Far We Go

Looking back on 2013, what were the highlights for the State Oil Fund of Azerbaijan Republic (SOFAZ)?

As of 2012, SOFAZ began investing in new asset classes such as equities, real estate, and gold, as well as diversifying its currency portfolio toward the Turkish lira, Russian ruble, and Australian dollar. This portfolio diversification was enabled by new investment guidelines approved by Presidential Decree. Overall, 2013 saw a continuation of this expansion and gave us solid experience in terms of the new asset classes and the approach to the implementation of the new investment strategy. The process of increasing exposure to a specific asset class requires a well-organized and detailed due diligence of the considered asset classes, as well as thorough analysis of increased exposure to risk and return measures. Accordingly, SOFAZ made a major investment of $500 million in VTB Group, a leading banking group in Russia. Furthermore, SOFAZ has also been carrying out its monitoring on the MSCI World Index, a public equities index in which SOFAZ has previously invested. These initiatives constitute a solid base to meet our target equity allocation of 10% in the years to come. Furthermore, SOFAZ made a fresh commitment to the IFC Global Infrastructure Fund following two previous commitments to the IFC Catalyst and IFC ALAC funds. This move further diversified our private equity portfolio by including infrastructure investments. In 2013, SOFAZ expanded its private equity asset class by conducting research in this market and by identifying major players, resources, and service providers. This will enable us to channel more investments into private equity as the global investment environment improves. As far as real estate is concerned, we analyzed opportunities for investment in East and Southeast Asia, conducted the necessary evaluation of investment prospects in the respective countries, and targeted the Asian market as the most promising destination for real estate investments. In 2013, SOFAZ reached the 30 tons of planned gold purchases that started in 2012.

As 2014 is the Year of Industry, is SOFAZ looking to increase the number of its industrial projects and assets?

First of all, it must be noted that Azerbaijan’s economy has experienced rapid development in the industrial sphere over recent years. Large-scale industrial projects have enabled the restructuring of social and economic life in the country and provided for the creation of basic requirements for continuous development. The construction of the oil, gas, and petrochemical STAR Oil Refinery Complex in Turkey and the construction of a new, semi-submersible drilling rig project are some of the industrial projects that SOFAZ began financing in 2013.

Azerbaijan’s contribution to energy security in Europe was enhanced late last year by the contract signed by a BP-led consortium to export gas from the Shah Deniz II field to Europe. How will this decision influence SOFAZ’s priorities?

The Shah Deniz II project serves to expand the South Caucasus Pipeline along the territories of Azerbaijan and Georgia, and will give impetus to the implementation of plans for the construction of the Trans-Anatolian Pipeline (TANAP) and the Trans-Adriatic Pipeline (TAP), while opening up a new gas corridor to Europe. As part of the project, the drilling of 26 subsea wells is planned, as is the construction of two major platforms. The gas, to be transported over a distance of 3,500 kilometers, will supply millions of customers in Georgia, Turkey, Greece, Bulgaria, Italy, and other countries. We expect the gas to first be supplied in 2019. As a beneficiary of oil, gas, and transportation agreements, SOFAZ’s mission is to transform depleting hydrocarbon reserves into financial assets generating perpetual income for current and future generations, the financing of strategically important infrastructure and social projects on a national scale, and ensuring the representation of the country in international agreements on the joint exploration of natural resources. Financing the TANAP project will meet SOFAZ’s objectives to support major projects to support socioeconomic progress and will positively influence SOFAZ’s priorities in the energy sector. The implementation of the Shah Deniz II energy project will secure the long-term development of our country. The entire project will involve an investment of $45 billion, and more than 30,000 new jobs will be created in the countries along the route. The Shah Deniz II project is highly significant and will make Azerbaijan’s large gas resources available for the European market, which will bring greater benefit to the state and, as a beneficiary of the state, SOFAZ’s gas revenues in turn will increase.

How important is transparency for SOFAZ?

Since the establishment of SOFAZ, our philosophy has held that as the overseers of national wealth we are accountable to the people of Azerbaijan. Accountability begins with transparency, which is why we need to be extremely open to scrutiny. Since the outset, SOFAZ has been audited by internationally renowned companies. We have published every single item of information regarding SOFAZ, including its assets, strategy, and internal procedures. And since 2003, under the leadership of President Ilham Aliyev, we have been running the Extractive Industry Transparency Initiative (EITI), an initiative to which SOFAZ has been one of the major contributors. The head of SOFAZ is also the head of the national commission of EITI. We were the first country to publish EITI reports and became fully compliant with EITI requirements in 2009.

What is the extent of SOFAZ’s international outreach?

An international forum of sovereign wealth funds was established in 2009, the inaugural meeting of which was held in Baku. There are around 25 sovereign wealth funds in the world including the funds of Qatar, Norway, Abu Dhabi, Russia, Australia, Peru, and Botswana. This is a highly diverse group that meets regularly, once a year, in a member country to discuss common issues that revolve around three major topics. The forum is organized around the Santiago Principles of how funds should generally be managed. This is always the first area of questions to see discussion. The second group of questions is directly related to business, investments, forecasts, and global economic development. And the third always concerns the investor-recipient country relationship. In that group, we always represent members from the EU and the US and discuss the relationship between the investor and recipient countries. There is broad cooperation between sovereign wealth funds within this framework.

What do you think President Aliyev’s third term will bring for SOFAZ and for economic growth?

In October 2013, the people of Azerbaijan overwhelmingly voted the President in for a third term by a huge margin. This evinced the success of the long-term program of President Aliyev, which has been implemented over the past 10 years. In that decade, the country’s GDP has tripled and the population’s income growth has been in double-digit territory. The economic policy of President Aliyev has proven to be successful. Its cornerstone is the development of the non-oil sector, and we can see from the numbers that a significant shift in GDP toward the non-oil sector has occurred. Three or four years ago, the non-oil sector was worth about 40% of GDP, while today it is over 60%. That is the most successful achievement of the President’s policy. In terms of his relationship with SOFAZ, the President has been supportive in changing our investment strategy as of 2012 in diversifying asset classes; we expect this support to continue. The President is adamant that we should not only support the level of our foreign exchange reserves, but also increase them consistently. Since the establishment of SOFAZ, there has not been a single year when our reserves decreased. Even in 2013, where our budget had forecast a deficit, its execution resulted in a surplus of over $1.7 billion. In short, we expect this strategy to continue, SOFAZ’s assets to grow, and the diversification process of our investment policy to be supported.