What Is the State Oil Fund (Azerbaijan)?

The term State Oil Fund of the Republic of Azerbaijan (SOFAZ) refers to a sovereign wealth fund (SWF) established by the Republic of Azerbaijan. The fund was launched in December 1999 after the president signed a decree. The fund, which invests the country's oil and gas revenues for future generations, is overseen by a special board that is led by the president. As of January 2021, the fund had about $43.6 billion in assets.

Key Takeaways

  • The State Oil Fund of Azerbaijan is a sovereign wealth fund established by the government of Azerbaijan.
  • It manages oil and gas agreements within the nation and those who purchase resources.
  • The fund invests in various asset classes throughout the world to multiply wealth derived from oil.
  • The sovereign wealth fund makes mostly conservative fixed-income and money-market investments and also diversifies its holdings to include gold, real estate, and equities.

Understanding the State Oil Fund (Azerbaijan)

The State Oil Fund of the Republic of Azerbaijan was established on Dec. 29, 1999, by President Heydar Aliyev. It is the ultimate result of a national oil and gas strategy put into place by the national leader in 1994. The fund, which is based in Baku, Azerbaijan, sees its source of deposits as primarily surplus revenues from the development of the country's oil and gas reserves.

According to the fund's website, its main objectives are:

  • Preserving the nation's economy, remaining disciplined on a fiscal-tax basis, cutting back the country's dependence on energy revenues, and stimulating other sectors in the economy
  • Managing and distributing the country's oil wealth equally, as well as preserving revenues from energy sources for future generations
  • Using the fund to finance large projects to benefit the nation

The fund had $43.6 billion in assets, which are invested in a number of asset classes. The aim is to maximize its long-term returns. As of Dec. 31, 2020, the breakdown of the fund's portfolio was as follows:

The six-month LIBOR interest rate is the performance benchmark for the fund's fixed income and money market instruments. Europe and Asia constituted almost 68% of the oil fund's holdings as of 2019. The fund also reported about 25% of its investments in North America, 0.7% in the Middle East, 2% in Australia. Only 0.05% of its investments were fixed in South America.

Although this sovereign wealth fund is ultimately accountable to Azerbaijan's president, it is directly overseen by the supervisory board. This entity is made up of government bodies and public organizations, including the prime minister and the chairman of the country's central bank. The fund's day-to-day operations and management, along with any decision-making is the responsibility of the executive director, who is appointed by the country's president.

If you're interested in investing in Azerbaijan, consider an exchange-traded fund or a mutual fund.

Special Considerations

According to the State Oil Fund's 2019 Annual Report, oil production accounted for 38.3% of Azerbaijan's gross domestic product (GDP) compared to 61.7% from non-oil-related sectors. This highlights Azerbaijan's reliance on oil production as a source of prosperity.

In order to help diversify the Azerbaijani economy, the primary purpose of the State Oil Fund is to preserve the wealth derived from this oil production and to invest in public infrastructure and the local non-oil economy.