AZERBAIJAN'S STATE OIL FUND: 2007 PERFORMANCE AND PLANS FOR

UNCLAS BAKU 001518 SIPDIS SIPDIS SESITIVE DEPT FOR EUR/CARC DEPT PASS TO TDA FORSTEIN, EXIM FOR GLAZER ANKARA FOR FCS COMMERCE FOR 4231 ITA/MAC/ORUE FOR DSTARKS COMMERCE FOR 3004 ITA/FCS/ ADVOCACY FOR ACHAMS-EDDINE E.O. 12958: N/A TAGS: ECON EINV ETRD ENRG EFIN AJ SUBJECT: AZERBAIJAN'S STATE OIL FUND: 2007 PERFORMANCE AND PLANS FOR ¶2008. SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION - PLEASE HANDLE ACCORDINGLY ¶1. (SBU) In 2007, Azerbaijan's State Oil Fund (SOFAZ) assets grew by 45.5 percent and totaled USD 2.195 billion on October 1. During 2007, SOFAZ earned 2.8 percent or USD 61.3 million of interest as a result of the asset management operations. SOFAZ's asset allocation is 55 percent in U.S. dollars, 35 percent in Euros, 5 percent in British pounds, and other currencies. The Fund plans to decrease its dollar assets to 50 percent and increase its Euro holdings to 40 percent in 2008. SOFAZ's holdings of U.S. Treasuries totaled 49 percent of its dollar-denominated portfolio. SOFAZ uses two international money management companies, Clariden-leu and Deutsche Asset Management, and the World Bank's treasury management services, to manage its assets. ¶2. (SBU) In 2007, the Oil Fund's budget totaled USD 2.49 billion, up 56.4 percent compared to 2006. Revenues totaled USD 1.588 billion and expenditures totaled 901 million for the first three quarters of ¶2007. This is an 82 percent increase in revenues and only a 24 percent increase in expenditures compared to 2006. SOFAZ assets grew by 45.5 percent during the year and totaled USD 2.195 billion. This is a 34 percent total increase compared to 2006. ¶3. (SBU) In 2007, SOFAZ transferred 62 percent (approx. USD 557 million) of its total expenditures to the state budget. In addition, 17 percent of its expenditures, or USD 129 million, went to the improvement of social conditions of IDPs and refugees, 4.5 percent, or USD 40.5 million, to the financing and reconstruction of the Samur-Absheron irrigation system, 7.3 percent, or USD 66.3 million, to financing construction of the Oghuz-Qabala-Baku water supply system, 0.02 percent, or USD 0.23 million, to financing the Baku-Tbilisi-Kars railway road project, and 11.6 percent, or USD 104 million, for the share of the State Oil company in joint exploitation of the Azeri-Chirag-Guneshli oilfield development project. SOFAZ administrative and operational expenses totaled USD 2.5 million (0.2 percent). ¶4. (SBU) In 2008 the Oil Fund is expected to transfer to the state budget approximately USD 1.309 billion, or 60 percent of its current assets. Apart from this transfer, the Fund plans to continue financing a number of projects "of state importance", such as improving social conditions for IDPs and refugees, constructing a water pipeline from Oquz-Qabala zone to the Baku City, rehabilitating the Samur-Absheron irrigation system, Baki-Tbilisi-Kars railway road project financing, and sponsoring state program on students exchange in 2007-2015. ¶5. (SBU) Comment: Established in 1999, SOFAZ remains the GOAJ's main tool to sterilize energy revenues and save for future generations. Despite the GOAJ's pledges, the recent public poll by the Azerbaijani Service of Radio Free Europe/Radio Liberty shows that people outside the ruling elite are skeptical about promises to share Azerbaijan's oil wealth. In 2002, SOFAZ joined an international anti-corruption effort called the Extractive Industries Transparency Initiative, which required oil companies to publicly report payments to the Oil Fund. According to energy experts, however, while it is easy to monitor contributions to the Oil Fund, it is much more difficult to monitor how they are spent. DERSE