: http://www.oilfund.az/en/account

GAPP 24. Principle

A process of regular review of the This report was first published on SOFAZ’s implementation of the GAPP should be official website in April, 2011 and it is engaged in by or on behalf of the SWF. reviewed on an annual basis.

168 © The State Oil Fund of the Republic of Azerbaijan 2016