State Oil Fund of Azerbaijan (SOFAZ)

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The State Oil Fund (SOFAZ) operates as a sovereign wealth fund for Azerbaijan. It was established in 1999 and as of the 1 January 2013 the fund’s assets stood at US $34.129 billion.[1]

SOFAZ reports directly to the President of Azerbaijan through its Executive Director and manages all state revenue from oil and natural gas. The objective of the establishment of the fund was to preserve Azerbaijan’s economic stability, aiding diversification of the economy, and preserving the nation’s wealth for future generations.[2] SOFAZ is also responsible for the implementation of the Extractive Industry Transparency Initiative (EITI) principles in Azerbaijan. [3]

While tax revenues from the state oil company and flow directly into Azerbaijan's state budget, state revenues from production sharing agreements (PSAs) , bonus payments and royalties are paid to SOFAZ. In addition SOFAZ receives the money earned in the form of transport fees from the Baku-Tbilisi-Ceyhan (BTC) pipeline. As of 2012, on its official website, the fund publishes annual report that provide a breakdown of revenue sources. [4]


SOFAZ is a state extra-budgetary fund, functioning as a separate legal entity, with its own specialist management team and supervisory hierarchy. The Executive Director is appointed and dismissed by the President of the Republic of Azerbaijan. [5]

However Revenue Watch Institute accuses the entity of displaying a weak governance structure, asserting that while its regulations hold that the fund shall be "accountable to the President", there are no check and balances to limit the president's discretion. RWI notes that countries such as Norway and Kazakhstan mandate a parliamentary role in spending decisions for the national oil fund, but Azerbaijan has no such legislative safeguards.[4] As of late 2012 there were no legislative restrictions in place on the volume of transfers from the State Oil Fund to the government budget or on spending by the Fund. According to blogger Shahin Abbasov, some argue that the Fund should be required to hold 25 percent of its revenues in reserves, for example.[6]

According to the Bertelsmann Foundation, two of the seven Board members who oversee SOFAZ are drawn from the Milli Majlis, Azerbaijan's elected Parliament, and the fund also cooperates with civil society organisations (CSOs) in order to spend its money in beneficial ways. However it is also noted that the two Parliamentarians who sit on the SOFAZ board are appointed by the Speaker of the Majilis, rather than being elected from among the chamber, and that the basis on which the democratic body is elected raises concerns.[7]

The Director as of March 2013 was Shahmar Movsumov.[8] In 2011 Movsumov was elected as an alternate member of the global EITI Board.[9]


SOFAZ resources grew from roughly US$ 1.2 billion in 2006 to over US$ 19 billion by 2008.[10] In 2012, SOFAZ funds rose to $32.6 billion 2012, [11] reaching US $34.129 billion by 2013.[12] However in 2013 the Fund will post a deficit of US $2.2 billion, as a result of increasing transfers to the State budget in the run-up to the year's Presidential elections, according the Baku think tank the Center for Economic and Social Development.[13]

Budget transfers

Between 2008 and 2012 the fund's contributions to the state budget increased from 32 percent of budget revenues in 2008, to 60 percent in 2012. [4]

SOFAZ transfers to the state budget were forecast at USD $14.51 billion in 2013, an increase of over 14 percent on budget transfers in 2012 ($12.5 billion).[14] Given the presidential elections scheduled for 2013, there was pressure on the government to spend big on infrastructure projects and increases in state salaries and pensions. But Zohrab Ismayil, director of NGO Support for a Free Economy, warned that with such a pace of transfers, "future generations of Azerbaijanis will face an empty Oil Fund."[15]

Infrastructure projects

The resources held by the fund are also used to finance investment projects. Revenue Watch Institute reports that SOFAZ has financed the relocation of refugees and other displaced persons (totalling over US $100 million per year as of 2012), the construction of the Oguz-Gabala-Baku water pipeline (US $903 million in 2011), among other projects. Between 2008 and 2012 the fund's contributions to the state budget increased from 32 percent of budget revenues in 2008, to 60 percent in 2012. [4]

SOFAZ also contributes to financing regional gas transportation projects, such as the Trans-Anatolian Pipeline (TANAP). As of early 2013 the Fund was also in preliminary talks to finance Nabucco West or the Trans-Adriatic Pipeline (TAP) projects in addition.[16]


According to Executive Director Movsumov, 2012 was marked by SOFAZ entering the state securities market, real estate and gold.

Commenting on the Fund's plans for 2013, Movsumov said that gold reserves would rise to 30 tons by the end of the year, accounting for up to 5 percent of the investment portfolio. SOFAZ began investing in gold during 2012. He said that as a kind of assets, gold has several unique characteristics that make it attractive to investors. Gold can act as an effective tool of hedging inflation and currency risks in the long term prospect. Moreover, gold ensures protection against high volatility in the financial markets during economic downturns. SOFAZ buys physical gold on the London Metal Exchange and temporarily stores it in JP Morgan's London vault. Commenting on the strategy, Movsumov highlighted that gold was attractive as an investment because it is an effective tool in hedging inflation and currency risks in the long term, and because it protects against volatility in the financial markets during economic downturns.[17]

The Sovereign Wealth Fund Institute notes that sovereign investors see gold as a store of value and an alternative currency to dollars, yen and euros.[18] However the Azerbaijani CESD accuses the fund of investing in gold "too late" as global prices had already begun to fall.[19]

Investment Policy

In 2011 the President of Azerbaijan issued a number of decrees which liberalise the operation and management of the assets of SOFAZ, which up until that point had been managed under an extremely conservative investment policy, according to reports by law firm Salans. The new rules significantly expanded the areas and composition of assets in which SOFAZ may invest. Following the amendments, SOFAZ was allowed to invest in assets valued in the currencies of the G7 countries (the US, Germany, the UK, France, Italy, Canada, and Japan), the countries of the Euro Zone, the Russian Federation, Turkey, and other countries where the long-term credit rating is not lower than 'A' (Standard and Poors) or 'A2' (Moodys). The composition of SOFAZ's investment portfolio expanded to include deposits in central and commercial banks, debt obligations issued by countries, state enterprises and international financial institutions, shares included in stock exchange indexes, gold bullion and real estate, among others. The changes swept away prohibitions on investment in precious metal and stones, real estate and goods.[20]

External Links

Official website:



  1. AZERBAIJAN STATE BUDGET’S SOFAZ DEPENDENCYCenter for Economic and Social Development, 28 January 2013.
  2. Background Note: AzerbaijanUS State Department, 23 March 2012.
  3. Corruption and Government TransparencyGlobal Security, retrieved 2 August 2012.
  4. 4.0 4.1 4.2 4.3 Azerbaijan | Transparency SnapshotRevenue Watch', retrieved 2 August 2012.
  5. Najman, Boris “The Economics and Politics of Oil in the Caspian BasinRoutledge', 2008.
  6. Azerbaijan | Azerbaijan: Less Oil, More Dependence on Oil MoneyEurasianet', 30 November 2012.
  7. The Strange Case of Azerbaijan And Its Resource Blessing/CurseBertelsmanns Stiftung', 15 September 2011.
  8. Azerbaijani State Oil Fund announces plans for 2013Trend News Agency, 17 March 2013.
  9. SOFAZ Executive Director takes part at the 5th EITI Global ConferenceSOFAZ, 2 Мarch 2011.
  10. Resource Nationalism Trends in Azerbaijan, 2004–2009RUSSCASP', March 2010.
  11. Azerbaijan State Oil Fund’s assets rose up to $32.6 bnAzerbaijan Business Centre, 23 July 2012.
  12. AZERBAIJAN STATE BUDGET’S SOFAZ DEPENDENCYCenter for Economic and Social Development, 28 January 2013.
  13. $ 2,2 BILLION DEFICIT IN SOFAZ BUDGETCenter for Economic and Social Development, 14 November 2012.
  14. $ 2,2 BILLION DEFICIT IN SOFAZ BUDGETCenter for Economic and Social Development, 14 November 2012.
  15. “[http Azerbaijan: Less Oil, More Dependence on Oil Money]” Eurasianet, 30 November 2012.
  16. SOFAZ announces plans to finance gas transportation projectsAzernews, 26 February 2013.
  17. Azerbaijani State Oil Fund announces plans for 2013Trend News Agency, 17 March 2013.
  18. SOFAZ Buys Physical GoldSWF Institute, 25 September 2012.
  19. SOFAZ' 'Gold Policy'?Center for Economic and Social Development, 21 February 2012.
  20. Liberalization of SOFAZ investment rulesSalans, 2011.