THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN 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 Heydar Aliyev 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 Samir SHARIFOV 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 Ilham Aliyev 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 Baku 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 economy of Azerbaijan 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,