Managing of Oil Boom: SOFAZ’s Inefficient Investment Policy

Managing of Oil Boom: SOFAZ’s Inefficient Investment Policy

Oil Fund of Azerbaijan (SOFAZ) has purchased 10 tons of gold. That gold, now,  is kept at London banks and preparations are carried out in direction of bringing it to the country. SOFAZ has applied to the Cabinet of Ministers in connection with exemption of gold from customs duties. The gold will be kept at special storehouses of the CBA- SOFAZ announced on September 21th, 2012.

SOFAZ reported that preparation process of draft budget for 2013 approaches the end: ‘The draft considers implementation of big oil-gas projects. The Fund spent $200 mln to purchase of foreign companies’ shares, so far. By the year-end, this sum will be reached up to $600 mln. In the coming days the Fund will buy property in some countries’.

The State Oil Company presently holds 95% of its reserves in dollars and euros. 62% of these asserts located in Europe.

The cost of real estate in the West has dropped dramatically during the crisis. Gold has very powerful capacity that it price always increases. Under these circumstances how strategically sound is the timing of SOFAZ’s decision to purchase real estates in some European cities and a great amount of gold?

Although VugarBayramov, the Chairman of Board at the Center for Economic and Social Development (CESD), regards purchasing gold as a positive step, he considers it a tardy decision: “Since 2008, we proposed that the Oil Fund keep at least one part of its assets in gold. At that time it was not prudent to keep the assets in foreign currency. On the contrary, gold was the most profitable investment during the global economic crisis. In this regard, keeping some assets in gold has been always reliable. Unfortunately, the Oil Fund didn’t decide to keep assets in gold. Since the beginning of the global financial crisis, the price of gold has increased by 3.5 times. Because the price of gold has risen dramatically, the decision not to keep assets in gold deprived SOFAZ of substantial opportunity to profit. Buying gold now can be considered as  a delayed decision. Although converting some assets to gold is a positive step, it should be taken into account that the price for gold has fallen 6% for the last six months. After a 1% drop last month the price of gold is now $ 50,6 per gram on  the world market.”

Investment in real estate is, likewise, considered a positive, but late decision, too. Mr. Bayramov notes that: “As we said before, the crisis created a lot of opportunities for local businessmen and state funds in Azerbaijan to capitalize on the decrease in real estate prices abroad. The lowest cost range in the USA and EU for  real estate was in 2008-2009.Although the Oil Fund was quite active that time, it didn’t prefer to purchase real estate and instead kept  a significant part of its assets in banks. As a result, the Oil Fund didn’t benefit from the price decrease. At the same time, Norway’s Oil Fund took advantage of the price decrease in 2008 and purchased three large estates in Paris. Since then, the cost of the property has increased 3, 5 times. This process shows that decision making on how and where asserts ought to be kept should be flexible. All in all, investing in real estate is more reliable than keeping money in funds because significant price reduction in real property is not expected. Generally, I consider all of the Oil Fund’s decisions to be late ones. If these steps had been made in 2008, then assets of the Fund would have doubled.”

According to the opinion of the economist, the investment policy of the Oil Fund shows that the current processes at SOFAZ do not have flexible decision-making. Practically speaking, in most cases the management of the Oil Fund’s assets generates minimal real income.

© CESD, 2012

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