Content 1. ABOUT SOFAZ 2 2. FACTS AT GLANCE 8 3. GOVERNANCE AND TRANSPARENCY 12 3.1. SOFAZ management 12 3.2. Transparency and accountability 18 4. NATIONAL ECONOMY AND SOFAZ 24 4.1. Macroeconomic development 24 4.2. SOFAZ Revenues 33 4.3. SOFAZ Expenditures 38 5. INVESTMENT REPORT 48 5.1. Investment Strategy 48 5.2. SOFAZ Investment portfolio 53 5.3. SOFAZ Investment portfolio 69 performance 5.4. Risk management 72 6. 2016 SOFAZ BUDGET EXECUTION 78 7. CONSOLIDATED FINANCIAL 86 STATEMENTS OF SOFAZ APPENDIX 149 “Baku-2015” first European Games torch 01 ABOUT SOFAZ SOFAZ’s mission is to transform depletable 1 ABOUT SOFAZ hydrocarbon reserves into financial assets generating perpetual income for current and future generations. The State Oil Fund of the Republic of Azerbaijan (SOFAZ) Objectives Legal framework was established in accordance SOFAZ’s activity is directed to SOFAZ’s operations are guided SOFAZ’s investment and risk the achievement of the following by the Constitution and laws management policies are objectives: of the Republic of Azerbaijan, defined by “Investment Guide- Presidential decrees and lines” and “Investment Policy” with the Decree of national 1) Supporting macroeconomic resolutions, SOFAZ Statute approved by the President stability, participating in and regulations. of the Republic of Azerbaijan ensuring fiscal-tax discipline after the review of the Super- and decreasing dependence SOFAZ’s funding and withdrawal visory Board. According to its leader Heydar Aliyev No. 240 on oil revenues while stimulating rules are clearly defined by the “Investment Policy” SOFAZ’s development of the non-oil sector; “Statute of the State Oil Fund investment decisions should aim of the Republic of Azerbaijan” at maximizing the risk adjust- 2) Funding major national scale and the “Rules on the prepa- ed returns. According to the on December 29, 1999. projects to support socio- ration and execution of the “Investment Guidelines”, SOFAZ economic progress; annual program of revenues and makes investment decisions expenditures (budget) of the independently. 3) Ensuring intergenerational State Oil Fund of the Republic equality with regard to the coun- of Azerbaijan”. According to the In 2004, the President of the SOFAZ is a mechanism whereby energy-related earnings are try’s oil wealth, accumulating and Law “On budget system” of the Republic of Azerbaijan Ilham accumulated and efficiently managed for future generations. preserving oil revenues for future Republic of Azerbaijan, all SOFAZ Aliyev approved “Long-term generations. expenditures, except for operating Strategy on the management expenditures, are incorporated of oil and gas resources”. This SOFAZ is structured as an extra-budgetary fund and functions as part of an annual consolidated document is considered as a as the legal entity separate from the government or central government budget presented to crucial milestone for the long- bank. Statute of SOFAZ was approved in 2000. the Parliament for approval. Thus, term prosperity of the country, indirectly, all citizens participate outlining the development of in the discussions of the budget the non-oil sector, human cap- The cornerstone of SOFAZ’s philosophy is to ensure of SOFAZ. In compliance with this ital and competitive economy. intergenerational equality with respect to the benefit from the law, SOFAZ can only execute the SOFAZ is one of the central country’s oil wealth. expenditures envisaged by its components in the implemen- budget. tation of the Strategy. 2 3 01 ABOUT SOFAZ Our Values: Respect, Team- work, Trust and Transparency 0.11% 6.5% 2.9% 10.2% 12.2% 2% 4.6% 2.35% 3.1% Since its very inception, SOFAZ 4.4% 1.29% 3.1% 3.4% $0.5 $2.5 $22.8 $34.1 $37.1 $33.6 $33.1 has built a strong cooperation bn. bn. bn. bn. bn. bn. bn. with a number of financial RESPECT 100% 100% 99.89% 94.36% 87.5% 82.1% 80% organizations and institutions in SOFAZ’s relations with international organiza- tions, financial institutions, - First investments - SOFAZ was - SOFAZ - Assets increased - Changes - SOFAZ - Changes Azerbaijan and globally. SOFAZ’s government bodies as were made. awarded with UN commenced to over USD 30 were made commenced were made well as its employees are Public Service investing into billion. to investment investing in real to investment relations with its partners are based on mutual respect. Award. private equity policy: allocation estate funds. policy: allocation Deeply rooted into the funds. - SOFAZ to equities to equities Fund’s philosophy, trust - Assets reached commenced increased from - Funds were increased from based on the principles of USD 2 billion. investing into 5% to 10%, while allocated into 10% to 15%; and respect are the main public equity, allocation to European stock allocation to real factors in maintaining gold and real fixed income markets through estate increased mutual respect, trust, teamwork healthy relations in work- estate. decreased from MSCI Europe ex- from 5% to 10%; place and cooperating 85% to 80%. UK index. and allocation and transparency. fruitfully with partners. - Currency to fixed income composition of - SOFAZ started decreased from fixed income in-house 80% to 70%. portfolio was management further diversified of public equity - Increased to include indexes. the share of Australian Dollar, allocations in Turkish Lira, and alternative asset TEAMWORK TRUST TRANSPARENCY Russian Ruble. classes. It is through teamwork Since its inception, SOFAZ SOFAZ’s activities are and joint efforts that adheres to the highest based on the principles SOFAZ succeeds in all standards of ethical behavior of transparency and of its endeavors and and honesty to gain the accountability. Internationally strengthens its prestige trust of its partners. SOFAZ praised as a credible and Fixed income Equities Gold Real estate locally and worldwide. expects all of its business transparent institution, SOFAZ, Building strong working partners to operate on the in line with the foremost relationships, praising same principles of mutual international practices, Note: The diagram illustrates year by year AuM and breakdowns of the personal, achievements trust and cooperation. ensures the highest level of investment portfolio by asset class. and encouraging transparency towards its teamwork contribute to counterparties, employees the establishment as well and external managers. as further development of professional work environment. 4 5 2015 European Games The first European Games were held in Baku on 12-28 June, 2015. 6000 athletes from 50 European countries participated in these games. A total of 20 sports were represented: 16 Olympic sports and 4 non-Olympic sports. Russia led the medal table with 164 total medals, Azerbaijan was the second with 56 medals, followed by Great Britain (47 medals). 02 Chart 2.3. Currency composition (as percentage of Investment Portfolio) 52.6% USD+ Gold 34.3% FACTS AT GLANCE EUR 2 4.8% GBP 0.6% AUD 1.1% 37.1 TRY Chart 2.1. 52.79% 35.9 1.6% 34.1 RUB Growth in SOFAZ 33.6 33.1 assets (USD billion) 1.2% 29.8 KRW 1.4% CNY 32.81% 22.8 30.89% 1.1% JPY 1.3% 14.9 Others 14.53% 0% 10% 20% 30% 40% 50% 5.12% 3.42% Growth in AuM 31.12.16 30.06.16 31.12.15 -1.27% AuM -9.52% 2009 2010 2011 2012 2013 2014 2015 2016 3.4% 4.4% 12.2% Chart 2.2. Annualized rate of return on investment portfolio Last 10 years 2.19% Last 5 years 1.72% Chart 2.4. Asset allocation (as percentage of Last 3 years 1.56% Investment Portfolio), 31.12.2016 Fixed income Real estate 2016 1.92% 80% Equity Gold 8 9 The closing ceremony of the European Games June 28, 2015 03 GOVERNANCE AND TRANSPARENCY 3 GOVERNANCE AND TRANSPARENCY 3.1. SOFAZ MANAGEMENT Supervisory Board The Supervisory Board, consisting of representatives of the state authorities and public organizations, carries out general oversight of SOFAZ’s operations. The Board reviews and evaluates Supervisory Board consists of the In 2016, the Supervisory Board of SOFAZ’s draft annual budget, annual following members: the State Oil Fund took a number report and financial statements, of decisions regarding the SOFAZ’s along with audit report. Members of Artur Rasizade activities. the Supervisory Board are approved Prime Minister of the Republic of by the President of the Republic of Azerbaijan Taking into account the changes Azerbaijan. The board members act made to the Law “About the entirely on a voluntary basis. Valeh Alesgerov state budget of the Republic of Vice-Speaker of the Parliament Azerbaijan in 2016”, the Supervisory (Milli Majlis) of the Republic of Board of SOFAZ with its decision Azerbaijan from 14 March, 2016 introduced certain changes to the Fund’s Vahid Akhundov 2016 budget with the purpose State Economic Policy Adviser of of adjustment the budgetary the Republic of Azerbaijan revenues and expenditures for 2016. According to these changes, Samir Sharifov the Fund’s revenues projection Minister of Finance of the Republic was decreased from of Azerbaijan AZN 6 711 564.1 thousand to AZN 4 578 474.6 thousand, while Shahin Mustafayev the expenditures were revised Minister of Economy of the from AZN 8 181 399.7 thousand to Republic of Azerbaijan AZN 10 688 933.7 thousand. Elman Rustamov The decision of the Supervisory Governor of the Central Bank of Board of SOFAZ from 3 May 2016 the Republic of Azerbaijan approved SOFAZ’s annual report The opening ceremony of the first European Games June 12, 2015 12 13 03 GOVERNANCE AND TRANSPARENCY for 2015 and the independent State Oil Fund of the Republic management and investment of Investment Department In addition, this department is also Budget Forecasting Auditor’s (PricewaterhouseCoopers) of Azerbaijan” and “Rules on the SOFAZ’s’s assets in accordance responsible for performance at- and Projects Report on the Fund’s financial preparation and execution of with the Guidelines approved by The Investment Department is re- tribution, modelling and research, activities.