Azerbaijan traditionally plays safe with its oil windfall, buying mainly US bonds and treasury bills. But now the country is following a trend set by other sovereign wealth funds, and investing more adventurously in gold, real estate and private equities.
A lot of money is at stake. The state oil fund of Azerbaijan has accumulated more than $29bn since its foundation in 1999 as a storehouse for the country’s oil export revenues and earnings from transit pipeline fees.
Sofaz officials have been pushing the government to sanction a more liberal investment policy since the global financial crisis struck in 2008. Their wish came true in December when president Ilham Aliev (pictured) issued a decree freeing the fund to expand its activities and invest in a broader range of assets. Under the new regulations, Sofaz will be allowed to invest up to 5 per cent of its portfolio in gold and a further 5 per cent in equities in 2012. Investments in prime real estate will also be permitted.
Sofaz announced on Thursday that it had begun buying physical gold on February 1st to “increase the diversification and profitability of the investment portfolio.” Gold bullion acquired by the fund must satisfy requirements applied by the London Bullion Market Association. Separately, Sofaz said it would begin investing in equities this year and recruit external managers to oversee the shares portfolio.
Sofaz’s mission is to store wealth for future generations after Azerbaijan’s oil runs out and act as a buffer in the event of economic shocks. However, the government also uses the fund to bridge the large gap between non-oil budget revenues and public spending. More than $11bn were transferred from Sofaz to the state budget last year to help finance infrastructure projects. Transfers are expected to be even higher this year as the government presses ahead with new irrigation schemes, a new railway line across Azerbaijan and Georgia to the Turkish frontier and housing for refugees.
After a mission to Azerbaijan late last year, the International Monetary Fund urged the government to reorient the economy away from heavy dependence on oil-financed public spending. It said measures should be taken to curb corruption and liberalise the economy to allow the stunted private sector to develop.
Meanwhile the clock is ticking at Sofaz which needs to stash away as much cash as it can before Azerbaijan’s oil runs out. Production from oilfields in the Caspian Sea is expected to begin falling in a few years and slow to a trickle after 2020. Azeris will be hoping that diversification works for Sofaz, and there’ll be a useful stream of investment income.
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