What does the budget of the State Oil Fund for 2022 promise?

On December 24, the Decree[1] of the President of the Republic of Azerbaijan on the budget of the State Oil Fund of the Republic of Azerbaijan (SOFAZ) for 2022 was signed. The decree approved SOFAZ's budget revenues for 2022 in the amount of 10 billion 589 million 701.9 thousand manats, and budget expenditures in the amount of 12 billion 789 million 674.6 thousand manats. The Fund's budget deficit for next year is projected at 2.2 billion manats.

99.37% of SOFAZ budget expenditures will be directed to the transfers to the state budget of the Republic of Azerbaijan in 2022, 0.27% to SOFAZ management expenses, 0.26% to financing the State Program[2] on Increasing International Competitiveness of Higher Education System in the Republic of Azerbaijan for 2019-2023, 0.1% to financing the State Program on Expanding the Educational Opportunities of Azerbaijani Youth in Prestigious Foreign Universities provided for in the Order[3] of the President of the Republic of Azerbaijan No. 2931 dated September 30, 2021.

As can be seen, the basis of the Fund's budget expenditures is the transfers to the state budget. Although the share of this expenditure increased, especially during the pandemic, it will reach its peak next year. According to the cost estimates for the management of SOFAZ in 2022, next year 45.16% of SOFAZ's maintenance costs will be labor costs, and 40.11 percent will be the cost of works and services. The increase in labor costs for the next year by 50 percent compared to 2021 is due to the expected increase in salaries of the Fund's employees from 2022. We would also like to note with regret that the cost estimates for the management of SOFAZ in 2022, approved by the Decree of the President of the Republic of Azerbaijan dated December 23, 2021, are presented in a generalized classification compared to previous years, which can be considered an indicator of reduced transparency.

Furthermore, although 0.1% or 17 million 850 thousand manats of SOFAZ’s budget expenditures for 2022 are projected to finance the State Program on Expanding the Educational Opportunities of Azerbaijani Youth in Prestigious Foreign Universities provided for in the Order[4] of the President of the Republic of Azerbaijan No. 2931 dated September 30, 2021, this State Program has not yet been adopted [5]. Recall that although the Cabinet of Ministers was given 2 months to develop this program by the Order of the President of the Republic of Azerbaijan on Expanding the Educational Opportunities of Azerbaijani Youth in Prestigious Foreign Universities on September 30, 2021, and this time has elapsed, the program has not adopted until the approval of SOFAZ's budget.

Next year, 81.01 percent of the Fund's revenues will be net income obtained from the sale of profit oil and gas falling to the share of the Republic of Azerbaijan, 11.49% - income from placement and management of the Fund's foreign exchange assets, 7.22% - income from bonuses paid by investors in connection with the signing or implementation of oil and gas agreements, 0.22% - income from the transfer of oil and gas through the territory of the Republic of Azerbaijan, 0.06% - the acreage payments of investors for the use of the contract area in connection with the development of hydrocarbon reserves.

The average annual export price of 1 barrel of oil, which is the basic indicator of SOFAZ's budget for 2022, was set at $ 50 next year, the average annual exchange rate of the Azerbaijani manat against the US dollar was set at 1.7 Azerbaijani manats to 1 US dollar.[6

It should be noted that 130.5 percent of SOFAZ's budget revenues and 59.8 percent of budget expenditures for the first 9 months of 2021 have been implemented. The main reason for the increase in revenues is that the net income price of crude oil ($ 61.1) for the relevant date is $ 21.1 higher than the initially projected amount ($ 40). So, the positive difference between the prices created a surplus of $ 1 billion 833.2 million in the Fund's budget. Moreover, since the Fund's extra-budgetary expenditures amounted to $ 1 billion 171 million as of that date, SOFAZ's assets increased by $ 662.2 million or 1.52 percent compared to the beginning of the current year ($ 43,564.3 million) and amounted to $ 44 billion 226.5 million.

Execution of 59.8% of the Fund's budget expenditures was due to the execution of 59.9% of the transfer from SOFAZ to the state budget compared to the forecast.

Table 1 presents a comparison of SOFAZ's expected revenues for 2021 with the actual indicators of the previous year and the forecast for the next year.

Table 1. SOFAZ’s budget revenues, 2020-2022, in million manats

Source: Chamber of Accounts of the Republic of Azerbaijan

As can be seen from the table, the Fund's budget revenues in 2022 are projected to be 17.8 percent lower than expected in 2021, and 13.1 percent higher than the actual revenues in 2020. Compared to 2020, the largest decrease in the Fund's sources of income in 2022 is projected at 38.5 percent of revenues from the management of the Fund’s assets. So, in 2022, revenues from the asset management of the State Oil Fund are projected to be $ 715.8 million or 1 billion 216.8 million manats, which is 761.8 million manats or 38.5 percent less than the relevant execution indicator of 2020, 457.1 million manats or 60.2 percent more than the forecast indicator for 2021, 265.6 million manats or 17.9 percent less than the expected execution indicator of 2021.

According to the results of the first 9 months of 2021, the Fund's foreign exchange assets management earned $ 1 billion 333.1 million; however, as SOFAZ's extra-budgetary expenditures reached $ 1.171 billion, net income was $ 162.1 million or 0.37 percent, taking into account the exchange rate difference from the Fund's assets management. According to the Fund's investment policy for 2021, at least 50 percent of the investment portfolio consisted of debt obligations and money market instruments, about 25 percent - stocks (shares), about 10 percent - real estate, and about 15 percent - gold sub-portfolios. As of October 1, 2021, the Fund's extra-budgetary expenditures amounted to $ 1 billion 171 million, of which $ 505 million was due to gold and $ 666 million was due to exchange rate differences. In terms of negative foreign exchange earnings, the euro ($ 502.1 million), TRY ($ 54.1 million), and JPY ($ 52.8 million) portfolios prevailed.

The base currency of the Fund's investment portfolio for 2022 is set in US dollars. Provided that at least 90% of the total value of the investment portfolio is in assets denominated in the currencies of countries with a credit rating of not less than "A" (Standard & Poor's, Fitch) or "A2" (Moody's) determined by international credit agencies, 65% of the total value of the Fund's investment portfolio can be invested in assets denominated in US dollars, 20% in assets denominated in euros, 5% in assets denominated in pound sterlings, and the remaining 10% in assets denominated in other currencies.

As of October 1, 2021, the total amount of investments in SOFAZ real estate complexes amounted to 2 billion 658.1 million US dollars. The Fund has invested in an office complex at 78 St. James’s, West End, London, worth £ 133.75 million; the Gallery Actor office and shopping center at Tverskaya 16, a business center in Moscow, worth 3,038.1 million Russian rubles; a real estate complex at 8 Vendome Square, Paris, worth € 180.3 million; and a new shopping center in Tokyo, worth $ 56.742 billion.

In December 2012, SOFAZ bought a property in the London real estate market worth 177 million 350 thousand pound sterlings. The value of the property, located at 88 St. James's, West End, London (for some reason, all official records say 78s[7] as of October 1, 2021, according to revaluations, amounted to 133 million 750 thousand pound sterlings. Thus, the loss of SOFAZ from the depreciation of this property alone amounted to 43.6 million pound sterlings or 100 million manats. But the losses do not end there. During the first nine months of this year, SOFAZ had a negative return on this property of 22 million 276 thousand 707 pound sterlings or more than 50 million manats. SOFAZ attributes this to the ongoing renovation of the London-based real estate, which was started by SGC Scaffolding LTD in 2018 and is ongoing (not that 4 years have passed since 2018 but repairs are still ongoing), and the lack of a lessee in the property. As can be seen, SOFAZ's losses from real estate transactions in London alone are more than 150 million manats a year.

However, according to the Pandora Papers [8], the Aliyev family and their partners earned £ 30 million 956 thousand from the sale of property, which is located on 56-60 Conduit Street, London, and registered in the name of offshore companies, to the Queen's estate. So, they bought the property for 35 million 544 thousand pound sterlings and sold it for 66.5 million pound sterlings.

[1] Azərbaycan Respublikası Dövlət Neft Fondunun 2022-ci il büdcəsi haqqında Azərbaycan Respublikası Prezidentinin Fərmanı, https://static.president.az/media/W1siZiIsIjIwMjEvMTIvMjMvMm51eTdnYWM1al9BUkRORl9CVURDRS5wZGYiXV0?sha=9cd5b0c8c88b928c

[2] http://www.e-qanun.az/framework/40711

[3] https://edu.gov.az/az/esas-senedler/azerbaycan-genclerinin-nufuzlu-xarici-ali-tehsil-muessiselerinde-tehsil-imkanlarinin-genislendirilmesi-haqqinda-azerbaycan-respublikasi-prezidentinin-

[4] https://edu.gov.az/az/esas-senedler/azerbaycan-genclerinin-nufuzlu-xarici-ali-tehsil-muessiselerinde-tehsil-imkanlarinin-genislendirilmesi-haqqinda-azerbaycan-respublikasi-prezidentinin-

[5]  “Azərbaycan gənclərinin nüfuzlu xarici ali təhsil müəssisələrində təhsil imkanlarının genişləndirilməsi haqqında” Azərbaycan Respublikası Prezidentinin 2021-ci il 30 sentyabr tarixli 2931 nömrəli Sərəncamının icrasının təmin edilməsi barədə https://nk.gov.az/az/document/5612/

[6] Azərbaycan Respublikası Dövlət Neft Fondunun 2022-ci il büdcəsinin layihəsinə Azərbaycan Respublikası Hesablama Palatasının Rəyi, https://sai.gov.az/files/SON%20ARDNF%20R%C6%8FY%20Final%20(03.12.2021)%20%C3%BCmumi-683401474.pdf

[7] https://www.oilfund.az/investments/real-estate

[8] https://www.occrp.org/en/the-pandora-papers/azerbaijans-ruling-aliyev-family-and-their-associates-acquired-dozens-of-prime-london-properties-worth-nearly-700-million