INVESTMENT PRIORITIES

The State Oil Fund of Azerbaijan (SOFAZ) is committed to diversifying its investment portfolio, with a focus on sustainable development, utilising gold as a hedging instrument and implementing structural changes in asset composition. A recent development of note has been the fund's entry into Europe's renewable energy sector, underlining the fund's long-term strategy to diversify beyond commodity dependence.

European market entry

One of the major economic developments in July 2025 was the acquisition by SOFAZ of a 49 per cent stake in a 402MW solar energy portfolio in Italy from Enfinity Global. The deal encompasses 14 sites in the Lazio and Emilia-Romagna regions, with one part of the sites already operational and another under construction, according to the fund.

Following the completion of the transaction, Enfinity Global will retain a controlling stake (51 per cent) and will continue to effectively manage these assets.

The project is designed to generate approximately 685GWh of electricity per year, reducing carbon dioxide emissions by almost 185,000 tonnes. This is the equivalent of the annual energy consumption of over 250,000 Italian households.

The long-term power purchase contracts provide revenue stability and are in line with SOFAZ's investment mandate as an institutional investor with a focus on sustainable and predictable assets.

According to Enfinity Global CEO Carlos Domenech, the partnership with SOFAZ will strengthen the company's financial base and accelerate the development of its Italian portfolio, which includes 2.6GW of solar generation and 5.3GW of storage capacity.

SOFAZ CEO Israfil Mammadov emphasised that the agreement signifies the initial phase in extending the fund's presence in the European green energy sector, with the potential to enhance energy affordability and promote the sustainable growth of the Italian economy.

The contract with Enfinity Global represents a significant development in SOFAZ's investment strategy, maintaining the organisation's conventional approach to asset preservation while implementing strategic initiatives to enhance their growth.

By the close of the first half of 2025, the SOFAZ investment portfolio is projected to reach $66.5 billion, marking a 14.8% increase compared to the same period last year. This portfolio encompasses a diverse range of assets, including equities, real estate, infrastructure, and gold. The fund's portfolio comprises shares in 1,400 companies across 23 countries. As Vadim Pshenichny, Director of the Risk Management Department, explains, the portfolio structure is constructed with the global market capitalisation of industries in mind.

"For example, the share of information technology in the global market is 15-20%, and healthcare is around 14%. We take these indicators into account when forming the portfolio," he noted.

With regard to equities, these account for 22 per cent of the investment fund, as this market is considered risky, although promising in terms of returns.

Real estate and infrastructure currently account for around 7%, with the real estate sector demonstrating consistent growth, rising from 6% at the start of 2025 to 6.7% on 1 July.

"Equities and private equity account for 25 per cent of our investment portfolio," Wheat added.

He noted that the stock market is the most active for SOFAZ, as this segment is particularly sensitive to global news and requires prompt risk management.

The mid-2025 portfolio restructuring is of particular interest: the share of bonds and monetary instruments fell from 53.3% to 38.9%, while gold increased from 14.8% to 28.8%, indicating a strategic shift towards defensive assets.

Gold as a strategic asset

The history of gold at SOFAZ has been a subject of interest in recent business developments. Firstly, it should be noted that the "gold" component of Azerbaijan's gold reserves is formed precisely from the purchases of the State Oil Fund. The Central Bank of the country is not engaged in this process.

In October 2024, in response to the growth of geopolitical risks and market volatility, as well as the expansion of diversification of its investment portfolio, the State Oil Fund decided to increase gold reserves and has been following this strategy for the second year.

As at 1 January 2025, the fund's investments in gold were estimated at over ₼21 billion – an increase of 83% compared to the previous year. Concurrently, the fund's assets under management increased from 12 to 20.5 per cent in 2024 alone, with gold bars accounting for a significant proportion of this growth.

This trend has continued into the current year. According to the latest published data, the fund has purchased 989,000 ounces of gold since the beginning of 2025. Therefore, as of 1 July, the share of this precious metal in SOFAZ was 28.8%, which is an increase of 3 percentage points compared to 1 April. This increase can be attributed to two key factors: the direct purchase of gold and the growth in its price.

It should be noted that SOFAZ has clear regulations in place. The share of sub-portfolio with gold is determined at 25% of the total investment portfolio. The upper deviation from this target is set at 4%. As is evident, the fund is close to reaching its limit, which indicates that it is advisable to cease further investment in order to mitigate potential risks: In Q2 of 2025, the sub-portfolio of the fund achieved the target set out in the initial planning stage, with a total of 181.1 tonnes being reached. Consequently, new gold investment operations have been temporarily suspended during this period," the statement said. The fund has stated that, depending on future market conditions and the general state of the investment portfolio, it may consider revising this issue at a later date.

Income, assets and budget

Statistics from the previous year and the next six months demonstrate the effectiveness of SOFAZ's investment strategy. Please be advised that President Ilham Aliyev has signed an order on the execution of the State Oil Fund's budget for 2024, followed by a detailed report on its activities.

Despite the high volatility of world markets in 2024, the Fund ended the year with a net profit of ₼7,858.25m. This represents a 3% decrease compared to the 2023 level. However, the profit structure has undergone significant changes: while income from bond investments decreased by 4.5 times to ₼680.2m, income from shares fell by 11% to ₼3,213m, and income from gold increased by 2.5 times to ₼3,385.7m. Significant growth was also recorded in income from investments in private capital (+27.7 per cent) and real estate's exit from the loss zone, with a net income of ₼32.3 million at the end of the year.

It is important to note the significant growth of the liquid part of the portfolio: at the beginning of 2025, cash and cash equivalents reached ₼5,593.6m, which is 79% more than at the beginning of the previous year. In percentage terms, the share of liquid assets increased from 3.3% to 5.45% of the total volume, providing additional financial stability in case of possible external economic shocks.

The positive trend of income growth has continued this year. As at 1 July 2025, the fund's assets reached $66,515.6m, representing an increase of 10.8% compared to the beginning of the year. The growth was driven by the positive dynamics of investment, profit and proceeds from the sale of oil and gas under the existing contracts.

Therefore, in the initial six months of the present year, the fund's revenues amounted to ₼8.8b, while expenditures totalled ₼7.3b. Concurrently, net income from the execution of oil and gas agreements amounted to ₼5.7b. Of this, ₼4,974.3m was attributable to profitable oil and gas, ₼3.6m to post-acre payments, and ₼765.3m came in the form of bonuses and transit payments. The Azeri-Chirag-Guneshli (₼4.4b) and Shahdeniz (₼423.3m) fields continue to be the primary sources of commodity revenues.

Asset management was also instrumental in generating revenue. During the reporting period, investment income totalled ₼3,089.8 million. This confirms the effectiveness of the fund's policy on portfolio diversification and sustainability of investment strategies, even in the conditions of global economic challenges.

The majority of the fund's budget was allocated to transfers to the state budget, totalling ₼7.2b, which constitutes the bulk of all expenditures. In addition to this, €5.2m was allocated to finance the completed "State Programme for Enhancing the International Competitiveness of the Higher Education System for 2019-2023", €20.1m to the ongoing youth study abroad programme for 2022-2028 and a further €13.8m for administrative needs.

It is imperative to pay close attention to the additional revenues generated from the revaluation of currency balances in the context of currency fluctuations. This total of ₼9,468.7m represents a substantial strengthening of the overall income result for the first half of the year, while also delivering further growth in assets.

As demonstrated, the State Oil Fund continues to demonstrate sustainability and strategic flexibility in the management of national assets, successfully adapting to global economic challenges. The objective of the selected policy is to ensure long-term investment growth based on the principles of risk diversification, with a view to maximising the Fund's assets and their long-term contribution to the country's economic development.