MAXIMUM EFFECT

The unstable situation on the world financial markets, the global crisis that has shaken the economies of the most developed countries, and uncertainty about the future of investments in this regard compelled the government of Azerbaijan to take a cautious policy of developing financial trends. The influence of external factors, even though slight, has always been felt even on the stable economy of our country, and this is quite logical. But entities whose activities are directly linked to external financial markets are finding themselves in the most difficult situation in this regard - each new step is now taken only after carefully studying the dynamics of global and local changes and after considering possible negative consequences. Therefore, it would be fairer to regard the recent statements of the State Oil Fund of Azerbaijan (SOFAR) on the expansion of the list of investments abroad as brave solutions achieved following years of research.

Investment in real estate

To begin with, we should note that the investment activities of SOFAR are a mandatory and almost necessary condition for stability on the domestic foreign exchange market. The placement of the main Oil Fund assets outside the country in foreign financial assets, securities and real estate, the handover of funds for management by foreign managers and the purchase of gold neutralize the negative impact of the currency on the domestic market, and as a result, the pressure on the exchange rate of the manat is contained.

However, as we know, the basic functions of the Oil Fund are not only the accumulation and current investment of financial resources from the sale of Azerbaijani oil and gas, but rather their preservation and augmentation for future generations. In this regard, sometimes some critical thoughts are expressed about the overly cautious investment policy of the Fund, but given the ever-increasing risks against the backdrop of the global crisis, they are not justified.

In any case, SOFAR's investment activity has clear rules and some limitations. For example, the current account for SOFAR's foreign exchange transactions inside the country can be opened only at the Central Bank, and outside the country - in banks that have long-term ratings not lower than "AA" of Standard & Poor's, "Aa3" of Moody's Investor Service and "AA" of Fitch. According to the Fund as at 30 June, 34.43 per cent of the Fund's investment portfolio are invested in securities with the rating "AAA", 12.5 per cent - "AA", 31.54 per cent - "A", 20.17 per cent - "BBB" and 1.36 per cent in other securities.

The projected total cost (average volume) of SOFAR's investment portfolio in 2012 is set at 23 billion manats, while at the end of 2011 - it was 19.4 billion manats.

It must be remembered that almost since its inception, the Fund has invested most of its savings in bonds, whose share in the investment portfolio of SOFAR exceeds 90 per cent. Moreover, most of them are corporate securities that are not lagging behind the government bonds of the world's leading countries for their degree of reliability. However, the basis of SOFAR's investment policy is still instruments of the monetary and debt markets. At the end of this year, according to the Fund's investment policy for 2012, SOFAR's investment portfolio should look like this: 85 per cent - instruments of the monetary and debt markets, 5 per cent - stocks, 5 per cent - real estate and 5 per cent - gold.

But as seen from the aforesaid disposition, certain changes in the investment policy of the Fund will still take place from this year. The executive director of the Fund, Sahmar Movsumov, said at a press conference that the State Oil Fund plans to enter the international securities market, investing $ 600 million in the purchase of shares. At the same time, at the initial stage, investment in shares will be made through foreign managers - USB Global Asset Management and State Street Global Advisors. It is planned to resort to passive management of these securities, taking into account the risks associated with significant changes in prices on world financial and stock markets. "To do this, the index MSCI World has been selected, which hosts over 1,600 leading companies of the world," Movsumov said. This stock market index reflects the situation on the "global" stock market and consists of a series of securities of 24 developed countries.

Owing to amendments to the charter of the Fund, SOFAR also begins to use new tools to invest its assets. One of them is to purchase offices in several countries, particularly in Southeast Asia (Singapore, Malaysia and Indonesia), in European capitals such as London, Paris and Rome, as well as in Moscow and Istanbul. "An agreement with local brokers on the purchase of real estate has already been reached, and it only remains to choose property," the head of the Fund said. The Fund has the right to spend a maximum of 5 per cent of its assets on this purpose.

More gold and currency

Another exciting and new sphere in the investment activity of the Oil Fund is plans to increase the "golden assets". In total, it is planned to buy about 30 tons of gold, but in order to minimize risks from price changes, this will take place in stages - every week over a period of two years. "As a result of the implementation of this strategy, the ultimate cost of investments in gold at the end of the two-year period will be approximately equal to the average market price of gold," Movsumov explained.

It must be noted that the Fund started buying gold in February this year. In order to conduct purchase and sale operations, accounts have been opened in a number of partner banks that are members of the London Bullion Market Association, and on 1 February 2012, the Oil Fund started buying 10 million ounces of gold a week. "As of 1 July this year, the Fund's investment portfolio includes 6,847 kg (220,146 ounces) of gold," Movsumov said. The London vault of the JP Morgan bank has been selected as a temporary location for storing SOFAR's gold reserves. By the end of the year, it is planned to buy another 240,000 ounces (about 7.5 tons) of gold. At the same time, to ensure additional profitability of the gold reserves of the Oil Fund, some of them are currently invested in the short-term deposits of influential banks operating on international financial markets.

In addition to the replenishment of its gold reserves, SOFAR is also diversifying its currency basket, which still includes only dollars, euros and British pounds. Movsumov said that in July, the fund placed 800 million Turkish liras in short-term deposits of Turkish banks. "In the near future, the Fund plans to further increase the amount of savings in the Turkish currency in the total investment portfolio," he said. According to the executive director, in order to diversify the foreign exchange reserves of the Fund, Australian government securities worth $ 200 million Australian dollars were purchased in July. "Negotiations are also under way to open accounts in Russia. It is planned that the accounts will be opened in the near future," Movsumov said.

The currency structure of the investment portfolio of the Oil Fund is set in the following order: 50 per cent of assets can be placed in US dollars, 40 per cent - in euros and 5 per cent - in British pounds. The remaining 5 per cent of the total cost of the Fund's investment portfolio may be in the currencies of Canada, Japan, eurozone countries, Turkey, Russia, and countries with long-term ratings not lower than "A" (Standard and Poor's, Fitch Ratings) and "A2" (Moody's).

Significant costs

Thus, although SOFAR is making some additions to its investment policy, in general, these steps cannot be called risky - the Fund is still working only with high rating financial institutions and reliable tools. So we can expect that the innovations will somewhat increase the profitability of the State Oil Fund assets and give confidence for further steps in this direction.

In fact, today SOFAR not only plays an important role in stabilizing the money market and the economy as a whole (in the first half of 2012 alone, transfers to the state budget amounted to 4,592.3 million manat) and acts as a guarantor of economic development in the future, but thanks to its assets, a number of strategically important infrastructure projects have been, and are being, implemented. For example, it is enough to note that within six months, 162.5 million manats were allocated from the Oil Fund for activities to improve the welfare of refugees and internally displaced people and 67 million manats - to finance the project on the reconstruction of the Samur-Abseron irrigation system. As part of the state programme for 2007-2015, 5 million manats have been spent on the education of Azerbaijani students abroad. Also, 37 million manats have been spent to finance the construction of the new Baku - Tbilisi - Kars railway line.

Today SOFAR is also considering investing in the construction of the Trans-Anatolian Pipeline (TANAP). "The government of Azerbaijan is ready to make every effort to facilitate the implementation of this project, and, in particular, investments in it from the State Oil Fund of Azerbaijan are being considered," Movsumov said.

Such projects are only the beginning. Over time, the TANAP project will not only pay for the investments, but also generate income. This is the main objective of the State Oil Fund - to provide a maximum long-term effect from the profit gained from the sale of oil and gas.

STATISTICS SAY

SOFAR revenues in the first half of 2012 amounted to $ 7,391.9 million manats and expenses - 4,878.1 million manats. Most of the Fund's revenues - 95.9 per cent - came from the sale of profit oil and gas.

SOFAR assets as of 1 July 2012 totalled $ 32,666 million, an increase of 9.6 per cent compared with the beginning of this year ($ 29.8 billion)