Oil revenues spending and management : how to secure risks Vugar Bayramov, phd

Oil revenues spending and management : how to secure risks

• Vugar Bayramov, phd.,

• CESD, EITI Coalition, www.cesd.az

Introduction

• Allocation direction of State Oil Fund

• How partner banks are determined ?

• Risks and effective use of oil money

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.

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

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)

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.

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

• ???

Fund has increased doubts in transparent usage of oil money by large depositing for 2 weeks

• 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.

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.

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.