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TBY talks to Shahmar Movsumov, CEO of State Oil Fund of Azerbaijan (SOFAZ), on changes in the Fund's portfolio, financial investments, and CSR projects.
BIOGRAPHY
Shahmar Movsumov is a graduate of the International Economic Relations Faculty of Moscow State Institute of International Relations, and has a Master’s in Public Administration from the John Kennedy School of Government at Harvard University. After graduation, he worked for an extensive period from 1995 to 2005 at the National Bank of Azerbaijan Republic, becoming its General Director in 2005, before moving to SOFAZ as Executive Director in 2006. Since 2006, he has also served as Chairman of the Government Commission on the Extractive Industries Transparency Initiative.SOFAZ recently announced changes in the structure of its portfolio, allowing more investments in equities and real estate, for example. How will this structural change offer new benefits to SOFAZ?
We are constantly reviewing our investment strategy in line with the risk/return profile of our stakeholders to further optimize our investment portfolio and increase the Fund's long-term returns. We have substantially increased our equity (both private and public equities) and real estate allocation to 15% and 10%, respectively. In public equities, we will continue our passive management strategy by replicating well diversified global indexes both in-house and through our external managers. In private equities, in addition to our IFC asset management investments, we are plan
ning to further expand our investment universe by adding new funds allocated to new geographies and different strategies. As for real estate, since 2012 we have managed to build up a portfolio made up of prime commercial properties in key gateway cities of Europe and Asia Pacific, in excess of $1.5 billion. Going forward, our plan is to build around this core portfolio by focusing on diversifying across various sectors, geographies, as well as different investment styles. This includes new sectors such as hospitality, logistics, and other alternative real estate and value-adding investment strategies.
SOFAZ recently sold $200 million on the FX market in Azerbaijan to local banks. How does selling foreign currency fit into your strategy to improve the domestic financial market of the country?
The main rationale behind the creation of SOFAZ has always been two-fold: the preservation of macroeconomic stability and the transformation of finite hydrocarbon reserves into financial assets able to generate perpetual income for current and future generations. As such, currency intervention is not part of our objectives. The goal of our FX operations in the local market is to obtain a sufficient amount of manat to cover the fund's total expenditures, which includes state budget transfers, direct project financing, and administrative costs. During previous years, SOFAZ was conducting local foreign exchange operations with the domestic commercial banks; however, starting from the beginning of 2016 this has been carried out in auctions conducted by the Central Bank. SOFAZ contributes to the development of the domestic financial markets mainly through bringing world class asset management principles and practices into the country and by creating an environment for the development of the local asset management industry.
Since 2001, SOFAZ has invested in improving the social conditions of refugees and internally displaced persons. As the 15th anniversary of starting this project, how do you assess the progress you have made in this field?
The territorial integrity of Azerbaijan was violated during the Armenian-Azerbaijani Nagorno Karabakh conflict and 20% of Azerbaijani lands, in particular Nagorno Karabakh and seven adjacent regions, were occupied by Armenian forces. As a result of this aggression, more than 1 million Azerbaijani citizens have been expelled from their homes and forced to move to other cities and regions in Azerbaijan. Since 2001, SOFAZ has been allocating money for building housing and improving the socio-economic conditions of the refugees and internally displaced persons in many regions of Azerbaijan. These financial resources were used to build 154 buildings, more than 30,000 houses, 132 schools, music schools, and kindergartens, 54 hospitals, primary healthcare units, ambulance and medical stations, 108 community clubs, and administrative buildings in order to settle refugees and internally displaced persons in the different regions of the country. More than 30,000 families, equivalent to more than 126,000 citizens, were settled in these houses. In the 2001-2015 period, SOFAZ allocated AZN1.903 billion to this project. As a consequence of the realization of this project, a large amount of jobs were created in the different regions of Azerbaijan, playing an important role in decreasing the poverty indicator from 46.7% to 5% in the last 15 years. The main achievement of this project was the substantial improvement of the standard of living of refugees and internally displaced persons and their full integration into society.
Parliamentary elections took place in November of 2015. As SOFAZ frequently works with parliament on budgeting issues, what are your expectations moving forward?
As the custodian of national wealth, we pride ourselves on our transparency and accountability. Our interaction with parliament is one of the most important avenues for our dialogue with the Fund's stakeholders. Manifestations of this dialogue include the representation of the Vice-Speaker of the Parliament in the Supervisory Board of SOFAZ and the active participation of the parliament in approving the Fund's budget, which is an integral part of the state budget. Furthermore, our accounts are regularly scrutinized by the Parliamentary Chamber of Accounts. We are very much looking forward to working closely with the newly elected parliament on any matters related to our activities.
With the success of the First European Games last year, what kinds of new investment opportunities will the Formula 1 Grand Prix event bring to Baku?
In preparation for the First European Games held in Baku last year, we substantially upgraded our infrastructure, which allowed us to organize the world class event and put Azerbaijan once again on the global map. Hosting a widely watched and popular sport tournament such as the Formula One Grand Prix will be another good opportunity to promote the country, which will have a positive impact on the domestic economy. With millions of TV viewers across the world, the Formula One Grand Prix will generate longer-term benefits for the country, such as business linkages, foreign investment, and community involvement.
Given the economic turbulence prevalent in the international economy with regards to the oil and gas market, what is your outlook for the year 2016?
The plunge of oil prices since the second half of 2014 is mainly explained by global supply and demand conditions. A surplus in oil supply is caused by an increased share of unconventional energy resources, such as shale oil, shale gas, and oil sands in the global oil supply. Furthermore, OPEC, which controls nearly 40% of the world market, has failed to reach an agreement in production curbs, further exacerbating the situation. On the demand side, fears in the global economy, primarily in emerging economies, have been the main drivers of the decline in prices. In addition, the surging US dollar has also played a role in this process. It is difficult to precisely forecast the price level, however recent trends, including the return of Iranian oil to the market, makes us to believe that the price will stay under $50 per barrel in the medium term.
WE KNOW WHAT TO DO
TABLE OF CONTENTS
Year In Review
Good Times Ahead
<strong></strong><strong>In a year dominated by the overarching theme of low hydrocarbons prices, Azerbaijan showed resilience and verve in putting in place bold measures both to counter the slump in energy prices and put its economy on a surer footing.</strong>
read articleReview: Diplomacy
Operation Outreach
In 2015, Azerbaijan's military budget increased by a notable 27%, to $4.8 billion, or 17.9% of the government's total budget for the year. The first Azerbaijan Defence Exhibition (ADEX 2014), drew over 200 companies from 34 countries, including Russia and the US.
read articleInterview
Rufat Mammadov, President, Azerbaijan Export and Investment Promotion Foundation (AZPROMO)
TBY talks to Rufat Mammadov, President of the Azerbaijan Export and Investment Promotion Foundation (AZPROMO), on large-scale events and their ability to attract FDI and the potential Iran may hold.
read articleReview: Banking
More Interest
In a sector faced with relatively flat growth for 2015-16, new opportunities are still there aplenty, led by the nascent Islamic banking sector, e-banking, and microfinance initiatives. Together, these areas should make banking more diversified and less reliant on a buoyant energy sector for its capital inlay.
read articleReview: Capital Markets
Taking Stock
As Azerbaijan grapples with the knock-on effects of low hydrocarbon prices, the Baku Stock Exchange (BSE) finds itself at the center of the country's efforts to stave off a budget deficit this year. In January, the government announced plans to sell $500 million worth of bonds on the BSE.
read articleReview: Industry & Mining
In The Bag
Industry in Azerbaijan is long established, diversified, and, in many areas, fast growing. Together, these qualities make the sector well placed to see through the global slump in commodity prices, while at home, the manufacturing industry continues to find ways to use its hydrocarbons expertise in other fields, including high technologies and research.
read articleInterview
Khanlar Fatiyev, , Chairman of the Supervisory Board, Ganja Automobile Plant Production Association
TBY talks to Khanlar Fatiyev, Chairman of the Supervisory Board of the Ganja Automobile Plant Production Association, on the role of the plant in driving growth in the non-oil sector.
read articleReview: Transport
The New Node
With major new railways linking the region, the opening of the new Baku International Sea Trade Port Complex, the completion of a massive program of road building and upgrading, investment in state-of-the-art fleets ranging from Boeing 787s to rail locomotives, Azerbaijan can rightly claim the title as the Caucasus' transportation hub.
read articleReview: Agriculture
Lots More
Farms across the country are pursuing a policy of increased yields for year-round fruit and in the wheat harvest to stave off an over-reliance on imports. With carefully targeted increases in exports, better routes to port and to market, and greater sophistication of agricultural facilities, farming could soon be the morning star of Azerbaijan's diversified economy.
read articleReview: Health
Under One Umbrella
Life expectancy at birth (2015) is 75 years for women and 70 for men. The median age is 30. For both sexes, longevity increased by six years between 2000 and 2012. Azerbaijan is a relatively youthful country—an important factor in healthcare—with 22% of its populace aged under 15 and just 9% aged over 60.
read articleReview: Education
Baku to School
Azerbaijan's culture has always harbored a deep respect for educational values. This is embodied in the country's Azerbaijan 2020 mission statement, which seeks to raise standards across the sector and introduce ICT as a standard part of the learning experience at all levels.
read articleInterview
Elkhan Mammadov,, Secretary General, Association of Football Federations of Azerbaijan (AFFA)
TBY talks to Elkhan Mammadov, Secretary General of the Association of Football Federations of Azerbaijan (AFFA), on the experience Azerbaijan is gaining in hosting international events.
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