1. Oil revenues spending and management : how to secure risks Vugar Bayramov, phd., CESD, EITI Coalition, www.cesd.az www.cesd.az

2. Introduction Allocation direction of State Oil Fund How partner banks are determined ? Risks and effective use of oil money

3. State Oil Fund of Azerbaijan- SOFAZ According to SOFAZ the actives of this institution achieved 3,335 billion USD (April, 2008), which was 2,017 billion in August, 2007.

4. Investment portfolio division of SOFAZ actives DirectionsMillion USDShare in % securities2,49575,49 detailed Debt issues463,46 14,02 Loans of agencies and IFIs908,1827,47 Loans of banks and financial institutions 909,6227,52 Cooperative loans207,606,28 Hypothec loans3,650,11 Shares2,810,09 Deposits and debt market tools386,5511,69 Bank accounts423,9412,82 Total investment portfolio3,305.81100 Source: SOFAZ, 2008

5. Geographic division of SOFAZ investment portfolio RegionsMillion USDShare in % Europe1,473.4944,57 America1,63149,37 Asia138,094,18 other62,251,88 Source: SOFAZ, 2008

6. Actives of SOFAZ managed by foreign managers AdıMilyon Dollar Clariden Leu49,9620,45 DeAM84.1734.45 World Bank110.1845,10 Total244,31100 Source: SOFAZ, 2008

7. Investment portfolio division by periods PeriodMillion USDShare, in % 0-1 years1,177.2535,61 1-3 years1,387.1141,96 3-5 years659,8419,96 5-7 years56,101,70 More than 7 years22,700,69 shares2,810,08 Source: SOFAZ, 2008

8. Division of actives by foreign currencies, August, 2007 Source: SOFAZ, 2008

9. Division of actives by foreign currencies, April, 2008 Source: SOFAZ, 2008 Note: though US dollar has been losing its position in world market, SOFAZ increased its share up to 63% from 55% in August, 2007

10. Financed projects 1. Azerbaijani part of BTC - 297,9 mln. AZN (1USD = 0,82AZN) 2. Improving living conditions of refuges– 378,0 mln. AZN 3. Oguz-Qabala-Baku water pipeline – 215,7 mln. AZN 4. Reconstruction of Samur-Absheron water channel – 113,9 mln. AZN 5. Tranfers to state budget – 1550 mln. AZN 6. Invetsments to State Investment Company foundation capital - 90 mln. AZN 7. “Bakı – Tbilisi – Qars railway project – 20,7 mln. AZN 8. adjusting share of SOFAZ in ACG project -87,6 mln AZN

11. Partner financial institutions Barclays Bank Plc (UK) BNP Paribas (France) Deutsche Bank (Germany) Dresdner Bank (Germany) JP Morgan Bank (US) HSBC (UK) Royal Bank of Skotland (UK) UBS AG (UK) Hypovereinsbank AG (Germany)

12. Income sources of SOFAZ, 2008 NIncome sources Income amounts (thousands AZN) 1.Net incomes from selling of carbohydrates of Azerbaijan3 473 109,6 2.Azerbaijan part of dividends from oil-gas projects (BTC)13 423,2 3.Incomes from managing actives of SOFAZ121 928,2 4.Other incomes900,0 Total3 609 361,0 Source: SOFAZ, 2008

13. Expense direction of SOFAZ, 2008 № Expense direction Expense amount (thousands AZN) 1. Improving living conditions of refuges 145 000,0 2.2. Tranfers to state budget 1 100 000,0 3. Oğuz-Qəbələ zonasından Bakı şəhərinə su kəmərinin çəkilməsi layihəsinin maliyyələşdirilməsi 211 820,0 4.Oguz-Qabala-Baku water pipeline120 600,0 5.“Bakı – Tbilisi – Qars railway project88 682,0 6.State program on youth educating in foreign countries, 2007-20155 000,0 7.7.Management expensesDövlət Neft Fondunun idarə edilməsi ilə bağlı xərclər9 751,6 Total1 680 853,6 Source: SOFAZ, 2008

14. SOFAZ strategy Azerbaijan president Ilham Aliyev adopted strategy for “long-term and effective use of oil-gas revenues” in September 27, 2004. This strategy covered very general issues, such as development of non oil-gas sector, SME business, infrastructure projects, poverty reduction, development of human capital, improving defense potential, etc. It’s very difficult to define concrete directions as of this strategy. Thus it’s very much important to define concrete indicators for spendings of the Fund.

15. SOFAZ Society Generale Operation SOFAZ invested deposit in 25 million euros to Society Generale (France) and withdrew the amount after 2 weeks ???

16. Net income of Society Generale Financial report of Society Generale, Paris 2008

17. Lessons to be learned from Society Generale case Fund has increased doubts in transparent usage of oil money by large depositing for 2 weeks The fact that our SOFAZ has been working with suspicious bank with not good background increases concerns regarding effective usage of oil revenues Great uncertainty that Fund was choosing its partner banks after serious evaluations.

18. Risks Though SOFAZ declares working by Norway model, its working principles is quite different. Estimation mechanism of SOFAZ for bank selection is not proper. Stabilization is Fund’s main policy, rather than sterilization Transparency of spending of oil money is still a great problem in Azerbaijan.

19. Risks The mission and goals of SOFAZ should be clearly defined. According to decree on establishment of the Fund its actives can be used for “solving main national problems and socio- economic development”. The Fund’s mission and goals should be more specific and areas for Fund’s investment should be shown clearly. Fund should have medium and long term expense strategy. It’s very important to hold public discussions during implementation of this strategy, but no real steps were made for realization of this. There also should be guidelines for legal use of Fund’s actives, as recommended by IMF.