MONEY IS NEVER ENOUGH

For some reason, they say that money does not smell, although every currency and even every banknote has its own specific and incomparable "flavor". Sometimes money smells of tobacco, litter and even oil. Azerbaijanis have long got used to this smell - oil has been the main driving force of the economy since the 19th century. However, neither we nor anyone else in the world knew at the time what sort of damage revenues from the sale of energy reserves can inflict. This became a talking point for the first time in the 20th century after the economy of the Netherlands "contracted" the dangerous disease of dependence form the export of one type of energy. This illness was called "Dutch disease" and since then, it has become a terrible ghost for the governments of oil and gas producing countries.

Azerbaijan has been frightened with this disease since the end of the last century, although a really large volume of oil dollars has only just started coming into the country. Nevertheless, numerous experts of all types of international organizations maintain that the disease is already present in the republic and the first signs of "Dutch disease" are about to appear. The government is confidently saying that it has taken all measures to prevent this evil - the non-oil sector is steadily developing, a program on the long-term spending of oil revenues has been drawn up, the State Oil Fund of the Azerbaijani Republic (SOFAR) has been set up and not a single oil dollar can get into the country's economy bypassing it.

Expenses only if necessary

Despite its seven-year history, SOFAR is continuing to improve its institutional structure, mechanisms of management and forms of development. Only the goal of the fund remains unchangeable - to accumulate and if possible to multiply the revenues received from the export of Azerbaijan's energy reserves for future generations. But unlike its analogues in the world, the role of a piggy bank is not the only function of SOFAR. Its duties also include the prevention of the possible negative impact on the economy of a great influx of oil dollars - such as a sharp rise in the price of the manat and a fall in the competitiveness of local production, as well as the preservation of macroeconomic stability and the protection of financial discipline. For this reason, apart from an article on revenues, the budget of SOFAR which is approved by the head of state every year also contains points on the spending of parts of the revenues.

It has to be noted that both articles of the fund's budget are growing more and more actively every year. As of 1 January 2007, the volume of funds accumulated in SOFAR increased by 4.34 per cent in comparison with 1 January 2006 - up to 1,454,500,000 dollars (1,267,400,000 manats). The executive director of SOFAR, Shahmar Movsumov, maintains that the revenues of the fund in 2006 totaled 985.9m manats, which is 49.4 per cent higher than the revenues in 2005, while expenses totaled 981.3m manats, which is 4.2 times higher than the expenses in 2005.

He said that in the structure of the fund's revenues, the largest part - 896.3m manats - fell to revenues from the sale of Azerbaijan's profit oil within the framework of the implementation of the contract on the exploitation of the Azeri-Chirag-Guneshli deposits. As a transit fee for pumping oil by the Baku-Supsa pipeline, the fund received 12.7m manats, 1.8m manats of bonuses, 7.6m manats of per acre payments, 0.6m manats from assets handed over to foreign investors and 11m manats from the difference between the price of exported oil and domestic oil prices. The revenues from the management of the fund's assets totaled 55.9m manats.

As for the expenses, this article is still causing a lot of arguments. Someone has suggested distributing the money of the Oil Fund among the country's population and someone else proposes allocating loans to local businessmen. But the leadership of the fund always responds to these initiatives in the same manner - the assets of SOFAR can be spent only with the permission of the head of state and only on projects of global importance. These are projects aimed at improving living standards for refugees (110m manats were spent on this purpose last year and it is planned to spend 124m manats this year), the construction of a new water channel from the Oguz-Qabala zone to Baku (82.7m manats), the reconstruction of the Samur-Absheron irrigation system (37m manats), as well as the formation of the authorized capital of the newly-created Azerbaijani Investment Company (90m manats). Last year 75.4m manats were spent on the financing of the state share in the construction of the Baku-Tbilisi-Ceyhan pipeline.

However, the expenses of the fund last year and this year also include a large proportion of transfers to the state budget - 585m manats. This is not just an injection into the state treasury. This money is earmarked for specific investment projects of great importance to the country, especially in terms of developing the non-oil sector. For this reason, there are no grounds to say that this might become the cause of "Dutch disease".

Three active portfolios

Anyway, in order to put an end to all arguments about the spending of its assets, SOFAR has drawn up and submitted to relevant government agencies proposals to divide the assets of the fund into three portfolios. The first one is a portfolio of expenses, the second one is a stabilization portfolio (funds that will be used to cover the state budget deficit if the world oil prices fall below the level set by the Azerbaijani budget) and the third one is a special investment portfolio (as the fund has been set up for future generations).

As SOFAR says, it would be expedient to "forget", i.e. not to spend the assets placed in the last portfolio. But the size of the second portfolio should not be lower than three per cent of GDP. Using assets invested in other projects in order to cover the budget deficit might lead to the forced sale of facilities implemented within the framework of these projects at a lower price. However, if a stabilization portfolio is created, its assets will be used for this purpose. Moreover, they can be used for eliminating the consequences of emergencies and natural disasters.

As for whether SOFAR is planning to distribute the oil revenues among the population, as it were directly, as is the case in Alaska, the fund is quite pessimistic about this idea. "In Alaska the situation is absolutely different. Its population is only 600,000 and there are very difficult living conditions there and so on. For this reason, the government is forced to distribute the oil revenues among people (800 dollars per person). But here, first, the 1.2bn dollars accumulated in SOFAR make up only 150 dollars if roughly divided into eight million. And second, imagine that we give these 150 dollars away. What will people do? They will immediately go shopping and spend the money. As a result, there will be a shortage of goods, prices will soar and inflation will become unstoppable. So it is better to invest this money in the economy - this will be more useful," SOFAR said.

With the same confidence, SOFAR rejects the danger of financial losses in connection with the current structure of the currency portfolio of assets. We should point out that they are distributed in the following way: 801.43m dollars (55.1 per cent), 37.2 per cent of the assets of the fund are in European currency and 5.6 per cent in British pounds. According to the SOFAR rules of managing assets, the currency diversification happens in the following way: 55 per cent are placed in dollars, 35 per cent in euros, five per cent in British pounds and the remaining five per cent are major currencies of the world with rating A. As regards the placing of funds among the currencies of other countries, the fund has been less active, which is why these five per cent were also distributed among the main three (dollar, euro and pounds). Last year profitability from the management of assets in dollars accounted for 5.2 per cent, euros - 2.7 per cent and British pounds - 4.7 per cent. At the same time, 2.1 per cent of the fund's assets are kept in Azerbaijani currency. Movsumov said that profitability from the management of the fund's assets in manats in 2006 accounted for 2.9 per cent, which is linked to the strengthening of the rate of the manat for the dollar. In the basic currency (USD), profitability accounted for 8.5 per cent.

On the other hand, the policy of managing the assets of the fund in which investment in securities takes the main place is of very great importance for multiplying them. At present, there is a tendency in developed countries (USA, Japan, Britain) when short-term investments yield more profit than long-term ones. In this regard, beginning from 2005 the Oil Fund has invested in short-term bonds. Today 51.6 per cent have been invested in securities for a period of one year, 33.9 per cent - from one to three years, 8.2 per cent - from three to five years, 2.8 per cent - from five to seven years and 3.5 per cent - from seven to 10 years. It is also necessary to take into account that SOFAR is conducting a conservative policy of investing in securities. It is mainly investing in securities with a high rating awarded by international rating agencies like Moody, Standard and Poor and Fitch. At present, 18.5 per cent of the fund's assets have been invested in securities with rating AAA, 28.2 per cent - AA, 28.1 per cent - A and 25.2 per cent BBB. At present, most of the assets (54.1 per cent) have been invested in European countries, 39.7 per cent in the USA, 5.6 per cent in Asia, 0.4 per cent in Africa and 0.2 in Australia.

In general, SOFAR is doing its best to justify its function as a "preventive" agency for "Dutch disease". They are sure that we have no signs of it for the time being and there are no prerequisites for it. According to the executive director of the Oil Fund, Shahmar Movsumov, the main sign of "Dutch disease" is the slowing down of economic growth in the country, which is definitely not the case in Azerbaijan.