ANNUAL REPORT 2012.indd

Transcription

CONTENTS
INTRODUCTION
2. NATIONAL ECONOMY AND THE OIL FUND
4
10
2.1. Macroeconomic development
10
2.2. SOFAZ Revenues
15
2.3. SOFAZ Expenditures
18
3. INVESTMENT STRATEGY AND RISK MANAGEMENT
28
3.1. Global economy during 2012
28
3.2. SOFAZ investment portfolio
37
3.3. SOFAZ investment portfolio performance
42
3.4. Restrictions on investment
44
3.5. Risk management
46
4. MANAGEMENT
54
5. OIL FUND - TRANSPARENT SOVEREIGN WEALTH FUND
66
5.1. SOFAZ public relations
66
5.2. Extractive Industries Transparency Initiative (EITI) activities
67
5.3. International Forum of Sovereign Wealth Funds
69
6. OUR VALUES: RESPECT, TEAMWORK, TRUST, TRANSPARENCY
76
7. 2012 STATE OIL FUND’S BUDGET EXECUTION
77
8. CONSOLIDATED FINANCIAL STATEMENTS OF THE
STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN
88
APPENDIX
132
INTRODUCTION
ANNUAL REPORT
2012
The Oil Fund, in accordance with its mission and objectives, continued its activity on accumalation
and proper management of revenues generated from Azerbaijan's national treasure-black gold
and also celebrated its 13th anniversary in 2012. As in previous years, the Fund’s assets increased
by 14.5% by the end of the year, reaching USD 34.1 billion. The portion of the Fund’s inflows set
aside for reserves equalled 22.7%.
STATE OIL FUND OF THE
REPUBLIC OF AZERBAIJAN
4
2012 was a successful year in terms of diversification of the investment portfolio of the Fund. The
new investment policy enabled SOFAZ to include new assets, such as gold bullions conforming to
the requirements of London Bullion Market Association (LBMA) and real estates to the State Oil
Fund’s invesment portfolio in 2012. At the same time, Russian ruble, Turkish lira and the Australian
dollar have been included to the Fund’s portfolio.
Starting from 2010, the Fund`s annual reports include quotations from the works of famous
Azerbaijani writers and poets, together with biographical notes. The cultural theme of the State
Oil Fund's 2012 Report will trace the legacy of the founder of Azerbaijani philosophical poetry,
outstanding poet Imadaddin Nasimi.
The State Oil Fund's 2010 Annual Report was the first report to feature this new design and it was
dedicated to the great Nizami Ganjavi, while 2011 Annual Report was honoured to Muhammad
Fuzuli. This new reporting concept, complete with literary quotations, should also serve as a
small but valuable contribution by the Fund to bring the literature of Azerbaijan to international
audience.
Seyyid Imadaddin Nasimi
e
eyyid
Imadaddin Nasimi (1369-1417) is one of the
lleading lights among Azerbai an’s 14th century poets and
intellectuals.
i
Proficient in all three dominant languages of the
Islamic
I
world, this outstanding poet is mainly known through
his
hi unfading
f di lyrical verses (gazal), written predominantly in his mother
tongue, i.e. the Azerbai ani Turkic.
Studies by the European orientalists like H.Purgstall, E.Gibb, H.Ritter,
K.Hewart, F.Barbinger, E.Brown, A.Bombachy or their US counterpart
C.Burill and others shed the light into a number of literary and philosophical
issues related to Nasimi.
The poet used a number of pen names like Seyyid, Huseyni, Nasimi,
Hashimi, Qureyshi, Ibrahimi. Nasimi was the most widespread among
them.
Seyyid Imadaddin Nasimi was born in 1369 in Shamakhy, one of
Azerbai an’s oldest cultural and poetic hubs. The poet’s personal life and
environment is shrouded with real stories and legends. Out of his close
kin, only his brother, Shah Khandan, more or less covered in historic
sources. Some records on Nasimi’s brother Shah Khandan, nicknamed
Julidamu (the disheveled one), are found in recollections by Gastamonulu
Latifi, whereas Ali in his "Kunhul-Akhbar" refers to Shah Khandan’s
famous couplet (beyt) addressed to his brother Nasimi (The mystery of
lords reveal me not, The assets of elite is never the folk’s plot!) and thus
mentions him as a poet in one of his book’s sections. Records by Salman
Mumtaz regarding Shah Khandan’s grave in Shamakhy being a longterm shrine among local people were viewed as another valuable piece
of information by researchers of later generations. The following couplet
by Seyyid Azim Shirvani, another recognized Azerbai ani poet, even
though incomplete, is a clear indication of this:
I wish to be buried at Shahandan upon my decease,
For Shahidi-Khandan’s resting there with ease.
Shah Khandan’s death in 1426 was confirmed by the Turkish researchers.
Upon conversion to Hurufism1 in 1387, Nasimi had been travelling all
over the Middle east for good 30 years disseminating his ideas and beliefs
unless he was atrociously executed in Haleb, Syria, in 1417 following
fatwa (decree) passed by retrograde clerics. As the story goes, innocent
poet admitted his authorship of verses recited by one of his young disciples
who was to be executed for the recital, ust to save a young soul. As a
result, he was apprehended and had his skin stripped off in public.
The poet faced the sentence with courage, so the tortures failed to break
his will. Once Nasimi turned pale from blood loss, one of the clerics
issuing the verdict spitefully asked him: “You claim you are the Truth, so
why have you got that yellow then?” In response, mustering his remaining
strength Nasimi said: “In the skies of eternity it is me who is the Sun of
Truth. No surprise the Sun grows yellow at the sunset”.
According to another story, one of the clerics passing Nasimi’s death
sentence ordered “to chop off and destroy anything that shall have a
droplet of this infidel’s blood on it”. Accidentally, while Nasimi’s skin was
stripped off, a stream of blood resulted on the cleric’s finger. So when
people claimed his finger cut off, frightened cleric stated that he did not
mean this literally. The dying poet bravely gazing at the zealot recited:
While chopped off finger of ascetic cleric turns off his face
from truth he likes to preach,
A poor poet with his skin all stripped off says not a word from
torture, pain and stitch.
This way or another, a tragic death of Nasimi, an innocent person
brutally executed for his verses and beliefs, made him ever more popular
among the masses. No surprise, his grave turned into a shrine over time.
Pilgrimage to Nasimi’s grave since his burial to this very day is a clear
indication of this enduring homage, whereas claims by numerous persons
bearing his name of being of Nasimi’s descent are probably not that far
from real truth.
____________________
1
Hurufism (Arabic:
hurufiyya, adjective form hurufi literal meaning “letters”
[of the alphabet]) was a mystical kabbalistic Sufi doctrine, which spread in areas of western
Persia, Anatolia and Azerbaijan in later 14th - early 15th century.
NATIONAL ECONOMY AND THE OIL FUND
2. NATIONAL ECONOMY AND THE OIL FUND
In 2012, AZN 15.3 billion was invested in fixed capital, of which 79% was internal investments and
21% foreign investments. GDP per capita amounted to AZN 5.9 thousand, real income increased
by 12.5%, unemployment and poverty declined to 5.2% and 6%, respectively. Inflation rate was
1.1%, the lowest level compared to the previous years.
Real sector. The decrease in oil production resulted in 3.8% decline in the volume of industrial
production in 2012. Real GDP growth was greater than in the previous year and the non-oil sector
surpassed oil sector in contribution to the overall GDP. The share of non-oil sector in total GDP
reached 52.7% (Chart 2.1.1).
Source: Ministry of Economic Development
Source: Ministry of Economic Development
of the Republic of Azerbaijan
of the Republic of Azerbaijan
According to the forecasts of local and international organizations, the growth is expected
to be higher in the upcoming year. Thus, based on the latest reports of the World Bank (WB),
International Monetary Fund (IMF), European Bank of Reconstruction and Development (EBRD),
and Asian Development Bank (ADB), the economic growth of the country is expected to be
around 4 % in 2013.
Chart 2.1.1. Share of non-oil sector in total GDP
Chart 2.1.4. Expected economic growth
Source: Ministry of Economic Development of the Republic of Azerbaijan
Industrial production was the largest contributor to GDP with a 50% share. In addition, significant
growth was observed in different segments of the non-oil sector. Thus, the real growth was 18.4%
in construction sector, 7.6% in services, 7.0% in net taxes on products and imports and 5.8% in
agriculture, forestry and fishery sector. Charts 2.1.2. and 2.1.3. present the breakdown and growth
of GDP by sector.
Strategic foreign exchange reserves. The State Oil Fund’s assets under management increased
by USD 4 329.4 million, or 14.5%, from USD 29 800.0 million to USD 34 129.4 million in 2012.
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ANNUAL REPORT
2012
10
The economy of Azerbaijan performed sustainably during the ongoing global economic crisis
which was mainly observed in the Eurozone throughout the previous year. Despite decreasing
crude oil production and diminishing oil sector, gross domestic product (GDP) maintained its
growth rate thanks to the rapid expansion in the non-oil sector of GDP. As a result, in 2012 the
non-oil sector grew by 9.7% and the overall economy grew by 2.2%.
ANNUAL REPORT
2012
2.1. Macroeconomic Development
In recent years, the share of the Fund’s assets in total GDP significantly increased and amounted
to 50% in 2012.
Chart 2.1.6. Share of SOFAZ’s assets in GDP
12
During 2001–2012 the State Oil Fund’s revenues equalled to USD 83.7 billion, 40.8% of which was
set aside for reserves in 2012. The Oil Fund’s reserve level is shown in Chart 2.1.8.
Chart 2.1.8. Revenues and reserves of SOFAZ, 2001-2012 (USD million)
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ANNUAL REPORT
2012
Chart 2.1.7. Strategic Foreign Exchange Reserves of the Republic of Azerbaijan (USD billion)
ANNUAL REPORT
2012
Chart 2.1.5. Growth in SOFAZ assets, 2001-2012 (USD million, as of 31.12.2012)
As of 31 December 2012, the country’s total foreign exchange reserves, including those held by
the Central Bank of the Republic of Azerbaijan (CBAR), amounted to USD 45.8 billion, 74.5% of
which were formed by the State Oil Fund’s assets (Chart 2.1.7.).
Thus, by the end of the last year, 41% of the Oil Fund’s overall revenues were set aside as reserves,
59 % for use.
Chart 2.1.9. The Oil Fund’s reserve level, 2001-2012 (USD million)
In 2012 higher crude oil prices in the world energy markets affected Azerbaijani foreign trade
balance positively. Foreign trade turnover amounted to USD 33 560.8 million, including export
volume of USD 23 908.0 million and import volume of USD 9 652.9 million. Foreign trade balance
surplus was USD 14 255 million (source: The State Customs Committee of the Republic of
Azerbaijan).
Securing fiscal sustainability. The State Oil Fund has played a more prominent role in securing
fiscal sustainability in the state economy for the last few years. The amount of transfers to the
state budget from the Oil Fund has significantly increased since 2008. Thus, in 2012, AZN 9 905.0
million transfer was the major contributor to the state budget revenues.
Chart 2.1.10. SOFAZ transfers as a percentage of state budget revenues, 2003-2012
The Oil Fund’s revenues came to a total of AZN 13 674.1 million (USD 17 405.4 million) in 2012.
They consisted of the proceeds from sales of the Republic of Azerbaijan’s share of hydrocarbons,
as well as transit fees, bonus payments, acreage fees, revenues from management of the Fund’s
assets and other revenues.
Chart 2.2.1. Structure of SOFAZ revenues, 2012 (USD million)
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ANNUAL REPORT
2012
14
2.2. SOFAZ Revenues
ANNUAL REPORT
2012
At the same time, there was a reduction in the volume of export and import equal to 10% and
more than 1% respectively, compared to the last year. This was mainly due to the reduction in
crude oil production in 2012.
As one of the main courses of SOFAZ’s activity, in 2012 a part of the Fund’s assets was directed
to financing major national scale projects in order to support socio-economic progress. In 2012
part of SOFAZ’s funds was allocated to implementation of state programs and activities aimed
at reduction of poverty, as well as investing in infrastructure and development of human capital
through financing the foreign education program.
Foreign trade. The global economic crisis imposed downward pressure on the foreign trade
volume. The position of the advanced economies in the world trade deteriorated compared to the
previous year. Thus, the growth of export decreased from 5.6% to 2.1% in advanced economies
and from 6.6 % to 3.6% in emerging economies during the last year.
Proceeds from profit oil and gas sales. In 2012, the State Oil Fund received a total of AZN
13 117.4 million or USD 16 695.8 million from sales of the Republic of Azerbaijan’s share of
hydrocarbons (Chart 2.2.2.).
Chart 2.2.2. Proceeds from profit oil and gas sales by fields, 2012 (USD million)
Acreage fees. Another source of SOFAZ’s revenues in 2012 was acreage fees paid by foreign
investors for the utilization of contract areas for development of hydrocarbon resources. Acreage
fees received by the Oil Fund in the year under review amounted to a total of AZN 3.0 million or
USD 3.8 million (Table 2.2.2.).
The State Oil Company of Azerbaijan Republic (SOCAR) deducts the costs of oil transportation,
banking, customs clearances, surveying, marketing and insurance costs before transferring the
proceeds from profit oil sales to the State Oil Fund.
Revenues from SOFAZ’s asset management. SOFAZ asset management revenues amounted to
AZN 544.0 million or USD 693.5 million, yielding 2.2% rate of return in 2012.
Transit fee revenues. Revenues from transportation of oil and gas through the territory of
Azerbaijan (transit fees), which amounted to AZN 7.9 million or USD 10 million, was another
source of SOFAZ’s revenues in 2012 (Table 2.2.1.).
Table 2.2.1. SOFAZ transit fee revenues, 2012
Transferor
Date
AIOC
AIOC
AIOC
AIOC
AIOC
AIOC
AIOC
AIOC
AIOC
AIOC
AIOC
AIOC
Total
12.01.2012
14.02.2012
02.04.2012
12.04.2012
24.05.2012
14.06.2012
12.07.2012
14.08.2012
13.09.2012
12.10.2012
14.11.2012
13.12.2012
Amount
USD mln.
0.6
1.0
0.9
1.0
1.0
0.4
0.4
1.0
1.0
0.9
0.8
1.0
10.0
AZN mln.
0.5
0.8
0.7
0.8
0.7
0.3
0.3
0.8
0.8
0.7
0.7
0.8
7.9
Oilfield
Date
GDF SUEZ E&P ABSHERON B.V.
Total E&P Azerbaijan B.V
BP International
Absheron
Absheron
Shafag-Asiman
Bahar and
Gum-deniz
Bahar Energy Limited
Total
Amount
28.06.2012
29.06.2012
29.06.2012
USD
mln.
0.5
1.0
2.1
AZN
mln.
0.4
0.7
1.7
10.10.2012
0.2
0.2
3.8
3.0
Bonus payments. Another source of SOFAZ’s revenues in 2012 was bonuses paid by investors for
signing and fulfilling oil and gas contracts. The Fund received a total of AZN 1.6 million or USD 2.0
million in bonus payments in 2012 (Table 2.2.3.).
17
Table 2.2.3. SOFAZ bonus payment revenues, 2012
Transferor
Oilfield
Date
UGE-LANCER
Total
Balakhani
02.02.2012
Amount
USD mln.
AZN mln.
2.0
2.0
1.6
1.6
Other revenues. In the year under review, assets (obsolete or unused metal scrap, pipes) received
from investors (international oil companies) under oil and gas contracts were sold, bringing SOFAZ
AZN 0.2 million or USD 0.3 million.
ANNUAL REPORT
2012
16
Transferor
ANNUAL REPORT
2012
Table 2.2.2. SOFAZ acreage fee revenues, 2012
2.3. SOFAZ Expenditures
Chart 2.3.2. SOFAZ transfers to the state budget in 2003-2012 (AZN million)
The Oil Fund’s expenditures in 2012 amounted to AZN 10 573.6 million. The major areas of
spending were:
1) Transfers to the state budget;
2) Funding social projects;
ANNUAL REPORT
2012
4) Funding human capital development program;
5) Administrative expenses.
Chart 2.3.1. Structure of the SOFAZ expenditure in 2012 (AZN million)
Financing the improvement of the social and economic conditions of refugees and internallydisplaced persons. In 2012 the Fund allocated a total of AZN 300.0 million for these purposes.
Total allocation to this project has been AZN 1 157.8 million since 2001. SOFAZ’s resources directed
to the construction of 61 private house settlements for 20 778 families, along with multi-story
buildings and a number of social and infrastructure facilities. The project aims to provide homes
and appropriate social, cultural and other facilities to enable refugees and internally-displaced
families driven from their homes by the conflict between Armenia and Azerbaijan over NagornoKarabakh to settle and improve their social and living conditions.
Samur-Absheron irrigation system reconstruction project. In 2012 SOFAZ allocated AZN
200.0 million to this project. A total of AZN 895.5 million has been allocated to this project since
2006. AZN 82.9 million was allocated for construction of the Takhtakorpu water storage with
hydroelectric station, AZN 80.8 million for the Takhtakorpu-Jeyranbatan water canal construction,
AZN 35.8 million for the Velvelechay-Takhtakorpu canal construction and AZN 0.5 million for
personnel expenses based on the request from OJSC “Melioration and Water Economy”, which is
responsible for the program implementation.
The project is designed to create a reliable water supply to Baku and Sumgait, enable energy
efficient water transportation and create electricity generation capacity of 25 MW.
Transfer to the state budget. In 2012 the amount of transfers to the state budget from SOFAZ
was AZN 9 905.0 million, which constituted 93.7% of the Fund’s total expenditures. Total transfers
to the state budget from SOFAZ amounted to AZN 35 085.0 million since 2003.
New Baku-Tbilisi-Kars railway construction project. In 2012 SOFAZ provided AZN 119.0 million
to finance this project. The total allocated amount to the project has been AZN 341.5 million since
2007. The main purpose of the project is to enhance the transit capacity of the region’s countries
by building a railway line that goes through Azerbaijan, Georgia and Turkey connecting the TransEuropean and Trans-Asian railway networks. To this end, the project envisages building a KarsAkhalkalaki railway line, 76 km of which will pass through Turkey and 26 km through Georgia, as
well as restoring and reconstruction the 160 km of Georgia’s Marabda-Akhalkalaki railway.
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ANNUAL REPORT
2012
18
Funding of social and infrastructure projects. In 2012 SOFAZ continued to finance important
infrastructure and social projects in the country, as well as the government program on the human
capital development.
3) Funding infrastructure projects;
Financing the “State Programme on the Education of Azerbaijani Youth Abroad in the
years 2007-2015”. This program helps to realize the idea of “transforming black gold into
human capital”. A total of AZN 54.8 million has been spent to fund the program since 2008.
SOFAZ allocated AZN 20.0 million to finance the program in 2012. Based on the request from
the Ministry of Education of the Republic of Azerbaijan which is responsible for the program
implementation, the Oil Fund allocated AZN 11.9 mln. for accommodation, AZN 6.6 mln. for
tuition, AZN 0.8 mln. for travel, AZN 0.3 mln. for health insurance, AZN 0.1 mln. for visa and
registration, AZN 0.3 mln. for the other expenditures and AZN 0.13 mln. for administrative and
organizational costs of the partner organizations collaborating with the Ministry of Education. As
of 1 January 2013, the education abroad of 1590 students, 370 of whom had already graduated,
was financed through the Program. In 2007-2012 among the priority areas identified by the
Ministry of Education for this Program medicine, public administration, engineering, information
and communication technologies were the most popular choice among the students. Chart 2.3.3.
presents a breakdown of graduates by countries of study.
The State Oil Fund’s administrative expenses were as follows: payroll/salary – AZN 2.35 million;
procurement of goods and services – AZN 0.94 million; pension and social benefits – AZN 0.06
million; grants and other payments – AZN 0.04 million; other expenses – AZN 4.59 million;
acquisition of intangible assets – AZN 21.64 million.
20
21
Chart 2.3.3. Distribution of graduates by countries of study
Administrative expenses. SOFAZ allocated AZN 29.6 million to the Fund’s Administrative
Expenses in its 2012 approved budget, which constituted 0.3% of the Fund’s total budget
expenditures.
ANNUAL REPORT
2012
Building human capital
ANNUAL REPORT
2012
Nasimi’s Humanistic Message
n
nfluenced
by socio-philosophical accomplishments of the
ancient world, the Islamic ideas of humanism reached
a
ttheir culmination in the literary and philosophical works
bby Nizami Gan avi, an outstanding Azerbai ani poet
th
off th
the 12 century. One may only regret that ust 15 years after
Nizami’s decease, this humanistic legacy was flouted and consigned
to oblivion for a good century as a result of violent foray by the
Mongol hordes that had overtaken all of the Middle East as the
divine scourge. Faced with unprecedented horror, people lost faith
in themselves, even though for a short time. However, since virtue
should always prevailed over vice in human nature, this domain of
darkness did not last long, and the principles of humanity became
dominant once again due to the efforts of the lucid minds of the
day. E.g. profound philosophical ideas may be found in the works of
Nasiraddin Tusi (1201-1274), a renowned intellectual, scholar and
astronomer of Azerbai ani descent and a Vizier of Hulaghu Khan,
one of the Mongol rulers. In his "Ahlaqi-Nasiri", N.Tusi offers the
ways for moral perfection and presents a human being at the center
of the Universe and the noblest creature ever.
Inspired by this humanistic tradition, Islamic poets and philosophers
of the 14th century appeared like Phoenix from its ashes to
revive fading hopes and expectations, to dispel the sentiments of
helplessness, and to bring about the belief in the ability of human
beings to master their fate. Imadaddin Nasimi was one of those
leading lights of the late 14th – early 15th centuries capable of
conveying this humanistic message in the three dominant languages
of the Islamic world, i.e. Arabic, Farsi and Turkic.
One of distinct elements featuring Nasimi’s humanism is probably
the poet’s irrepressible talent, the harmony embedded in his nature,
and his enormous affection towards human beauty.
What makes this humanism ever more captivating is Nasimi’s
tremendous love to human beings. This is the reason why, as a
follower of the best traditions featuring the Azerbai ani poetry in
preceding centuries, Nasimi managed to build upon the artistic
images and poetic accomplishments of previous generations.
While delving into Nasimi’s humanistic legacy, what should not be
omitted is the capacious and multifaceted nature of his sentiment
towards human beings. As it was the case with the Mediaeval
Oriental and European Humanists, the anthropocentric nature of
the Universe is dominant in the works of Nasimi. In other words,
contrary to the dominant geocentric theory of the day, the endless
World we live in is centered neither around the Terrestrial Globe
comprising lifeless stones and earth with flammable gases, nor the
Solar Star, but the world’s crown creature, i.e. the MAN.
Meanwhile, what should be also noted in this respect is that Nasimi’s
love towards humankind is far from being indiscriminate. Rather, it
is selective in a sense that the human being revered to by the poet is
the perfect man, the physiological and social entity worthwhile being
considered a human being. Far not any humanlike entity stands to
this definition.
A person who succeeded in ascending to this top level is viewed as
the Almighty’s messenger on Earth, so with a sense of enormous
pride the outstanding intellectual admits that the only reason of his
not being called The Truth (Allah) was the fear of mixing him with
the Almighty. That being said, reaching the status of a perfect man
requires tremendous efforts, torment, breadth of mind and soul, as
well as sincere love to one’s neighbors and all creatures around.
Following ideas Nizami, Ibn Khaldun and other progressive
intellectuals and poets of previous centuries who advocated equal
rights for all people in the world and explained visual diversity
among people by peculiarities of social and geographic environment,
Nasimi was ardently promoting the ideas of equality for everyone
under the Almighty’s protection whereby not a single religion or
ideology was considered superior towards the others.
Humanistic message of Nasimi and his sentiments towards the
humankind may be sensed not only in the contents of his works, but
in the very way they were written, i.e. the rhythm, the articulation,
the harmony, and the alliteration. The rhythmics of Nasimi’s gazals
beats in unison with readers’ hearts evoking love and oy with internal
tranquility invariably accomplished. No doubt, what stands behind
this is an enormous love to fellow-men featuring the poet himself.
Gazal
For the yearning lover pains of love are sweet to bear.
Heresy and Islam are the same to lover’s eyes.
Anguish the beloved causes always gratifies.
Like a prince the lover is wherever he abides.
He in whose direction the beloved casts her eyes
Since in all the world the one you love can have no like,
Insight gains – his name is the all-seeing one, the wise.
By this token your beloved you shall recognise.
O full moon, your beauty into tumult throws the skies.
He who views the Kaaba and the idol not as one,
Look up to the heavens and you’ll see there groans and sighs.
Though advanced in years, is yet unready to be wise.
It’s for your sake Nasimi his being has renounced.
You who tell my fortune, casting lots before my eyes,
See with what ma estic presence does the poor man rise!
Do not cast again! What you have forecast satisfies.
That poor man, who in pursuit of love prostrated lies,
With the name of King Khosrov the world shall eulogize.
Man of power, be not tempted by the world of wealth,
For it is of little worth. Such wealth you should despise.
Keep away and wash your hands of this unworthy world,
For its captive is the man whom riches tantalize.
You who love the countenance of Kaaba, with a prayer
Come to love’s arena where with silk the wild thorn vies.
Imadaddin Nasimi
“Poems” translated by Peter Tempest
1973, page 31
INVESTMENT STRATEGY AND RISK MANAGEMENT
3. INVESTMENT STRATEGY AND
RISK MANAGEMENT
2012 was marked by the deterioration of the economic growth rates in both developed and
emerging economies. A slowdown in global growth at the beginning of 2012 was deeper than
expected, as the growth equalled to 2.9% at the yearend vs. 3.4% forecasted. European growth
amounted to -0.6% for the Eurozone vs. +0.2% expected at the beginning of the year. In general,
the Eurozone, as well as the United Kingdom slid into recession. The GDP growth rate equalled
7.7% in China, 1.0% in Brazil in 2012. On the other hand, US growth was in line with forecasts at
the beginning of 2012 equalling to 2.2% on average.
In general, global growth dropped by nearly one percentage point in 2012, from 3.8% (in PPP
terms) in 2011 to 2.9% in 2012. After the inflationary shock in 2011, inflation tended to decrease
in most countries.
Chart 3.1.2. Inflation rates in the USA, Eurozone and UK (2006-2012, percentages)
ANNUAL REPORT
2012
3.1. Global economy during 2012
A deepening Eurozone crisis played a crucial part in deterioration of global economic environment.
The global trade dropped from 4.5% in 2011 to 2.5% in 2012. Fiscal austerity in Europe, the
ongoing deleveraging among private economic agents in developed countries, as well as the
monetary tightening in 2011 played a significant role in a slowdown in growth in most countries.
However, highly expansionary economic policies in 2012 of the United States have helped them
to maintain stable growth rate. Japan was exception as well, as the latter benefited from the aftereffects of the Fukushima disaster.
Chart 3.1.1. Rates of growth in GDP in the USA, Eurozone and UK (2006-2012, percentages)
28
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ANNUAL REPORT
2012
Source: Bloomberg
Elections in the United States were the most significant event in the country. However, they did
not change the political configuration that had prevailed in the previous two years and resulted
in re-election of Barack Obama.
Source: Bloomberg
The economic growth rates were in line with forecasted and equalled to 2.2% on average in
2012 after 1.8% in 2011. Highly expansionary economic policies in 2012 of the United States
have helped them to maintain stable growth rate. Fiscal policy did not become restrictive and
monetary policy continued to ease. As a result, the fiscal deficit declined to 6.7% in 2012 from
8.6% in 2011.
at the end of 2012. In general, the unemployment rate stayed on its upward trend, rising from
10.16% at the beginning of the year to 11.37% in December. However, in Spain unemployment
rate increased sharply and amounted to 26.06%.
Chart 3.1.3. Unemployment rates in the USA, Eurozone and UK (2006-2012, percentages)
ANNUAL REPORT
2012
About 1.8 million jobs were created during 2012 and country’s unemployment rate at 8.3% in
January went down slightly to 7.7% in December. Real estate sector improved as well in 2012 as
investment in structures and residential investment accelerated, prices returned to upward trend
and inventories fell. On the other hand, household consumption dropped to 1.8% in 2012 against
2.5% in 2011.
A deepening sovereign debt crisis continued to deteriorate social and economic situations in the
Eurozone and was the main factor driving the economic slowdown in the region. The peripheral
countries and other countries in the zone as well suffered from the ongoing fiscal austerity, even
though due to interventions by the European Central Bank, financial environment gradually
improved.
Similar to 2011, the Eurozone economy was characterized by its heterogeneity in 2012 as well.
Thus, while some countries showed positive growth rates, for instance growth rate in Germany
equalled to 1% on average, other countries in the Eurozone gradually slid to recession, showing
falling GDP. Italy and Spain have been facing severe problems since the second half of 2011
and continued to show signs of recession in 2012 as well. Hence, growth rate in Spain and Italy
equalled -1.6% and -2.1%, respectively. France avoided recession, however, showed very modest
growth rate amounted to 0.1%. The United Kingdom also showed signs of weakness in 2012 with
a recession of 0.2%.
The fiscal deficit in the Eurozone was reduced from 4.1% of GDP to 3.5% in 2012. Deleveraging
among private agents, as well as the negative effects on growth created difficulties for some
countries to keep their deficit commitments.
Inflation remained relatively high in the Eurozone equalling to 2.5% at an annual average, before
declining towards the end of the year. Similar to GDP growth, the significant cross-country
variations were observed on unemployment as well. Thus, the German unemployment rate fell
slightly from 7.05% to 6.83% while the French unemployment rate rose from 9.62% to 10.24%
31
Source: Bloomberg
The monetary policies of countries in 2012 aimed to counter the recessionary effect of the fiscal
deficit and the private-sector deleveraging. While in emerging countries central banks eased their
monetary policies in 2012 via rate cuts, developed countries continued unconventional policy
tools, because rates there were already low. For instance, China lowered the reserve requirement
ratio and twice (in July and August) cut the 1-year lending rate from 6.56% to 6%. India lowered
its rates only marginally by 50 bp to 8%. The Russian central bank in particular was forced to hike
its key intervention rate by 50 bp to 8.5% in September, owing to persistently high inflation.
The Federal Reserve, the central bank of the United States continued its policy launched in 2010
of purchasing treasuries. In October 2011 the Federal Reserve made some changes in monetary
policy namely Operation Twist, to amount to USD 267 bln. In order to drive down long-term
interest rates the FED started selling short-term securities and buying long-term securities. In
September 2012 it launched a third wave of quantitative policy by purchasing of Agency MBS for
an amount 40 bln. per month.
Furthermore, December 2012 meeting at the Federal Reserve resulted in an announcement of
a new programme of purchase of Treasury securities for and amount of USD 45 bln. per month,
starting in early 2013.
ANNUAL REPORT
2012
30
Unlike to the previous year when growing commodities prices led to increasing inflation, 2012
was marked by gradual disappearance of the sharp increase in commodity prices of preceding
year. As a result, inflation fell noticeably over the year to 2.1% on average after 3.2% in 2011.
Chart 3.1.4. Leading countries’ central banks interest rates (2002-2012, percentages)
The Bank of Japan launched its government bond (JGBs) purchase programme in order to prevent
the persistent deflation and in attempt to weaken the yen.
Chart 3.1.5. 5-year Credit Default Swap (CDS) of named European countries (basis points)
ANNUAL REPORT
2012
Source: Bloomberg
In the reporting year European Central Bank (ECB) was very active in implementing of
unconventional monetary policies to prevent widespread recession and growing liquidity crisis,
as the interbank market seized up, and reduce sovereign risk. In July 2012 the ECB officially
announced the closing of the SMP (Securities Markets Programme) and the launch of OMT
(Outright Monetary Transactions). According to this programme, sovereign papers with short
maturities up to 3 years should be purchased in secondary market. In 2012 ECB allotted unlimited
amounts of liquidity to the banks with a maturity of 3 years. ECB also launched a next Very Long
Term Refinancing Operation in late February which amounted to EUR 530 bln.
In July 2012 the ECB also lowered the Refi rate by 25 bp to 0.75%. Consequently, this rate went
below 1% for the first time since the creation of the ECB. As a result of the weakening economic
growth short-term interest rates decreased during the year and reached very low level, reflecting
the excess liquidity and the fall in banking risk.
The Bank of England (BoE) extended its government bond purchase programmes, by purchasing
Gilts for GBP 100 bln. in 2012 bringing the total amount held to GBP 375 bln. Additionally, in
August it launched a new programme which aimed to help the banks to obtain cheap funding
over a period of up to 4 years.
33
Source: Bloomberg
Equity market
In 2012, coordinated efforts by central banks, especially by the ECB, contributed to positive
performance of the major stock indices. The MSCI World Index, composed of stocks of 24
developed countries, ended the year with a +12.2% return, while MSCI EM Index, the stock market
measure of developing countries, examined +15.1% return. Major US broad market index, S&P500
increased +13.4% over the year, mainly due to the strong positive earnings. The first quarter of the
year which saw a monetary interventions by central banks and rise in stock prices, was followed
by macroeconomic and political risks during the second quarter and consequently major declines
in both MSCI World and MSCI Emerging Markets indices. Coordinated monetary easing measures
by the ECB, the Fed and the People’s Bank of China resulted in major gains in European stock
prices in Q3. Due to uncertainty with Spain, the fourth quarter was characterized by volatility in
stock prices. Overall, European stock market gauge, Eurostoxx posted a positive gain of 15.2%
during the 2012. In terms of individual country performances, German DAX showed the most
significant increase of 29.1% over the year. France’s CAC40 gained 14.6%. Similar to previous years
since the beginning of sovereign debt crisis, South European countries, Spain, Italy and Portugal
were among the worst stock market performers in Eurozone, with Spanish IBEX, Italian MIB and
Portuguese PSI posting annual returns of -5.1%, +7.8% and +3%, respectively. Exception was
ANNUAL REPORT
2012
32
Greece; driven by the determination of EU member countries to keep the country in Eurozone, its
benchmark index Athex gained 32.5%, following the severe decline of 2011 (-52%).
In Asia, Japanese stock market gauge, Nikkei 225 Index, surged 23% during the year, the strongest
return for the index since 2005. The strong results can partly be attributed to the newly elected
government, which pledged to turn around the nation’s long-suffered economy and undertake
more economy-stimulating measures.
ANNUAL REPORT
2012
The leasing markets have been less resilient however, as corporates focus on productivity gains
and cost savings, rather than on expansion. But even here, improvement in optimism is detected
which should translate into renewed growth in leasing activity during 2013.
Commodity market
The fluctuations experienced by oil prices in 2012 can be explained primarily by market
fundamentals and geopolitical tensions. In the first quarter of 2012, oil prices increased due
to stronger Chinese demand. The announcement of an EU embargo on Iranian oil raised fears
in March that Iran might close the Straits of Hormuz. Consequently, Brent prices increased to
USD 126/bbl in March. In the second quarter, oil prices dropped by almost 28% (USD 90/bbl in
late June) as increasing worries over the Eurozone debt crisis darkened the prospects for global
demand. The downward trend in the price reversed again in July after the European embargo and
US sanctions on Iranian oil came into effect on 1 July. Moreover, high seasonal demand in the US
and EU helped to push oil prices back up in third quarter. During the fourth quarter, high oil prices
were supported by disruptions in Nigerian oil output, as the country experienced a strong decline
in crude oil production and export due to natural disaster.
Chart 3.1.6. MSCI World Index (2002-2012, index points)
Chart 3.1.7. Changes in crude oil price in months (2012, USD/barrel)
35
ANNUAL REPORT
2012
34
Source: Bloomberg
Real Estate
The global real estate market’s movement in 2012 was better than expected. Investment volume
in 2012 slightly exceeded 2011 level by around 2%.
An exceptional rally in 2012 has served to demonstrate the strength of investors’ appetite for core
commercial property. The search for yield in the low interest rate environment, combined with
perceived reduction in macro-economic risks and the selective improvement in debt markets,
is supporting increasing investor activity. In this context real estate market expects investment
volumes to grow more in 2013, with the best upside potential in secondary markets, which are
now beginning to be attractive to investors with their more favourable yields.
Source: Bloomberg
Gold
ANNUAL REPORT
2012
Chart 3.1.8. Changes in gold price in years (1972-2012, USD/ounce)
3.2. SOFAZ investment portfolio
During 2012, SOFAZ’s investment strategy was modified to include several new asset classes and
currencies in accordance with the amendments made into “Rules on management of foreign
currency assets of the State Oil Fund of the Republic of Azerbaijan” in October 27, 2011. As a
result, by the end of the year under review, portion of the Fixed Income securities was decreased
to 94.36%, with new asset classes - Equities, Gold and Real Estate gaining 2.00%, 2.35% and
1.29% of the investment portfolio respectively. New currencies added into currency composition
were Turkish Lira, Russian Ruble and Australian Dollar. SOFAZ targets maximizing returns and
enhancing the diversification of its investment portfolio as a result of these changes.
Chart 3.2.1. Breakdown of SOFAZ investment portfolio by asset classes (31.12.2012)
37
ANNUAL REPORT
2012
36
Central bank demand, consumer demand from China and India and quantitative easing were
major factors that affected gold prices during the year. Central banks from around the world
significantly increased its gold reserves in 2012, as they sought to diversify reserves. Especially, the
central banks of Turkey, Russia, Philippines, Korea and Kazakhstan substantially boosted their gold
reserves during the year. Chinese gold imports from Hong Kong increased sharply, while India’s
gold imports dropped significantly during the year. The main reason for this decrease was the
efforts of Indian authorities to reduce gold imports due to the country’s widening trade deficit.
Quantitative easing had also a significant impact on gold market. Ahead of the introduction of
third round of this programme, gold prices rallied by 12% in Q3.
Fixed Income Investments
Source: Bloomberg
During the year under review, the Fund’s fixed income investment strategy has not undergone
significant changes compared to the previous year. As in 2011, it continued investing primarily in
short-term fixed-income securities as well as commercial papers, and floating rate notes.
The portion of the Fixed Income securities equalled 94.36%, in line with Fund’s Investment Policy,
which implies that at least 85% of the overall portfolio should consist of debt obligations and
money market instruments. The Fund sought to achieve the highest possible return with minimal
risk in the prevailing low-interest-rate environment. The scope of fixed income investments
was also broadened to include lower investment grade securities into portfolio with the aim to
enhance the yield and secure greater diversification.
Chart 3.2.3. Breakdown of SOFAZ fixed income portfolio by currencies
Holdings of short term commercial papers in the Fund’s fixed income portfolio have increased
to 24.74% of total portfolio by the end of 2012 compared to 12.76% a year earlier. On the other
hand, proportion of the Fund’s sovereign debt holdings declined to 11.40% from 17.01% in 2011.
This shift led to drop in the duration of portfolio to 0.36, resulting in less sensitivity to interest rate
movements.
During the year under review, the Fund continued its strategy of achieving geographic diversification
of the investment portfolio. As a result, emerging markets exposure was gradually increased to
13.07% compared to 9.5% a year earlier. In spite of these activities, Europe still remained the
largest exposure of the portfolio by the end of 2012.
ANNUAL REPORT
2012
Chart 3.2.2. Breakdown of fixed income portfolio by product types
In line with the changes into investment guidelines, new currencies - Turkish lira, Russian ruble
and Australian dollar were added to portfolio in the year under review. In accordance with these
guidelines, total amount of investments in new currencies is limited to maximum of 5% of total
assets under management. The Fund got a mandate to invest in Australian government bonds in
2012 and this investment equalled to 0.65% of the portfolio by the end of the year. Turkish lira and
Russian ruble denominated investments were in the form of deposits at the largest local banks
and constituted to 1.43% and 0.31% of the investment portfolio, respectively. Thus, total exposure
to new currencies was in line with the limits put forth by investment guidelines. Exposure to USD,
EUR, and GBP has not experienced significant changes during 2012.
Chart 3.2.4. SOFAZ investment portfolio: Geographical distribution
39
ANNUAL REPORT
2012
38
Promoting emerging market equity funds and making them more visible to investors is of
growing importance. In the year under review, SOFAZ joined IFC by investing in the Catalyst
Fund. The fund of funds is managed by IFC Asset Management Company, LLC, and is
designed to stimulate the development of funds and projects focused on renewable energy
and climate-friendly solutions in emerging markets.
Chart 3.2.5. SOFAZ investment portfolio bonds by credit rating
The IFC Catalyst Fund will invest in funds that provide growth capital to companies developing
innovative ways to address climate change, and invest directly in those companies. The
commitment period of the fund is 3 years for investee funds and 5 years for co-investments. At
the first closing of the fund, SOFAZ committed USD 50 million of the USD 280 million raised.
ANNUAL REPORT
2012
In 2010, SOFAZ also committed USD 100 million to the IFC African, Latin American and
Caribbean Fund (ALAC). The Fund invested USD 1 billion in private sector growth opportunities
in emerging markets. As of December 2012, SOFAZ has contributed USD 54.7 million of its
commitment to the ALAC Fund.
40
During 2012, the Fund also gradually decreased its exposure to high-grade bonds, while increasing
its exposure to lower grade bonds. Thus, investments in ‘AAA’ and ‘AA’ rated securities declined
to 32.96% and 10.98% respectively, down from previous year’s 36.44% and 14.30%. Increase in
exposure to emerging markets and non-investment grade deposit investments in Turkey and
Russia during the year under review, led to significant rise in the portfolio’s exposure to ‘A’ and
below rated investments.
41
New investment policy adopted for year 2012 enabled SOFAZ to invest up to 5% of its assets
into equities. In this area Fund has adopted the passive investment strategy by investing MSCI
World Index, which is comprised of large/mid cap stocks of developed countries. At the initial
stage, SOFAZ has opted to delegate the management of its public equity portfolio to external
managers while building necessary internal capacity and expertise for the subsequent in-house
equity portfolio management in the future. As a result, two financial institutions, UBS Global Asset
Management and State Street Global Advisors, have been awarded with the mandates to manage
the fund’s equity portfolio.
Through external managers, fund has invested a total of USD 600 mln. into equities. At the year
end, the equity portfolio of SOFAZ was comprised of more than 1600 stocks of the developed
countries.
Real estate investments
In 2012, SOFAZ made its foray into real estate market through direct property acquisitions in
several key European cities. Fund’s strategy is aimed at investing in key business cities with high
market transparency, depth, liquidity, landlord friendly laws and practice of very long leases. The
investments were primarily directed into mixed use office space. SOFAZ made its first investment
in London followed by Moscow and Paris:
● 78 St James Street, London, UK for 177,350,000 GBP (285,550,000 USD) completed in
December
● Actor Gallery, Tverskaya 16, Moscow, Russia for 133,000,000 USD completed in December
● 8, Place Vendome, Paris, France for 135,000,000 EUR (180,000,000 USD) to be completed
in March 2013
ANNUAL REPORT
2012
Equity investments
These acquisitions are early examples of SOFAZ’s successful realization of its real estate investment
strategy. The secure income that will be generated tied with strong fundamentals of prime office
space in major world capitals are the defining factors in fund’s investment rationale. From 2013,
the Fund will start broadening its investment geography outside the European market with global
diversification of the real estate portfolio. This is in line with the strategy of diversifying away the
risk of exposure to a single region.
The following information is used for performance measurement:
The portfolio’s COB market value in local currency. The prices provided by the custodian bank
and stored in the Oil Fund’s portfolio management system are used to calculate the portfolio’s
COB market value in local currency. The prices provided by the custodian bank, audited and
stored in the Oil Fund’s portfolio management system are used for calculating the portfolio’s
month-end market value in local currency.
According to the investment guidelines, up to 5% of the SOFAZ’s assets can be invested into
gold and Fund has been making this investment by purchasing the gold bars conforming to
the requirements of the London Bullion Market Association (LBMA). In order to reduce the risks
associated with price fluctuations, fund has scheduled to acquire the planned overall amount of
gold on a weekly basis in equal amounts within two years.
Starting from February 1, 2012, SOFAZ started the purchase of 25 gold bars conforming to the
requirements of London Bullion Market Association (LBMA) per week (10,000 troy ounces) from
the market-maker member banks of LBMA. As of December 31, 2012 14 934 kg of gold (480 146
troy ounces) was acquired. The gold is kept in JP Morgan’s London vault.
In the next stage, it is planned to ship strategically important gold reserves to Azerbaijan and
preserve it inside the country. Currently, in order to get extra return on the gold investments,
some amount of the gold is invested in short-term deposits at the reputable banks operating in
the international financial markets.
3.3. SOFAZ investment portfolio performance
Performance measurement methodology. Returns on SOFAZ assets are calculated in accordance
with the “Performance measurement methodology for the investment portfolio and subportfolios of the State Oil Fund” approved by the Resolution No. 5 of 21 April 2009. In accordance
with this methodology, the AZN, USD or EUR is taken as the base currency in calculating the
performance of the total investment portfolio. Performance is also calculated without a base
currency, i.e. without taking currency exchange fluctuations into account. The performance of the
sub-portfolios is measured in the respective (local) currency of each sub-portfolio and in the base
currency, i.e. USD (provided the impact of the currency component is indicated).
COB net flows defined as the difference between inflows and outflows during the business day.
Net flow figures are calculated by the SOFAZ portfolio management system on a daily basis.
SOFAZ rate of return in 2012. The return on the SOFAZ investment portfolio was equal to about
4.2%, 4.5%, 3.8%, 3.3%, 1% and 0.8% in 2006, 2007, 2008, 2009, 2010 and 2011 respectively. The
return from managing its investment portfolio was equal to 2.2% in 2012.
43
Chart 3.3.1. SOFAZ investment portfolio: Rate of return
ANNUAL REPORT
2012
42
The portfolio’s previous day COB market value in local currency. The prices provided by the
custodian bank and stored in the Oil Fund’s portfolio management system are used to calculate
the portfolio’s previous day COB market value in local currency.
ANNUAL REPORT
2012
Gold
3.4. Restrictions on investment
The Oil Fund’s investment portfolio is managed in accordance with the “Rules on managing
the foreign currency assets of the State Oil Fund of the Republic of Azerbaijan” (“Investment
Guidelines”), approved by Presidential Decree No. 511 of 19 June 2001. According to the Rules,
SOFAZ assets may be invested in the following:
ANNUAL REPORT
2012
● Debt obligations issued by the governments, government agencies, international financial
organizations, for profit organizations and other institutions with long-term investment
grade credit ratings (Standard & Poor’s or Fitch or Moody’s);
● Debt obligations with long-term investment grade credit ratings (Standard & Poor’s or
Fitch or Moody’s) issued by governments, government agencies, international financial
organizations, for profit organizations and other institutions;
● Investments in stocks included in major international equity indices;
● Shares of mutual and alternative investment funds;
SOFAZ currency assets are managed in accordance with the Fund’s investment policy which is
approved by the President of the Republic of Azerbaijan on an annual basis.
According to that policy:
The Oil Fund’s assets must have reasonable liquidity in order to ensure that planned money and
other transfers related to the Fund’s budgetary expenditures can be made in an accurate and
timely manner. For this reason, a proportion of these assets, equivalent to no less than USD 100
million (minimum liquidity level) is to be held in cash or cash equivalents. If minimum liquidity
level is breached, it must be restored within 7 (seven) working days.
The Oil Fund determines the target duration (not exceeding 48 months) of its investment portfolio
in line with the current status of the global financial markets.
The maximum average weight of one specific security or one issuer (excluding depository banks)
in the investment portfolio should not exceed 15% of the total value of the investment portfolio.
● Gold bars conforming to the requirements of the London Bullion Market Association;
● Real Estate;
● Non-investment grade debt obligations or deposits with credit rating of not less than
BB- (Standard & Poor’s or Fitch) or Ba3 (Moody’s). Maximum capital, allocated to those
investments should not exceed 5% of the total value. In this case, the counterparty banks
of the Oil Fund providing custodian (depositary) services and holding correspondent
accounts for Oil Fund may have non-investment grade credit rating (not less than BB(Standard & Poor’s, Fitch) or Ba3 (Moody’s)) (According to the “Rules on management
of the foreign currency assets of the State Oil Fund of the Republic of Azerbaijan”
(“Investment Guidelines”), approved by Presidential Decree No. 511 of 19 June 2001 as
amended by decrees No. 607 of 21 December 2001, No. 202 of 1 March 2005 and No.
519 of 27 October 2011).
Derivatives (i.e. swaps, forwards, futures, etc.) may be used for hedging or optimizing the currency
composition and asset allocation of the Investment Portfolio.
45
External managers
According to the “Rules on managing the foreign currency assets of the State Oil Fund of the
Republic of Azerbaijan” (“Investment Guidelines”), approved by Presidential Decree No. 511 of
19 June 2001 as amended by decrees No. 607 of 21 December 2001, No. 202 of 1 March 2005
and No. 519 of 27 October 2011 an external manager engaged in managing the Fund’s financial
assets, or its parent company, shall have an investment-grade credit rating (of no less than Baa3
(Moody’s) or BBB- (Standard & Poor’s, Fitch)), at least 5 years relevant experience of managing
financial assets or experience of managing financial assets equal to or exceeding USD 1 billion.
In February, 2012 SOFAZ announced the Request for Proposal for selection of managers for
passive equity portfolio management. After a detailed due diligence of all the provided proposals,
State Street Global Advisors (SSgA) and UBS Global Asset Management (UBS) were selected as
the winners and in June, 2012 SOFAZ signed contracts with them. Besides, following the legal
merger between Credit Suisse and Clariden Leu, on April 2, 2012, Credit Suisse assumed all the
rights and obligations of Clariden Leu. Accordingly, from this date onwards, any existing or future
reference to Clariden Leu in any documentation was to be read as a reference to Credit Suisse.
The external managers handling SOFAZ financial assets as of 31 December 2012 are the World
Bank, Deutsche Asset Management, Credit Suisse, SSgA and UBS.
ANNUAL REPORT
2012
44
Investment policy
● Deposits in the central (national) banks, commercial banks and other financial institutions;
3.5. Risk management
Risk management is an essential element of the Oil Fund’s operations. SOFAZ employs globally
recognized, state-of-the-art models, procedures and indicators to handle this particular task. The
Risk manager software application (developed by Riskmetrics) procured in February 2010 has
greatly enhanced the Fund’s risk management capabilities. Its risk management practices are
divided into two areas: financial risks and operational risks.
ANNUAL REPORT
2012
Credit risk. Credit risk is the risk that a borrower will fail to repay the principal or interest on
borrowed funds on time or fail to honour its contractual obligations. Credit risk stems from a
number of sources, such as the borrower’s bankruptcy, credit rating downgrade, etc. As credit
risks increase, investors tend to lend their assets at higher interest rates. Credit risk is an essential
consideration when investing in fixed income assets and key credit rating agencies regularly
assess the credit ratings of thousands of companies, agencies and financial institutions. The credit
ratings of the securities in which SOFAZ invests, as well as their issuers, are regulated by the Fund’s
“Investment Guidelines”.
46
Operational risks
Operational risk is the risk of contingent financial or non-financial losses caused by internal
processes, the human factor and external factors.
Human risk. This is associated with the deliberate or unintentional failure of staff to comply with
the organization’s rules and codes of conduct. SOFAZ closely monitors its staff to ensure strict
compliance with its policies and procedures and to prevent any engagement in illegal market
transactions and disclosures of the corporate commercial secrets. Furthermore, as part of the
personnel’s skill development, staff from relevant departments regularly attend numerous training
seminars and courses, held by investment banks with which the Fund cooperates.
47
ANNUAL REPORT
2012
Market risk. Also commonly referred to as systematic risk, market risk is the risk that a portfolio’s
value will decline because of changes in market risk factors. These include security prices, interest
rates, foreign currency exchange rates and commodity prices. Market risks are tightly controlled
in all investment management companies and SOFAZ is continuously improving control of these
risks. The Fund’s investment portfolio is dominated by short-term bonds. However, it constantly
monitors the central bank interest rates of the countries to which it is exposed and adjusts the
duration of the relevant fixed-income securities accordingly.
Reputational risk. Reputational risk is the risk that the organization may experience difficulties
in maintaining past business relations, establishing new ones or gaining access to capital because
it is perceived negatively by its stakeholders (customers, counterparts, shareholders, regulators,
etc.). An organization might face reputational risk even without violating any law. SOFAZ pays
particular attention to reputational risk and has been able to enhance its reputation and positive
image both at home and abroad a great deal, especially thanks to its success in the Extractive
Industries Transparency Initiative.
Financial risks
“Both Worlds within my compass come,
but this world cannot compass me.”
h gazal-fakhriyye is among Nasimi’s most recognized
his
works indeed. In ust sixteen couplets (beyt), in a very
w
ssuccinct manner, an intellectual poet succeeded in
presenting the human as a driving force of the Universe,
its source off power and beauty. Nasimi’s lyrical “self” implies not
only an individual but the whole of mankind irrespective of language,
faith or race. That being said, Nasimi’s image of a perfect man is
not a statically shaped concept formed once and forever. In fact,
an individual’s ever-lasting strive for perfection with no limit and
ultimate point brings about the artistic expression like “this world
cannot compass me” implying the infinite notion of knowledge and
capabilities. This is the reason why a human being capable of
encompassing the two worlds with his reason is in the meantime
incapable to fit into the mundane framework of the day-to-day life.
And this is exactly the drive behind the eternal quest for spiritual
world. It is this endeavor towards perfection that should rescue the
humankind from ignorance and oppression, murder and massacre,
slavery and humiliation and lead it towards the world of ustice,
enlightenment and universal love.
It goes without saying that gazal penned in the socio-cultural
environment of the Middle Ages is not devoid of religious and
mystical images. As it was the case with all mediaeval poets, Nasimi
was under an obvious influence of his milieu. However, the splendor
of Nasimi, as well as other eminent figures of his time is that they
were capable of being ahead of their time by conveying the message
of eternal values for the generations to come. From this point of
view, the mystical religious imagery and concepts they apply retain
their value to this very day by supporting the vital and global ideas
that never fade.
Even though the ideal ust world the outstanding Azerbai ani poet
Imadaddin Nasimi was strongly striving for and believing in back
600 years ago, is far from being a reality today, the true meritocratic
criteria are still oftentimes trumped over by considerations of
confession and nationality, the double standards prevail world
over with evil and violence unbridled on a number of occasions, the
anthem to humanity passed over in Nasimi’s immortal verses is still
valid, with the message of love, respect and mutual understanding
still finding its way to human hearts.
Pay due regard to form, acknowledge content in the form, because
Body and Soul I am, but soul and body cannot compass me.
I am both shell and pearl, the Doomsday scales, the bridge to Paradise.
With such a wealth of wares, this worldly counter cannot compass me.
I am “the hidden treasure” that is God. I am the open eyes.
I am the ewel of the mine. No sea or mine can compass me.
Although I am the boundless sea, my name is Adam, I am man.
Both worlds within my compass come,
but this world cannot compass me.
I am Mount Sinai and both worlds. This dwelling cannot compass me.
I am both soul and world as well. I am both world and epoch, too.
Both worlds within my compass come, but this world cannot compass me.
Mark this particular: this world and epoch cannot compass me.
An omnipresent pearl am I and both worlds cannot compass me.
I am the stars, the sky, the angel, revelation come from God.
Because in me both earth and heaven and Creation’s “BE!” were found.
So hold your tongue and silent be! There is no tongue can compass me.
Be silent! For there is no commentary can encompass me.
I am the atom, sun, four elements, five saints, and dimensions six.
Both worlds are my inauguration. In your essence I begin.
Go seek my attributes! But explanations cannot compass me.
So know me by this token, though a token cannot compass me.
I am the core and attribute, the flower, sugar and sweetmeat.
Through doubt and surmise no one came to be a Friend of God and Truth.
The man who honors God knows doubt and surmise cannot compass me.
I am Assignment Night, the Eve. No tight-shut lips can compass me.
I am the burning bush. I am the rock that rose into the sky.
Observe this tongue of flame. There is no tongue of flame can compass me
The honey and the sugar, too, I am. The sun and moon I am.
The living spirit I bestow. The spirit cannot compass me.
The bow and arrow, too, I am. I am both old in years, and young.
I am eternal oy. The box for mirrors cannot compass me.
Though I, Nasimi, am today a Hashimite or Kureishite,
My praise is higher. Praise and reputation cannot compass me.
Imadaddin Nasimi
1973, page 16
MANAGEMENT
4. MANAGEMENT
SOFAZ organizational structure
Investment Department (Front-Office)
SOFAZ Supervisory Board
The Investment Department is responsible for developing investment strategy, real estate,
portfolio management and trading. The Department has 3 divisions:
The Supervisory Board, consisting of representatives of the state authorities and public
organizations, carries out general oversight of State Oil Fund operations. The Board reviews and
evaluates the Fund’s draft annual budgets, annual reports and financial statements, along with
audit reports. Members of the Supervisory Board are approved by the President of the Republic
of Azerbaijan. The Board members act on a voluntary (non-remunerable) basis.
Presidential Decree No. 73 of 27 November 2008 approved the new composition of the State Oil
Fund’s Supervisory Board as consisting of the following members:
Artur Rasizade
Prime Minister of the Republic of Azerbaijan
Valeh Alesgerov
Vice-Speaker of the Parliament (Milli Majlis) of the Republic of Azerbaijan
Vahid Akhundov
State Economic Policy Adviser of the Republic of Azerbaijan
Samir Sharifov
Minister of Finance of the Republic of Azerbaijan
Shahin Mustafayev
Minister of Economic Development of the Republic of Azerbaijan
Elman Rustamov
Chairman of the management Board of the Central Bank of the Republic of Azerbaijan
Mahmud Kerimov
President of the National Academy of Sciences of the Republic of Azerbaijan
The Supervisory Board held 1 meeting in 2012. At the meeting on 7 June 2012, Fund’s 2011
annual performance report and the audit findings were discussed and deemed satisfactory. In
addition, the Supervisory Board discussed and agreed on certain changes and amendments to
the Fund’s 2012 annual budget.
On 27 December 2012 Supervisory Board by the means of request discussed and approved the
Oil Fund’s draft annual budget for 2013, its draft investment programme (including its investment
policy), as well as the Fund’s draft administrative expenses. The Board resolved to submit the
Fund’s draft annual budget to the President of the Republic of Azerbaijan for approval.
● the Fixed-Income Division;
● the Equity and Alternative Investments Division;
● the Money Market and Foreign Exchange Division.
Risk Management Department (Middle-Office)
The Risk management Department is responsible for conducting assessments of and preparing
proposals for the Fund’s investment policy and strategic asset allocation (SAA), selecting
benchmarks and risk budgeting. In addition, this department is also responsible for risk and
performance measurement, performance attribution, modeling and research, compliance
supervision and supervision of external managers. The department has 2 divisions:
55
● the Strategic Asset Allocation/Risk and Performance Measurement Division;
● the External Asset Management/ Research Division.
Settlements Department (Back-Office)
Back-Office functions are performed by the Settlements Department, operating under the Fund’s
Finance and Operations Administration.
The Settlements Department is responsible for verifying trades with counterparties, for trade
settlement with the custodian bank and correspondent banks, for reconciling cash and transactions
with statements from the banks, and for reconciling external managers’ transactions and positions
with information from custodians on a daily and monthly basis.
Budget Forecasting and Projects Department
The Budget Forecasting and Projects Department is responsible for forecasting SOFAZ revenue
and expenditures, organizing its budgeting, its economic analysis, strategic research and
macroeconomic modelling work, and for organizing and supporting the activities of the Fund’s
Supervisory Board and the financing of fund-sponsored projects.
ANNUAL REPORT
2012
54
The Oil Fund’s day-to-day activities are managed by the Executive Director who is appointed by
the President of the Republic of Azerbaijan.
ANNUAL REPORT
2012
SOFAZ’s investment activity is conducted by Front, Middle and Back Offices. Front and Middle
office functions are performed by the Investment and Risk management Departments set up
under the Asset management Administration.
MANAGEMENT
MANAGEMENT
ANNUAL REPORT
2012
56
57
Figure 4.1. SOFAZ organizational structure
ANNUAL REPORT
2012
Daryaye-Muhit (The Ocean)
s the story goes, this masnavi (a distich-type verse
with two lines rhymed together) was penned by
w
Nasimi as response to the poetic letter by his brother
N
tthat starts with the following couplet:
Th
The mystery of lords reveals me not
The assets of elite are never the folk’s plot!
Speaking of ‘the mystery’ what Nasimi’s brother implied is the
secret esoteric knowledge available only to ‘the elite’. ‘The folk’
stands for the crowd, so he advises Nasimi not to reveal the science
of the selected few to the masses. Back in the 14-15th centuries it
was widely believed among some scholars that the secret learning
required to accomplish perfection could not be grasped by each and
every individual.
Nasimi strongly disagreed with this prevalent view of the day, so he
advocated the idea of disseminating esoteric knowledge of hurufism
among broad masses. It was exactly this knowledge destined to
make people better that together with his followers and disciples he
was trying to promote to his very best through his gazals and other
verses. As it was the case in a number of the poet’s other works, in
this masnavi Nasimi promotes the theory of a perfect man. Elevating
such a perfect person to the divine level, he coins the concept of
‘ana-l-haqq’ (I am the Truth) to be applied to such an individual.
Meanwhile Daryaye-Muhit distich reveals Nasimi’s pantheist
views presented in artistic and philosophical manner, with a number
of images and symbols featuring figurative (irfani) poetry. The
verse presents the Universe comprising the microcosm and the
macrocosm through the unity of the nature and the society, as well
as inseparability of individuals linked together on the organic level.
Daryaye-Muhit
The mighty ocean in excitement stirs.
All is in motion in the universe.
The pristine source is patent to all eyes.
How shall the sage accept a compromise?
In every molecule appears the sun.
Homage to earth by purity is done.
The artist in his drawing you may scan.
The ruby is revealed in Badakhshan.
Sharp water has become a drink divine
And every poison – candy crystalline.
The antidote submits to poisoning.
The rounded pearl becomes a medicine.
All earth and heaven are Truth absolute.
“I am the Truth!” say tambourine and flute.
The men who laud are one with what they laud
And the adorer is the true adored.
Now every drop is the gigantic sea,
Each speck of dust is Jesus and Mary.
The stone and clod are buds of eglantine,
Ferhad and Khosrov – their sweet love Shirin.
The lover and beloved are as one.
Distinction between “no” and “yes” has gone.
Belief and heresy as one combine.
The sweet and bitter have become one wine.
The fellowship of thought does toil create
And unity has opened mercy’s gate.
One Truth become the body and the soul.
The Law and rival sects become one whole.
Released each thing is from duality.
The single whole wins immortality.
O seeker after Truth, if you can see,
Behold, all blessings flow from unity.
The curtain moves and brings all things to light
Save Allah, his eternity and might.
The essence now remains, of all else purged.
The sea is what was in the sea submerged.
If insight be not blunted, see revealed
The Truth within yourself – not far afield.
You are – if soul and body you observe –
The aim and essence of the universe.
Alas, you did not hear the trumpet blast.
You halt upon the bridge you have not passed,
A mirror likeness true believers share.
The mirror watch and God discover there!
The scales are set. The Day of Judgement nears.
It’s coming now. Believe me! God appears.
Beware of the accursed Satan, friend!
An ear unto his pleading do not lend!
Since with a little you are not content,
An alien you are and not a friend.
The man intoxicated by this wine
Shall live forever, to the end of time.
Who shall have knowledge of the soul divine
Shall to the world the worth of dust assign.
Who knows himself, the Lord God, too, he knows.
The seeds of Ioving unity he sows.
A termite has come crawling from the ground.
The secret of the ant I shall expound.
O you who stray from Truth, O ruffian,
If Satan you are not, acknowledge man!
It bears an edict sealed. “That is to say,”
The ant declares, “I’m Solomon today!”
It was in man God did himself display.
So bow to man and be not led astray!
“I’m Moses. In my hand God’s staff I hold
And in my belt God’s timeless sword behold!”
The trumpet blast of Judgement Day rings out,
Do you not hear, O humble and devout?
“The faithful and the pagan recognise!
And woe to him who manufactures lies!”
The Judgment Day has come. Awake, arise!
If you still doubt it, open wide your eyes.
Into men’s hands the termite’s staff shall come
And they discover equilibrium.
Wake up! It is already Judgement time.
Observe the mass of wickedness and crime.
This equilibrium contains the Truth
That owns all riches and is absolute.
From True God came the true road we survey
And it is Fazlullah who shows the way.
When you across this balance shall have passed
You shall be free of grief and woe at last.
He is both Paradise and its fair youth,
He’s mercy and the throne of God and Truth,
It’s in this sense we praise you to the sky,
O Fazlullah, O grace from God on high!
The face of man has now become the Truth.
Bow to the one who merits it in sooth!
Advance to Truth, if greatness you would find,
And see to it you do not lag behind.
Nasimi’s breathing is a soul divine,
A mighty ocean and a ruby mine!
Imadaddin Nasimi
1973, page 77
OIL FUND - TRANSPARENT SOVEREIGN WEALTH FUND
5. OIL FUND - TRANSPARENT SOVEREIGN WEALTH FUND
Today mass media, NGOs and independent experts appreciate Fund as the governmental
organization replying to their requests on time and in details.
Seminar for mass media representatives was held by the staff of the State Oil Fund of the Republic
of Azerbaijan on 4 July, 2012.
SOFAZ information policy. The State Oil Fund’s public relations are managed in accordance
with its Information Policy, as approved by the Order of Executive Director of SOFAZ, dated 20
April 2007. This policy was developed to properly coordinate and effectively manage the Fund’s
public relations, ensuring it meets the public’s need for information and maintains and further
develops its reputation of being a transparent public organization, in accordance with the Law
of the Republic of Azerbaijan “On right to obtain information”. Instruments employed by the Oil
Fund for public information and disclosure purposes include:
● Press-releases;
● Quarterly and annual reports;
● The official website;
● Press conferences;
● Disclosures and publications in the mass media.
SOFAZ issues press releases about its assets, projects, revenues and expenditures through the
periodical press on a quarterly basis. Furthermore, press releases are used to inform the public
about various events and meetings held at the Fund.
SOFAZ publishes quarterly revenue and expenditure statements, annual reports and reports on
EITI activities through the press and its own website (www.oilfund.az). It ensures the transparency
of the revenues from the management of the natural reserves and their utilization.
Quarterly press conferences are held for media representatives in order to keep them updated of
the Oil Fund’s activities. In addition, SOFAZ’s Executive Director gives interviews to reputable local
and international media.
Oil Fund always takes an interest in answering questions of public. SOFAZ replies to all verbal and
written Fund-related requests directed to the Fund in the frame of time envisaged by the Law of
the Republic of Azerbaijan «On right to obtain information».
During the seminar journalists were informed about SOFAZ, the organizational structure, Fund’s
management mechanism, SOFAZ’s budget, financed projects, new investment policy, transparency
activities, information about sovereign wealth funds and financial markets.
5.2. Extractive Industries Transparency Initiative (EITI) activities
The Extractive Industries Transparency Initiative (EITI) is designed to promote transparency and
accountability in the extractive industry. It was first announced in September 2002 in Johannesburg
by British Prime Minister Tony Blair. The first EITI conference was held in London on 17 June 2003.
A delegation, headed by the current President of the Republic of Azerbaijan Ilham Aliyev, attended
the conference and announced Azerbaijan’s accession to the international initiative.
67
The EITI Committee was set up by the Cabinet of Ministers of the Republic of Azerbaijan in its
13 November 2003 decree. The Committee, chaired by the Executive Director of the Oil Fund,
consists of representatives of the ministries of Foreign Affairs, Economic Development, Industry
and Energy, Finance, Taxes, Ecology and Natural Resources, the State Statistical Committee, the
State Oil Company and the Ambassador of the Republic of Azerbaijan in the United Kingdom of
Great Britain and Northern Ireland.
ANNUAL REPORT
2012
66
Transparency has been a key principle in the State Oil Fund’s operations since its inception.
Regular auditing of the Fund’s financial statements by a global reputable auditor is used as the
primary safeguard to ensure the transparency of SOFAZ operations. The State Oil Fund’s financial
performance in 2011 was audited by Ernst&Young.
The purpose of the seminar was to enhance the awareness of mass media about the Oil Fund who
carefully deals with transparency issues and is highly valued by numerous authoritative international
organizations for its achievements, to disseminate professional information about the Fund and to
cooperate with mass media on providing information to the population about SOFAZ.
ANNUAL REPORT
2012
5.1. SOFAZ public relations
The EITI is a voluntary initiative, supported by companies, governments, investors and civil society
organizations. It provides the implementing countries with a significant capacity to demonstrate a
completely transparent investment environment that is attractive to investors and to international
financial institutions. The EITI acts as a major incentive to improve accountability and governance
in a politically stable and rapidly growing country. This, in turn, helps to avoid any possible
disagreements that may arise over the revenue distribution in the extractive industries.
On 24 November 2004, the EITI Committee, local and foreign oil and gas companies and the
Increasing Transparency in the Extractive Industries Coalition of NGOs signed a memorandum of
Understanding on implementing the EITI in Azerbaijan.
The government of Azerbaijan discloses its EITI reports about the mechanism as stipulated
by the memorandum. In accordance with the memorandum, a competition is held to select a
reliable international audit firm for each reporting cycle to analyze and reconcile government
and company reports. The successful bidder is selected by EITI multi-stakeholder Group (MSG),
consisting of representatives of the parties to the Memorandum.
On 29 June 2012 the first annual report on implementation of Extractive Industries Transparency
Initiative in Azerbaijan for the year 2011 was published.
All companies operating in extractive industries, as well as state enterprises are involved in EITI
implementation process. The government has also ensured active participation of the civil society
in development, monitoring and evaluation of the EITI implementation process.
The report is published based on new rules on EITI adopted at the V Global EITI Conference in
Paris in 2011.
In 2012, the Oil Fund continued its activities within EITI.
ANNUAL REPORT
2012
On December 14, 2012, Moore Stephens, the audit company and the EITI Secretariat arranged a
training session with the organizational support of BP for local and foreign companies operating
in the extractive industry of Azerbaijan. The main purpose of the training was to eliminate
inconsistencies and errors detected during the reconciliation of EITI reports in Azerbaijan, and the
attempt to increase the quality of EITI reporting by reducing the number of such errors in reports
for the next accounting period. Such training, which was held in Azerbaijan for the first time,
allowed its participants to communicate with both employees of other companies, and directly
with the auditors. Thus, the training participants managed to clarify various aspects related to the
preparation of the EITI reports, get timely answers to their questions. Representatives of local and
foreign companies participated in the training and they have increased their professionalism on
preparation of EITI reports.
The meeting of the Multi-stakeholder Group (MSG) on implementation of EITI in Azerbaijan was
held on June 4, 2012.
At the meeting Azerbaijan Government Committee on EITI announced the release of
the Government’s EITI report (2011) audited by Moore Stephens, the independent Aggregator.
The release is accompanied by the Aggregator’s opinion based on individual submissions of
extractive industry companies participating in the EITI process in Azerbaijan.
At the meeting held on July 17, 2012, the EITI NGO Coalition presented its opinion with regard to
the 16th report on the EITI (for 2011 reporting year) – Government’s report and the Independent
Accountants’ Opinion (IAO).
In 2012, another innovation was implemented in the EITI process in Azerbaijan and the EITI report
was issued on August 31 of in the form of an integrated document. This document includes a
report on the aggregate revenues received by the Government of the Republic of Azerbaijan
from the extractive industries, the Independent Accountants opinion and the opinion of the EITI
Coalition of public organizations, which earlier were issued separately.
The last meeting of the MSG for the year 2012 was held on 21 December 2012. 2013 EITI Work plan
was approved, other issues on EITI implementation in Azerbaijan were discussed and appropriate
decisions were made at the meeting.
5.3. International Forum of Sovereign Wealth Funds
69
The International Forum of Sovereign Wealth Funds (IFSWF or Forum) was established by the
International Working Group of Sovereign Wealth Funds, meeting in Kuwait City on 5-6 April
2009. IFSWF is a voluntary group of Sovereign Wealth Funds (SWFs), which meets, exchanges
views on issues of common interest and facilitates an understanding of the Santiago Principles
and of SWF activities.
The State Oil Fund of the Republic of Azerbaijan is an active member of IFSWF and has
systematically participated in its meetings. IFSWF held its first meeting in Baku organized by
the government of Azerbaijan and SOFAZ on 8-9 October 2009.
IFSWF met for its fourth annual meeting in Mexico City, Mexico on September 5–7, 2012. Hosted
by the Mexican Ministry of Finance and Public Credit, the Forum advanced on its commitments
made in Beijing in May 2011 by discussing the IFSWF Members application of the Santiago
Principles, risk management and the investment environment, commitment to an open investment
environment, as well as making progress on its internal governance issues.
In accordance with Santiago Principle №24, SOFAZ published its first self-assessment report on
its adherence to these Principles and the report is reviewed on an annual basis. The report is
presented in the Appendix.
ANNUAL REPORT
2012
The delegation of representatives of Kyrgyzstan and Tajikistan visited Azerbaijan between March
6-30, 2012 and Afghani delegation visited Baku on 5 November, 2012. During the meetings the
delegations had studied the experience earned by Azerbaijan in the management of revenues
received from the extractive industries and the provision of transparency in this field.
On September 24, 2012, SOFAZ held a meeting with a youth delegation of the African Union. The
African Union was represented by 16 countries in the meeting. During the meeting participants
widely discussed the issues related to the situation in the oil and gas sector of Azerbaijani economy,
national strategy, management of oil revenues, implementation mechanism and coordination
structure of the EITI in Azerbaijan and associated problems and prospects, the significance of the
EITI for our country and many other aspects. Young delegates received answers to their questions
as to the EITI implementation and reporting in Azerbaijan.
The EITI International Board held 19th meeting in Sussex, England on 14-15 February, 2012.
The delegation headed by the Chairman of the National EITI Committee, a member of the EITI
International Board and the Executive Director of the State Oil Fund of the Republic of Azerbaijan
Shahmar Movsumov participated at this meeting.
68
Nasimi’s
Verbal Apologetics
i
ince
very old times and throughout the Middle Ages,
people, poets in particular, have always adored the power
oof the word viewing it as the world’s greatest miracle. This
was far not by chance, for it was the word that differed
w
hhumans other
th animate beings due to the ability to convey the most
intricate message through the combination of sounds and letters. It
is by this very reason that the leading intellectuals of various periods
were searching their minds out trying to figure out the mystery of the
very emergence of the phenomenon of the word, with innumerable
poems and philosophical treatises dedicated thereto.
Nasimi was one of the strong believers in the word’s magic power
and exceptional capacity in educating and bringing up a perfect
individual. Therefore, in a number of his works the poet openly
expresses his adoration of the word, the word of poetry in particular.
This was the driving force behind Nasimi’s lines, stanzas, couplets
and whole gazals eulogizing the ma or cultural and spiritual
accomplishments in human history. "The Word", a gazal presented
hereby, is one of the best examples of his legacy dedicated to this
particular issue.
According to Nasimi, the very concepts of flesh or spirit are nothing
but words. This is the reason why the words are vested with divine
force, i.e. the force to create. So those having command over words
are capable of fully mastering this force. That being said, the words
also differ depending on the might of those pronouncing them, thus
the most potent word is the one delivered by the Almighty through
His Prophet, i.e. the word of the Holy Qur’an. Creative individuals
are striving to reach this unattainable point from time to time.
Numerous eulogies to the power of the word were written in the
Azerbai ani literature both prior to Nasimi and afterwards, the most
remarkable out of them, to our point of view, belong to Muhammad
Fuzuli (1494-1556), a true genius of the Azerbai ani poetry. The
following couplet by Fuzuli is particularly recognized in this respect:
The human flesh is live with word,
A wordless flesh is alien’s award.
As a Hurufi intellectual, along with words, Nasimi attached an
enormous value to the Arabic letters of the Holy Qur’an, reiterating
their significance times and again in his works. Fazlullah Naimi, the
founding father of Hurufism, claimed that once the almighty created
the Universe with ust two letters in Arabic (Kainat, comprising the
two basic consonants: ‘kaf’ and ‘nun’), and the whole of Qur’an
was created with only 28 letters, then the letters are sacred in their
nature. The number of letters in the Arabic and Farsi alphabets
(28 and 32 respectively), as well as their interrelationship (28+4)
presents a set of mysterious figurative symbols for the Hurufis.
Through specific manipulations with letters and figures, the Hurufis
tried to prove the level of sanctity of an individual together with the
capacity to ascend to a certain level of divinity. Comparing the shape
of facial hair and wrinkles to certain letters and figures they tried
to read certain Qur’anic verses and thus identified an individual
as a saint. It is true that the Hurufis used a great deal of mystical
and cabbalistic elements, however their ultimate goal was to prove
the divine origin of human beings and through this to put end to
oppression, violence, misery and humiliation.
Nasimi’s "The Word" is conveying this message.
The Word
Come, heed this word, for is not soul – the word?
High heaven is the dwelling of the word.
From every angle grasp it and observe
This fact: the world’s Creator is the word.
Know that the Author and the Book are one,
The Self-sufficing Cause explains the word.
O sage, note well the legend, realise
There can be no suspicion of the word.
The prophet said the heart is mercy’s throne,
Because he saw the heart breathes with the word.
“I count on you,” Ali said, “Succour me!”
On learning there was refuge in the word.
The word cannot be made, so mark this well:
No payment is exacted for the word.
The universal reason, tablet, Pen,
Four elements and Heaven are the word.
What lies without, within, begins and ends,
Is manifest and secret – is the word.
Of reason and our origin the proof,
Enlightener of all – such is the word.
The world was shaped by letters B and E.
If this you grasp, then clear becomes the word.
The blameless Jesus and the blest Mohammed,
The Mahdi, Lord of Time – are the pure word.
All this explains, if you would understand
What kind of word it constitutes the word.
“The Book of Eternity” you must acquire
To learn that what most matters is the word.
Is not the word sublime enough to say
That Fazlullah, the wise one, is the word?
Be sensible and check your wagging tongue,
Nasimi, for unbounded is the word.
Imadaddin Nasimi
1973, page 13
ANNUAL REPORT
2012
Since its inception, SOFAZ has cooperated closely with a number of economic organizations,
financial institutions and banks, both in Azerbaijan and worldwide. Its economic relations with all
its counterpart organizations are based on the principles of respect, transparency, mutual trust
and reliable partnership.
The State Oil Fund’s budget for 2012 was approved by Decree No.570 of the President of the
Republic of Azerbaijan on 29 December, 2011.
The great success the State Oil Fund has been able to achieve in a short period of time stems
mainly from its personnel’s creative approach, hard work and, above all, eagerness to improve
their qualifications and corporate culture. The Fund’s team consisting of highly qualified and
competent young professionals values personal respect, responsibility and teamwork.
The State Oil Fund assigns particular importance to solidarity, mutual trust, understanding,
professionalism, conscientiousness and teamwork. It is through teamwork and joint efforts that
it has been able to gain success and a good reputation, not only in Azerbaijan but worldwide,
as well. Complete and accurate information about all proceeds from the country’s sales of each
barrel of oil and each cubic metre of gas under production sharing agreements is freely available
on SOFAZ website thanks to the Transparency Initiative. By making information on its revenues
and income publicly available, the State Oil Fund strengthens the trust of the country’s citizens
and international organizations in the transparency of its operations.
As a highly specialized entity, the State Oil Fund operates in accordance with transparency
principles and criteria. The Fund is highly praised at home and abroad as an example of credibility
and transparency because of its transparent work with its staff, counterparties and external
managers in line with best international practices. Azerbaijan’s complete compliance with the EITI
principles and criteria and the Fund’s achievements in implementing the EITI brought SOFAZ the
UN 2007 Public Service Award and the EITI 2009 Award.
In order to ensure timely implementation of arrangements related to socio-economic issues
and settlement of refugees and internally displaced persons in 2012, changes were made to the
budget of the State Oil Fund by Decree No.589 of the President of the Republic of Azerbaijan on
8 February, 2012.
Based on the changes, the expenditures related to financing of arrangements related to social
conditions and settlement issues of refugees and internally displaced persons was increased from
AZN 110 000.0 thousand to AZN 300 000.0 thousand, and total budget expenditures of the Fund
increased from AZN 10 561 304.0 thousand to AZN 10 751 304.0 thousand accordingly.
77
By Decree of the President of the Republic of Azerbaijan on 2 July, 2012 the budget of the State
Oil Fund was amended again. One of the reasons for this amendment was expected additional
revenues to Azerbaijani Government from Production Sharing Agreements due to high level of
crude oil prices. Another reason was the need to specify the revenues of the budget of SOFAZ
for 2012 related to the changes in the state budget of Republic of Azerbaijan for 2012. Based
on these changes, net revenues generated from the sale of the Republic of Azerbaijan’s share of
hydrocarbons was increased from AZN 10 365 432.0 thousand to AZN 13 388 644.0 thousand,
at the same time revenues of AZN 1 572.6 thousand related to “Bonuses paid by investors when
signing and fulfilling oil and gas contracts” was added and the total amount of revenues of SOFAZ
was increased from AZN 10 697 030.6 thousand to AZN 13 721 815.2 thousand accordingly.
Revenues
Effective use of the country’s resources by applying state-of-the-art technologies, utilization of
the resulting proceeds and revenues to improve the welfare of the nation and the country, fair
distribution of oil revenues between current and future generations are the primary goals and
objectives of the State Oil Fund. Mutual respect, trust, teamwork and transparent operations
provide the necessary foundation and favourable conditions for achieving these goals.
In 2012 the State Oil Fund’s revenues amounted to AZN 13 674.1 million, which compared to
the amount indicated in the budget (AZN 13 721.8 million) was implemented at 99.7% level.
Foreign currency translation gain was AZN 253.4 million. Differences in the implementation of
each revenue item in 2012 SOFAZ budget are as follows:
ANNUAL REPORT
2012
7. 2012 STATE OIL FUND'S
BUDGET EXECUTION
76
6. OUR VALUES:
RESPECT, TEAMWORK, TRUST, TRANSPARENCY
2012 STATE OIL FUND'S BUDGET EXECUTION
In 2012 SOCAR, Total E&P Azerbaijan B.V. and SOCAR OIL affiliate company paid USD 1.5 million in
accordance with the implementation of 28.2 Article of Exploration, Development, and Production
Sharing Agreement for the Absheron Offshore Block in the Azerbaijani Sector of the Caspian
Sea. Besides, SOCAR, BP (Azerbaijan) Exploration and SOCAR OIL affiliate company paid USD 2.1
million in accordance with the implementation of 28.2 Article of Exploration, Development, and
Production Sharing Agreement for the Shafag-Asiman Offshore Block in the Azerbaijani Sector
of the Caspian Sea. At the same time, SOCAR, Bahar Energy Operating Limited and SOCAR Oil
affiliate company paid USD 0.2 million (due to less coverage of production area in Bahar and
Gum Deniz Fields compared to initial forecasts, Bahar Energy LTD paid to budget less than USD
0.62 million) in accordance with the implementation of 31.2 Article of Exploration, Rehabilitation,
Development and Production Sharing Agreement for the Bahar and Gum Deniz Fields in the
Azerbaijani Sector of the Caspian Sea. Due to these, revenues under this item were executed 90%
against the budgeted amount (AZN 3.3 million).
Other revenues and proceeds. In 2012, assets (obsolete or unused metal scrap, pipes) received
from investors (international oil companies) under oil and gas contracts were sold, bringing SOFAZ
AZN 0.3 million. This revenue item was executed at 28% level of the planned AZN 0.9 million. (The
execution level of the budget is presented in Table 7.1.).
Table 7.1. Revenues of SOFAZ in 2012
№
BUDGETED ACTUAL
1.
2.
3.
Revenues from transportation of oil and gas through the territory of Azerbaijan. Revenues
from transportation of oil and gas through the territory of Azerbaijan (transit fees) amounted to
AZN 7.9 million or USD 10.0 million in 2012. Transit fee revenues were fulfilled at 97% level of the
planned AZN 8.1 million. A 3% gap for this revenue item is a result of lower crude oil production
and a decrease in oil transportation through Baku-Supsa pipeline in 2012.
Bonuses paid by investors when signing and fulfilling oil and gas contracts. In 2012 revenues
from this source equaled to AZN 1.6 million or USD 2.0 million. The payment due in 2011 (to be
paid within 30 days from the signature date) according to the Production Sharing Agreement
between SOCAR, UGE-LANCER PTE LTD and SOCAR OIL affiliate company for Exploration,
Rehabilitation, and Development of Balakhani-Sabunchu-Ramana and Kurdakhani Oil Field
Blocks, was transferred to SOFAZ in 2012.
REVENUE ITEMS
AMOUNT OF THE
REVENUES
AZN MLN.
4.
5.
6.
Net revenues generated from the sale of the share
of the Republic of Azerbaijan in hydrocarbons
(excluding expenditures on transportation of
hydrocarbons, customs clearance and banking
costs, marketing, insurance and independent
surveyor fees, as well as shareholder revenues of
State Oil Company of the Republic of Azerbaijan
from the investments in the projects where it is an
investor, participant or a contracting party)
Acreage fees paid by foreign investors for the use
of contract areas for development of hydrocarbon
resources
Revenue from transporting oil and gas through
the territory of the Republic of Azerbaijan
Bonuses paid to the State Oil Company of the
Republic of Azerbaijan or other relevant state
bodies by investors when signing and fulfilling oil
and gas contracts
Asset management revenues of the State Oil Fund
Other revenues and proceeds
Total revenues
Extra-budgetary revenues
EXECUTION
PERCENTAGE
13 388.6
13 117.4
98.0
3.3
3.0
90.0
8.1
7.9
97.0
1.6
1.6
100.0
319.2
0.9
13 721.8
544.0
0.3
13 674.1
253.4
170.3
28.0
99.7
Expenditures
During the reporting year, the State Oil Fund’s budget expenditures amounted to AZN 10 573.6
million which made up 98.4% of the planned expenditures (AZN 10 751.3) million.
79
ANNUAL REPORT
2012
78
Acreage fees paid by foreign investors for the use of contract areas for development of
hydrocarbon resources. Acreage fees received by the Oil Fund in the year under review was AZN
3.0 million, or USD 3.8 million.
Asset management revenues of SOFAZ. Revenues generated through asset management
equaled to AZN 544 million (USD 693.5 million) which was over-fulfilled by 70.4%. In 2012 the
SOFAZ’s investment portfolio yielded 2.2% rate of return.
ANNUAL REPORT
2012
Profit proceeds from sales of hydrocarbons. In 2012 the State Oil Fund received a total of
AZN 13 117.4 million, or USD 16 695.8 million, from sales of the Republic of Azerbaijan’s share
of hydrocarbons, which compared to the initially forecasted amount (AZN 13 388.6 million) was
implemented at 98% level. The reason of lower level of implementation of this revenue item
was production of crude oil at a level relatively lower than the volume planned in the budget of
SOFAZ. On the other hand the revenues of USD 234.2 million from the sale of 2.1 million barrel
crude oil on 30.10.2012 by SOCAR was expected to be included in the Oil Fund’s budget within
120 days (on 28.02.2013). Therefore, this amount will be allocated to 2013 budget.
The improvement of the social and economic conditions of refugees and internally displaced
persons. In 2012 the State Oil Fund allocated AZN 300 million for this project. This expenditure
item was fulfilled by 100% as planned.
Transfers to the state budget of the Republic of Azerbaijan in 2012. Budget transfers of AZN
9 905.0 million constituted significant portion (93.7%) of the State Oil Fund’s budget expenditures
in 2012. This expenditure item was fulfilled by 100% as planned.
Financing the State Program on the Education of Azerbaijani Youth Abroad. In 2012 the State
Oil Fund allocated AZN 20 million to finance “The State Program on the Education of Azerbaijani
Youth Abroad in the years 2007–2015” as adopted by Decree of the President of the Republic of
Azerbaijan No.2090 on 16 April 2007.
Administrative expenses of the State Oil Fund. Administrative expenses of SOFAZ totaled
to AZN 29.6 million which amounted to 40.1% of its 2012 approved budget expenditure item
(AZN 73.8 million). Under-fulfillment of this expenditure item can be explained by lower than the
planned costs on the construction of the Fund’s new administrative building and management
fees paid to external asset managers during the year.
ANNUAL REPORT
2012
№
EXPENDITURE ITEMS
The improvement of the social and
1. economic conditions of refugees and
internally-displaced persons
Transfers to the state budget of the
2.
Republic of Azerbaijan in 2012
Samur-Absheron
irrigation
system
3.
reconstruction project
New Baku-Tbilisi-Kars railway construction
4.
project
Financing the State Program on the
5. Education of Azerbaijani Youth Abroad in
the years 2007-2015
Administrative expenses of the State Oil
6.
Fund
Total
AMOUNT OF
EXPENDITURES
AZN MLN.
BUDGETED
ACTUAL
EXECUTION
PERCENTAGE
300.0
300.0
100.0
9 905.0
9 905.0
100.0
200.0
200.0
100.0
252.5
119.0
47.1
20.0
20.0
100.0
73.8
29.6
40.1
10 751.3
10 573.6
98.4
81
ANNUAL REPORT
2012
80
New Baku-Tbilisi-Kars railway construction project. In 2012 the State Oil Fund allocated AZN
119.0 million to finance the new Baku-Tbilisi-Kars railway construction project and the Oil Fund
fulfilled this expenditures item by 47.1% of the planned AZN 252.5 million.
Table 7.2. Expenditures of SOFAZ in 2012
Samur-Absheron irrigation system reconstruction project. In 2012 the State Oil Fund allocated
AZN 200 million to finance this project, fulfilling this expenditure item by 100%.
Separation Torment of
Lyrical ‘Self’
a
anegyric
to the torment and ordeal of an individual
sseparated from his beloved one constitutes the leitmotif
oof Nasimi’s lyrics. This motif, known and widely used in
tthe world literature and ancient philosophy since times
iimmemorial,
i l was particularly typical of pantheistic artists. E.g., the
ancient Greek philosophers like Plato or Socrates used to resort to
love-crazed characters neglecting their flesh and obsessed with the
desire to merge with the whole of the world. Nasimi is not alien to the
‘platonic love’ motifs either. However, the way he approaches this
motif is different from that of philosophers. For Nasimi, ‘platonic love’
evolves into human love whereby the hero is tormented by the love to
a real beauty. The poet’s lyrical ‘self’ addresses the heart’s desire of
his hero aspiring to put end to the torment of being apart and en oy the
moment of reunion. Meanwhile, the fate itself is scaring the person in
love who, nonetheless, is ready and willing to suffer from his beloved
one’s nostalgia for the rest of his life. What is no less important is that
despite the bitterness of being apart, the hero retains his faithfulness
and dedication. So it is this lofty sentiment that makes the hero so
ennobled and almost sacred for the reader. In fact, this torment and
torture one voluntarily undertakes in the sake of love becomes one
of the ways to accomplish perfection. It is a trial, and only those
capable of meeting this test of love are the ones truly fallen in love.
Nasimi’s love is not only addressed to the beautiful ones. It
encompasses the whole of humankind, or, to be more precise, the
people of spiritual beauty and rich inner world. Therefore the love
shed by the outstanding poet makes no formal difference among the
people, with wisdom and maturity being the ma or criterion. Needless
to say, in this respect, Nasimi appears as a due successor of Nizami
Gan avi (1141-1209), another genius of the Azerbai ani poetry who
also opposed to conventional discrimination by saying: “Knowledge
is the only power, with no other way to gain advantage whatsoever!”
In fact, Nasimi views those suffering from the grief of being apart
as somewhat scholars in the field of love. An important issue not to
omit is that despite all tortures and torment of those fallen in love,
Nasimi presents his images with hope and optimism. This is the
reason why a number of his gazals show the light in the end of
the tunnel. “Where are you?” and “I have found” stanzas, hereby
quoted, are quite typical in this regard.
Of my eyes you are light. For sight of you my soul is thirsting.
Maiden fair, like Paradise your beauty charms me. Say, where are you?
To your fragrant tresses’ chains Nasimi has his heart surrendered.
So what need has he of other fetters and of ail? Where are you?
Imadaddin Nasimi
1973, page 65
Where are you?
I have found
Fires of love consume my soul, but you can make me whole. Where are you?
Soul within my soul you are. My soul is seeking you. Where are you?
Let me give thanks to God that I today my friend have found,
That dwelling in my heart a brave beloved I have found.
With the wine of assignation into ecstasy you threw me.
Raging heat I feel within me. Cooling fount of life, where are you?
The world with all its wealth is not a farthing worth to me,
For my own coin with an impress of beauty have I found.
O rich store of beauty’s favors, I am burning. Let me see you!
For there’s none but you from whom this boon I can receive. Where are you?
I was on earth yet sunbeams did become my customers.
Go tell the traders I today my own rich store have found!
Destiny that promised much has wrested from my grasp your tresses.
Like Med nun I am distraught and bitterly I weep. Where are you?
I do not grieve no matter how much sorrow there may be,
For grief with gladness and a sympathiser I have found.
O fair beauty, swept by passion strong my yeaning eyes are burning.
Tears of blood I shed for you. O graceful cypress tree, where are you?
Go tell the zealot who is calling me to Paradise
Not to expect me! Here my own rose-garden have I found.
O you of the rosebud mouth, the thorn of separation galls me.
Come, for blood fills like a rosebud my deserted soul. Where are you?
And it is meet that Joseph should my servant here become,
For in the Egypt of thy lips sweet sugar have I found.
My precious secrets to a stranger I shall not disclose.
A trusty friend – a treasure-house of secrets – I have found.
The sun of oy has risen. I have woken from my sleep.
The meaning of this is: a wakeful treasure I have found.
To Bagdad come, O zealot, and the oyful tidings bear:
A nimble-witted, whimsical beloved I have found.
What do I need a soul for, wherefore do I need this world,
When without argument a true companion I have found?
O you who give your all to scoundrels, sleepy, heedless one,
The moon-faced beauty with beguiling tresses I have found.
If I, as once Mansur did, should declare that “I am God!”,
Do not blame me, O had a, that a gallows I have found.
If you, like Moses, are enamoured of the face of God,
Behold yourself within yourself and say: “God I have found!”
Nasimi for her locks’ heterodoxy gave up faith.
O you in the dervish shirt, a Christian hair-belt I have found!
Imadaddin Nasimi
1973, page 35
Contents
INDEPENDENT AUDITORS’ REPORT
92
Consolidated statement of financial performance
93
Consolidated statement of changes in net assets/equity
94
Consolidated statement of cash flows
95
Statement of comparison of budget and actual amounts
96
ANNUAL REPORT
2012
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The State Oil Fund of the
Republic of Azerbaijan
Consolidated Financial
Statements
Year ended 31 December 2012
Together with Independent Auditors’ Report
97
2. Basis of preparation
99
3. Significant accounting policies
99
4. Significant judgments and estimates
107
5. Cash and cash equivalents
109
6. Financial assets at fair value through surplus or deficit
110
7. Financial investments held-to-maturity
112
8. Gold bullions
113
9. Investment properties
114
10. Property and equipment
115
11. Other non-current and intangible assets
116
12. Capital contributions
117
13. Transfers by the Fund
117
14. Interest income
117
15. Foreign currency translation differences
118
16. Net gain/(loss) on financial assets at fair value through surplus or deficit
118
17. Operating expenses
118
18. Income taxes
118
19. Fair value of financial instruments
120
20. Risk management
120
21. Transactions with related parties
128
22. Commitments and contingencies
129
23. Events after the reporting period
130
89
ANNUAL REPORT
2012
88
1. Principal activities
Consolidated statement of financial position
Independent auditors’ report
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Public Sector Accounting Standards issued by the
International Public Sector Accounting Standards Board of the International Federation of Accountants,
and for such internal control as management determines is necessary to enable the preparation of
consolidated financial statements that are free from material misstatement, whether due to fraud or
error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with International Standards on Auditing. Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the consolidated financial statements. The audit procedures selected depend on our judgment, including
the assessment of the risks of material misstatement of the consolidated financial statements, whether
due to fraud or error. In making those risk assessments, the auditor considers internal control relevant
to the entity’s preparation and fair presentation of the consolidated financial statements in order to
design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.
15 April 2013
91
ANNUAL REPORT
2012
90
We have audited the accompanying consolidated financial statements of the State Oil Fund of the
Republic of Azerbaijan and its subsidiaries, which comprise the consolidated statement of financial
position as at 31 December 2012 and the consolidated statements of financial performance, of changes
in net assets/equity and of cash flows, and statement of comparison of budget and actual amounts for the
year then ended, and a summary of significant accounting policies and other explanatory information.
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of the State Oil Fund of the Republic of Azerbaijan and its subsidiaries as at 31 December 2012,
and their financial performance and cash flows for the year then ended in accordance with International
Public Sector Accounting Standards.
ANNUAL REPORT
2012
To the Supervisory Board of the State Oil Fund of the Republic of Azerbaijan
Opinion
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated statement of financial position
As at 31 December 2012
(Thousands of Azerbaijani Manats)
Consolidated statement of financial performance
For the year ended 31 December 2012
1,182,309
24,127,399
57,523
624,735
12,986
7,528
1,028
26,013,508
771,095
22,282,480
57,143
9,407
10,710
23,130,835
456,969
338,057
4,485
77,117
876,628
326,959
2,611
52,393
381,963
26,890,136
23,512,798
4,757
429
Net assets
26,885,379
23,512,369
Net assets/equity
Contributed capital
Property revaluation reserve
Foreign currency translation reserve
Accumulated deficit
Total net assets/equity
26,929,986
1,836
(185)
(46,258)
26,885,379
24,343,928
1,836
(833,395)
23,512,369
Non-current assets
Financial investments held–to–maturity
Investment properties
Property and equipment, net
Other non-current and intangible assets
Total non-current assets
Total assets
Liabilities
Current liabilities
5
6
7
8
2011
7
9
10
11
The accompanying notes on pages 97 to 131 are an integral part of these consolidated financial statements.
Notes
14
15
2012
466,882
253,387
2011
540,261
(749,751)
16
77,110
857
798,236
(363,830)
(573,320)
Operating expenses
Surplus/(deficit) before income tax expense
17
(7,891)
790,345
(10,794)
(584,114)
Income tax expense
Net surplus/(deficit) for the year
18
(3,208)
787,137
(584,114)
Interest income
Net gain/(loss) on foreign currency translation differences
Net gain/(loss) on financial assets at fair value through surplus or
deficit
Other operating income
Total operating gain/(loss)
93
ANNUAL REPORT
2012
92
Assets
Current assets
Cash and cash equivalents
Financial assets at fair value through surplus or deficit
Gold bullions
Tax receivables other than income tax
Current income tax asset
Other current assets
Total current assets
2012
ANNUAL REPORT
2012
Notes
Consolidated statement of changes in net assets/equity
Consolidated statement of cash flows
Contributions received
Net surplus for the year
Exchange differences
on translation of foreign
operations
Transfers to the State Budget
Transfers to the State
Refugees Committee and
Internally Displaced Peoples’
Social Development Fund
Transfers for the
reconstruction of SamurAbsheron Irrigation system
Transfers for the construction
of new Baku-Tbilisi-Kars
railway line
Transfers for the State
Program on “Education of
Azerbaijani youth abroad”
31 December 2012
12
10
12
18,441,696
15,451,696
-
4,441
(2,074)
-
(249,812)
-
18,196,325
15,451,696
(2,074)
(9,000,000)
(531)
-
-
531
(584,114)
-
(584,114)
(9,000,000)
(199,998)
-
-
-
(199,998)
(161,926)
-
-
-
(161,926)
(139,974)
-
-
-
(139,974)
(32,567)
-
-
-
(32,567)
(14,999)
24,343,928
1,836
-
(833,395)
(14,999)
23,512,369
13,130,042
-
-
-
787,137
13,130,042
787,137
(9,905,000)
-
(185)
-
-
(185)
(9,905,000)
(299,982)
-
-
-
(299,982)
(199,997)
-
-
-
(199,997)
(119,028)
-
-
-
(119,028)
(19,977)
26,929,986
1,836
(185)
(46,258)
(19,977)
26,885,379
Operating cash flows from interest received
2012
2011
790,345
(584,114)
10
11
125
48
101
88
16
15
(122,832)
(296,384)
(40,118)
331,381
695,520
(22,205)
(1,399,792)
(130,390)
(338,057)
(624,735)
(3,579)
(1,028)
4,328
(2,162,069)
(32)
(2,162,101)
(5,419,139)
(384,248)
(7,165)
234
86
(5,389,461)
(5,389,461)
10
11
(1,999)
(145)
(24,627)
(26,771)
(78)
(282)
(39,027)
(39,387)
12
13,130,042
(9,905,000)
(199,997)
-
15,451,696
(9,000,000)
(199,998)
(32,567)
(299,982)
(119,028)
(139,974)
(161,926)
(19,977)
2,586,058
14,028
411,214
771,095
1,182,309
(14,999)
5,902,232
(16,072)
457,312
313,783
771,095
507,001
518,056
5
5
95
ANNUAL REPORT
2012
94
31 December 2010
Revaluation of building
Depreciation transfer for
building
Net deficit for the year
Transfers for the
reconstruction of SamurAbsheron Irrigation system
of new Baku-Tbilisi-Kars
railway line
Transfers to the State
Refugees Committee and
Internally Displaced Peoples’
Social Development Fund
of Oguz-Gabala-Baku water
pipeline
Transfers for the State
Program on “Education of
Azerbaijani youth abroad”
31 December 2011
Notes
Cash flows from operating activities:
Adjustments to reconcile deficit to net cash used in operating
activities
Depreciation of property and equipment
Amortization of intangible assets
Unrealized (gain)/loss on change in fair value of financial assets at fair
value through surplus or deficit
Net unrealized (gain)/loss on foreign currency translation differences
Change in interest accruals
Changes in operating assets and liabilities:
Increase in financial assets at fair value through surplus or deficit
Increase in financial investments held-to-maturity
Increase in investment properties
Purchase of gold bullions
Increase in tax receivables other than income tax
(Increase)/decrease in other assets
Increase in current liabilities
Net cash used in operating activities before income tax
Income taxes paid
Net cash used in operating activities after income tax
Cash flows from investing activities:
Purchase of property and equipment
Purchase of intangible assets
Increase in other non-current assets
Net cash used in investing activities
Cash flows from financing activities:
Transfers for the reconstruction of Samur-Absheron Irrigation system
Transfers for the construction of Oguz-Gabala-Baku water pipeline
Transfers to the State Refugees Committee and Internally Displaced
Peoples’ Social Development Fund
Transfers for the construction of new Baku-Tbilisi-Kars railway line
Transfers for State Program on “Education of Azerbaijani youth
abroad”
Net cash from financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
ANNUAL REPORT
2012
Foreign
Property
Accumulated
Total
Contributed
currency
Notes
revaluation
Surplus/
net assets/
capital
translation
reserve
(deficit)
equity
reserve
1. Principal activities
Statement of comparison of budget and actual amounts1
Annual budgeted amounts
Payments
Reconstruction of Samur-Absheron Irrigation system
Transfers to the State Refugees Committee and
Internally Displaced Peoples’ Social Development
Fund
Construction of new Baku-Tbilisi-Kars railway line
Education of Azerbaijani youth abroad
Expenses for managing the Fund2
Total payments
Net receipts
12
Final3
10,365,432
319,219
13,388,644
319,219
13,117,355
543,992
12
-
1,573
1,573
12
8,137
8,137
7,891
12
3,343
900
10,697,031
3,343
900
13,721,816
3,008
252
13,674,071
(9,905,000)
(200,000)
(9,905,000)
(200,000)
(9,905,000)
(199,997)
(110,000)
(252,484)
(20,000)
(73,820)
(10,561,304)
(300,000)
(252,484)
(20,000)
(73,820)
(10,751,304)
(299,982)
(119,028)
(19,977)
(29,622)
(10,573,606)
135,727
2,970,512
3,100,465
1
The Statement of comparison of budget and actual amounts only refer to the State Oil Fund of the
Republic of Azerbaijan and excludes its subsidiaries.
2
Explanation of material differences between the annual original and final budget for which the Fund
is held publicly accountable, and the final annual budget and actual amounts are part of the annual
report of the Fund.
3
According to the decree #570 of the President of the Republic of Azerbaijan on the approval of the
budget of the State Oil Fund of the Republic of Azerbaijan dated 29 December 2011 and decrees #589
and #666 of the President of the Republic of Azerbaijan on the amendments to the budget of the State
Oil Fund of the Republic of Azerbaijan dated 8 February 2012 and 2 July 2012 respectively.
In accordance with the Decree and the Regulations (discussed below), SOFAZ is an extra-budget state
organization, formed as a separate legal entity, which is accountable and responsible to the President of
the Republic of Azerbaijan.
The consolidated financial statements include the financial statements of SOFAZ and its direct and
indirect subsidiaries (together the “Fund”) listed in the following table:
% interest
Date of
Date of
establishment acquisition
Subsidiary
2012
2011
Country
SOFAZ Re Ltd.
100.00
-
Jersey Islands
22-May-12
-
SOFAZ Re UK L.P.
100.00
-
Jersey Islands
6-Aug-12
-
SOFAZ Re Min Ltd.
78, St James’s Street Unit
Trust
100.00
-
Jersey Islands
13-Aug-12
-
100.00
-
Jersey Islands
2-Oct-12
-
JSC Tverskaya 16
SOFAZ RE Europe
Holding Sarl
100.00
-
Russian Federation
29-Jun-93
21-Dec-12
100.00
-
Luxembourg
31-Oct-12
-
SOFAZ RE Europe Sarl
100.00
-
Luxembourg
31-Oct-12
-
SCI 8 Place Vendome
100.00
-
France
14-Nov-12
-
Industry
property
management
property
management
property
management
property
management
property
management
property
management
property
management
property
management
SOFAZ’s subsidiaries are entities which own the investment properties located in United Kingdom and
Russia as described in Note 9. Subsidiaries in Luxembourg and France are established to hold and own
investment properties in Europe in the future.
Contributions into the Fund are made in accordance with the Regulation of the Fund (“Regulation”)
approved by Presidential Decree #434 dated 29 December 2000 as amended by Presidential Decrees
#849 and #202 on “Amending Certain Legislative Acts Regulating the Operations of The State Oil Fund
of the Republic of Azerbaijan” dated 7 February 2003 and 1 March 2005, respectively, and Article 2.3 of
the “Regulations on Development and Implementation of the Annual Program of Income and Expenses
(Budget) of the Fund” approved by Presidential Decree #579 dated 12 September 2001 as amended
by Presidential Decrees #849 and #202 mentioned earlier. Pursuant to the Regulations of the Fund,
contributions are received from the following sources:
97
ANNUAL REPORT
2012
96
Receipts
Contributions received from sales of profit oil and
gas
Income from placement and management of assets1
The oil and gas agreements signature or
performance bonuses paid by investors to the State
Oil Company of the Republic of Azerbaijan or an
authorized state body
Income from transit of oil and gas through the
territory of the Republic of Azerbaijan
Acreage fees by the foreign investors for use of the
contract areas in connection with the development
of hydrocarbon resources
Other gains and receipts
Total receipts
Original3
ANNUAL REPORT
2012
Notes2
Actual
amounts on
a comparable
basis
The State Oil Fund of the Republic of Azerbaijan (“SOFAZ”) was established by Decree #240 of the
President of the Republic of Azerbaijan on the “Establishment of The State Oil Fund of the Republic of
Azerbaijan” dated 29 December 1999 (the “Decree”). The purpose of SOFAZ is to ensure the accumulation,
effective management, and use of income and other inflows generated from agreements related to oil
and gas exploration and development, as well as, from SOFAZ’s own activities, for the benefit of citizens
and future generations of the Republic of Azerbaijan.
a) Revenues generated from implementing agreements on exploration, development and production
sharing for oil and gas fields in the territory of the Republic of Azerbaijan including the Azerbaijan
Sector of the Caspian Sea, as well as other agreements on oil and gas exploration, development and
transportation entered into between the State Oil Company of the Republic of Azerbaijan (“SOCAR”) or
other authorized state bodies and investors, including:
i. Net revenues from the sale of hydrocarbons related to the share of the Republic of Azerbaijan (net of
expenditures incurred for hydrocarbons transportation, customs clearance and bank costs, marketing,
insurance, and independent surveyor fees) excluding revenues related to the participating interest or
investment of SOCAR in a project in which SOCAR is an investor, participant or a contracting party;
ii. Price adjustment revenues under Shah Deniz Phase I;
ANNUAL REPORT
2012
v. Dividends and profit participation revenues related to the share of the Republic of Azerbaijan in
connection with oil and gas agreements, excluding revenues related to a participating interest or
investment of SOCAR in a project in which SOCAR is an investor, participant or a contracting party;
vi. Revenues generated from oil and gas transported over the territory of the Republic of Azerbaijan
with the use of the Baku-Supsa, Baku-Tbilisi-Ceyhan (“BTC”) and Baku-Tbilisi-Erzurum export pipelines;
vii. Revenues generated from transfer of assets from investors to SOCAR and/or an authorized state
body within the framework of oil and gas agreements.
b) Revenues generated from investment, management, sale and other disposal of the Fund’s assets
(including financial assets and assets contributed by investors within oil and gas agreements), other nonsale income or revaluation surplus of the Fund’s assets in its reporting currency (Azerbaijani manats), etc.;
c) Grants and other free aids;
d) Other revenues and receipts in accordance with the legislation of the Republic of Azerbaijan.
Under the provisions of the Fund’s Regulations approved by the President of the Republic of Azerbaijan,
SOCAR or an authorized state body implements the collection of the fees and revenues listed above and
their transfers to the Fund.
The Regulations exclude the following from the list of sources of the Fund’s revenue and assets:
The Fund’s registered office address is: 20, Bulbul Avenue, Baku, Azerbaijan, AZ1014. The actual address
of the Fund is 24, Neftchiler Avenue, Baku, Azerbaijan, AZ1000.
These consolidated financial statements as of and for the year ended 31 December 2012 were authorized
for issue by the Fund’s Management on 15 April 2013.
2. Basis of preparation
These consolidated financial statements have been prepared in accordance with International Public
Sector Accounting Standards (“IPSAS”) issued by the International Public Sector Accounting Standards
Board (“IPSASB”) of the International Federation of Accountants (“IFAC”). IPSAS are developed by
adopting International Financial Reporting Standards (“IFRS”) to the public sector context. IFRS comprise
standards issued by the International Accounting Standards Board (“IASB”), and Interpretations issued
by the International Financial Reporting Interpretations Committee (“IFRIC”).
The public sector refers to national governments, regional governments, local governments and related
governmental entities. As permitted by IPSAS, the Fund follows the provisions of IFRS pronouncements
in the absence of equivalent IPSAS.
These consolidated financial statements have been prepared on the assumption that the Fund is a going
concern and will continue in operation for the foreseeable future.
These consolidated financial statements are presented in thousands of Azerbaijani Manats (“AZN”),
unless otherwise indicated.
These consolidated financial statements have been prepared under the historical cost convention,
except for the measurement at fair value of financial assets at fair value through surplus or deficit, gold
bullions, investment properties and buildings.
● The rental fees from the use of state property under contracts with foreign companies;
● Revenues from the sale of hydrocarbons related to the participating interest or investment of
SOCAR in any project in which SOCAR is an investor, participant or a contracting party; and
● Other revenues generated from joint activities with foreign companies.
3. Significant accounting policies
Changes in accounting policies
The Fund has adopted the following amended IPSAS effective during the year. The principal effects of
these changes are as follows:
Amendment to IPSAS 1 “Presentation of Financial Statements”
99
ANNUAL REPORT
2012
98
iv. Acreage payments due to SOCAR and/or an authorized state body of the Republic of Azerbaijan from
investors for the use of the contract area in connection with oil and gas exploration and development;
In 2012 and 2011, the Fund was a party to a custody agreement with the Bank of New York Mellon,
and five (2011: three) investment management agreements with financial institutions with Deutsche
Asset Management International GmbH, Credit Suisse (on 2 April 2012 Clariden Leu legally merged
with Credit Suisse, who acquired all of Clariden Leu’s assets and liabilities and assumed all of its rights
and obligations), the International Bank for Reconstruction and Development (IBRD – World Bank
Group), State Street Global Advisors (SSGA) and Union Bank of Switzerland (UBS). Under the custody
agreements the financial institutions hold securities purchased by the Fund, whereas in accordance
with the investment management agreements the financial institutions manage the Fund’s investments
based on general investment policies established by the Fund.
iii. Bonuses paid by investors under the production sharing agreements to SOCAR or an authorized
state body in connection with oil and gas agreements;
The amendment to IPSAS 1 was issued in November 2010, and became effective for annual periods
beginning on or after 1 January 2012. Main changes covered the current/non-current classification of
convertible instruments which states that terms of a liability that could, at the option of the counterparty,
result in its settlement by the issue of equity instruments do not affect its classification. These amendments
did not have any impact on the Fund’s financial statements.
Recognition and measurement of financial instruments
Amendment to IPSAS 2 “Cash Flow Statements”
Financial assets and liabilities are initially recognized at fair value plus, in the case of a financial asset or
financial liability not at fair value through surplus or deficit, transaction costs that are directly attributable
to the acquisition or issue of the financial asset or financial liability. The accounting policies for subsequent
re-measurement of these items are disclosed in the respective accounting policies set out below.
The amendment to IPSAS 2 was issued in November 2010, and became effective for annual periods
beginning on or after 1 January 2012. Main changes covered the cash flows on unrecognized assets
which states that only cash outflows that result in a recognized asset in the statement of financial
position are eligible for classification as investing activities. Also paragraph 30 in “Reporting Cash Flows
from Operating Activities” section of the Standard is amended and following text deleted “The impact of
any extraordinary items which are classified as operating cash flows”. These amendments did not have
any impact on the Fund’s financial statements.
The following amendments to standards and interpretations did not have any impact on the accounting
policies, financial position or performance of the Fund:
Derecognition of financial assets and liabilities
Financial assets
A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial
assets) is derecognized where:
● The rights to receive cash flows from the asset have expired;
● IPSAS 12 Inventories
● The Fund has transferred its rights to receive cash flows from the asset, or retained the right to
receive cash flows from the asset, but has assumed an obligation to pay them in full without
material delay to a third party under a ‘pass-through’ arrangement; and
● IPSAS 18 Segment Reporting
● IPSAS 21 Impairment of non-cash generating assets
Basis of consolidation
Subsidiaries, which are those entities in which the Fund has an interest of more than one half of the
voting rights, or otherwise has power to exercise control over their operations, are consolidated.
Subsidiaries are consolidated from the date on which control is transferred to the Fund and are no
longer consolidated from the date that control ceases. All intra-group transactions, balances and
unrealized gains on transactions between group companies are eliminated in full; unrealized losses
are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
Where necessary, accounting policies for subsidiaries have been changed to ensure consistency with the
policies adopted by the Fund.
For subsidiaries acquired and treated as an asset acquisition, no deferred tax is recognized by the Fund
in respect of the asset i.e. property at the time of acquisition.
If the Fund loses control over a subsidiary, it derecognizes the assets and liabilities of the subsidiary, the
carrying amount of any non-controlling interests, the cumulative translation differences, recorded in
equity; recognizes the fair value of the consideration received, the fair value of any investment retained
and any surplus or deficit in statement of financial performance and reclassifies the parent’s share of
components previously recognized in equity to statement of financial performance.
● The Fund either (a) has transferred substantially all the risks and rewards of the asset, or (b)
has neither transferred nor retained substantially all the risks and rewards of the asset, but has
transferred control of the asset.
101
A financial asset is derecognized when it has been transferred and the transfer qualifies for derecognition.
A transfer requires that the Fund either: (a) transfers the contractual rights to receive the asset’s cash
flows; or (b) retains the right to the asset’s cash flows but assumes a contractual obligation to pay those
cash flows to a third party. After a transfer, the Fund reassesses the extent to which it has retained the
risks and rewards of ownership of the transferred asset. If substantially all the risks and rewards have
been retained, the asset remains in the statement of financial position. If substantially all of the risks and
rewards have been transferred, the asset is derecognized. If substantially all the risks and rewards have
been neither retained nor transferred, the Fund assesses whether or not is has retained control of the
asset. If it has not retained control, the asset is derecognized. Where the Fund has retained control of the
asset, it continues to recognize the asset to the extent of its continuing involvement.
ANNUAL REPORT
2012
The Fund recognizes financial assets and liabilities on its statement of financial position when it becomes
a party to the contractual obligations of the instrument. A purchase or sale of financial assets is recognized
using trade date accounting (Resolution #32 dated 13 June 2007 issued by the Supervisory Board of The
State Oil Fund of the Republic of Azerbaijan). The trade date is the date on which the Fund commits to
purchase or sell an asset.
● IPSAS 9 Revenue from Exchange Transactions
● IPSAS 13 Leases
100
ANNUAL REPORT
2012
Financial liabilities
A financial liability is derecognized when the obligation is discharged, cancelled, or expires.
Cash and cash equivalents include cash on hand, deposits with original maturity of three months, and
short-term, highly liquid investments i.e. money market funds, readily convertible to known amounts of
cash and subject to low risk of changes in value, with an original maturity of three months or less. Cash
on hand, cash in banks and deposits are carried at cost plus interest, if any.
Investment properties
Financial assets at fair value through surplus or deficit comprise equity and debt securities, and are
classified as held for trading. A financial asset is classified as held for trading if it is:
Investment properties are properties intended to earn rentals, or for capital appreciation, or both.
Investment properties measured initially at cost, including transaction costs. The carrying amount
includes the cost of replacing part of existing investment properties at the time that cost is incurred if
the recognition criteria are met and excludes the costs of day-to-day servicing of investment properties.
Subsequent to initial recognition, investment properties are stated at fair value, which reflects market
conditions at the reporting date. Gains or losses arising from changes in the fair values of investment
properties are included in the consolidated statement of financial performance in the period in which
they arise. Fair values are evaluated annually by an accredited external, independent valuer, applying a
valuation model recommended by the International Valuation Standards Committee.
a) Acquired principally for the purpose of selling or repurchasing it in the near term;
b) On initial recognition part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking;
c) A derivative (except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument).
ANNUAL REPORT
2012
e) The financial asset forms part of a group of financial assets or liabilities or both, which is managed
and its performance is evaluated on a fair value basis, in accordance with the Fund’s documented risk
management or investment strategy, and information about the grouping is provided internally on that
basis the entity’s key management personnel.
Financial assets at fair value through surplus or deficit are initially recorded and subsequently measured
at fair value. The Fund uses quoted market prices and valuation model to determine fair value for financial
assets at fair value through surplus or deficit. The fair value adjustment on financial assets at fair value
through surplus or deficit is recognized in the statement of financial performance for the period as part
of net gain or loss on financial assets at fair value through surplus or deficit. The Fund does not reclassify
financial instruments in or out of this category while they are held.
Financial investments held-to-maturity
Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified
as held-to-maturity when the Fund has the positive intention and ability to hold them to maturity.
Investments intended to be held for an undefined period are not included in this classification. Heldto-maturity investments are subsequently measured at amortized cost. Gains and losses are recognized
in the statement of financial performance for the period when the investments are impaired, as well as
through the amortization process.
Gold bullions
The Fund is involved in purchase of gold bullions for investment purposes with the intention of
diversification of the investment portfolio with ability to sell the gold in the future. The gold bullions are
initially recognized and subsequently measured at fair value, and classified at fair value through surplus
or deficit as part of current assets.
Transfers are made to or from investment properties only when there is a change in use. For a transfer
from investment properties to owner-occupied properties, the deemed cost for subsequent accounting
is the fair value at the date of change in use. If owner-occupied properties become investment properties,
the Fund accounts for such property in accordance with the policy stated under property and equipment
up to the date of change in use.
Property and equipment
The Fund’s property and equipment are tangible assets held for administrative purposes with an expected
useful life of more than one accounting period and with the cost exceeding AZN 100 (full amount).
Depreciation is charged on the carrying value of property and equipment and is designed to write off
assets over their useful economic lives. Depreciation is calculated on a straight line basis at the following
estimated useful lives:
Buildings
Vehicles
Office equipment
Furniture
Other property and equipment
Years
50
7
4
5
3
The carrying amounts of property and equipment are reviewed at each reporting date to assess whether
they are recorded in excess of their recoverable amounts. The recoverable amount is the higher of fair
value less costs to sell and value in use. Where carrying values exceed the estimated recoverable amount,
assets are written down to their recoverable amount, impairment is recognized in the respective period
and is included in operating expenses. After the recognition of an impairment loss the depreciation
charge for property and equipment is adjusted in future periods to allocate the asset’s revised carrying
value, less its residual value (if any), on a systematic basis over its remaining useful life.
103
ANNUAL REPORT
2012
d) Such designation eliminates or significantly reduces a measurement or recognition inconsistency
that would otherwise arise from measuring assets or recognizing the gains and losses on them on different bases; or
Investment properties are derecognized when either they have been disposed of or when the investment
properties are permanently withdrawn from use and no future economic benefit is expected from its
disposal. The difference between the net disposal proceeds and the carrying amount of the asset is
recognized in the consolidated statement of financial performance in the period of derecognition.
A financial asset other than a financial asset held for trading may be designated at fair value through
surplus or deficit upon initial recognition if:
102
A building held for administrative purposes is stated in the statement of the financial position at
its revalued amount, being the fair value at the date of revaluation, determined from market-based
evidence by appraisal undertaken by professional independent appraisers, less any subsequent
accumulated depreciation and subsequent accumulated impairment losses. Revaluations are performed
with sufficient regularity such that the carrying amount does not differ materially from that which would
be determined using fair values at the reporting date.
ANNUAL REPORT
2012
Depreciation on revalued buildings is charged to the statement of financial performance. On the
subsequent sale or retirement of a revalued property, the attributable revaluation surplus remaining in
the property revaluation reserve is transferred directly to accumulated deficit or surplus.
Market value of property is assessed using any of the following three methods:
● The comparable sales method which involves analysis of market sales prices for similar real
estate property;
● The income-based method which assumes a direct relationship between revenues generated by
the property and its market value;
● The costs method which presumes the value of property to be equal to its recoverable amount
less any depreciation charges.
Intangible assets
Intangible assets acquired separately are measured on initial recognition at cost. Following initial
recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated
impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite.
Intangible assets with finite lives are amortized over the useful economic lives of 10 years and assessed
for impairment whenever there is an indication that the intangible asset may be impaired. Amortization
periods and methods for intangible assets with indefinite useful lives are reviewed at least at each
financial year-end.
Taxation
Income tax expense comprises current and deferred tax expense.
The current tax expense is based on taxable profit for the year. Taxable profit differs from net profit before
tax as reported in the statement of the financial performance because it excludes items of income or
expense that are taxable or deductible in other years and it further excludes items that are never taxable
or deductible. The Fund’s current tax expense is calculated using tax rates that have been enacted during
the reporting period.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent
that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset
to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when
the liability is settled or the asset is realized. Deferred tax is charged or credited to surplus or deficit,
except when it relates to items charged or credited directly to the statement of financial performance, in
which case the deferred tax is also dealt with in the statement of financial performance.
No deferred tax is recognized and the initial recognition exception applies if the temporary difference
arises in neither in a business combination nor in a transaction that gives rise to an accounting or taxable
profit or loss.
Deferred income tax assets and deferred income tax liabilities are offset and reported net in the statement
of financial position if:
● The Fund has a legally enforceable right to set off current income tax assets against current
income tax liabilities; and
● Deferred income tax assets and the deferred income tax liabilities relate to income taxes levied
by the same taxation authority on the same taxable entity.
The Republic of Azerbaijan also has various other taxes, which are assessed on the Fund’s activities. These
taxes are included as a component of operating expenses in the statement of financial performance.
Contingencies
Contingent liabilities are not recognized in the statement of financial position but are disclosed unless the
possibility of any outflow in settlement is remote. A contingent asset is not recognized in the statement
of financial position but disclosed when an inflow of economic benefits is probable.
Net assets/Equity
As discussed in Note 1, in accordance with the Decrees and the Regulations, the Fund is an extra-budget
state organization. All decisions regarding contributions to and transfers from the Fund are made based
on the Decrees approved by the President of the Republic of Azerbaijan. Contributions/transfers received/
made by the Fund represent contributions/withdrawals and, accordingly, are recognized through net
assets/equity at the fair value of the consideration received/paid.
Transfers to the State Budget, as well as state institutions, state-owned entities and companies are
recognized on the date of payment. All transfers are made within the approved budget of the Fund
and transferred to the State Treasury of the Republic of Azerbaijan for payments to eligible budgetary
beneficiaries (state institutions, state-owned entities and companies) based on their requests for
payments.
105
ANNUAL REPORT
2012
104
An annual transfer from the revaluation reserve for property and equipment to accumulated deficit or
surplus is made for the difference between depreciation based on the revalued carrying amount of the
assets and depreciation based on the assets original cost.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying
amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the
computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred
tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are
recognized to the extent that it is probable that taxable profits will be available against which deductible
temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary
difference arises from the initial recognition of other assets and liabilities in a transaction that affects
neither the tax profit nor the accounting profit.
Any revaluation increase arising on the revaluation of such buildings is credited to the property
revaluation reserve, except to the extent that it reverses a revaluation decrease for the same asset
previously recognized as an expense, in which case the increase is credited to surplus or deficit for the
period to the extent of the decrease previously charged. A decrease in carrying amount arising on the
revaluation of such buildings is charged as an expense to the extent that it exceeds the balance, if any,
held in the property revaluation reserve relating to a previous revaluation of that asset.
Recognition of income and expense
Interest income is recognized on an accrual basis using the effective interest method. The effective
interest method is a method of calculating the amortized cost of a financial asset or a financial liability (or
a group of financial assets or financial liabilities) and of allocating the interest income over the relevant
period. The effective interest rate is the rate that exactly discounts estimated future cash payments or
receipts through the expected life of the financial instrument or, when appropriate, a shorter period to
the net carrying amount of the financial asset.
Once a financial asset or a group of similar financial assets has been written down (or partly written
down) as a result of an impairment loss, interest income is thereafter recognized using the rate of
interest used to discount the future cash flows for the purpose of measuring the impairment loss.
ANNUAL REPORT
2012
Expenses are recognized on accrual basis, i.e. when they are incurred.
2011
0.7865
1.0178
1.2123
-
Offset of financial assets and liabilities
Financial assets and liabilities are offset and reported net on the statement of financial position when
the Fund has a legally enforceable right to set off the recognized amounts and the Fund intends either
to settle on a net basis or to realize the asset and settle the liability simultaneously. In accounting for
a transfer of a financial asset that does not qualify for derecognition, the Fund does not offset the
transferred asset and the associated liability.
4. Significant judgments and estimates
The consolidated financial statements are presented in AZN, which is the Fund’s functional and
presentation currency. Transactions in foreign currencies are initially recorded in the functional currency,
converted at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at
the reporting date. Gains and losses resulting from the translation of foreign currency transactions are
recognized in the consolidated statement of performance as foreign currency translation differences.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated
using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair
value in a foreign currency are translated using the exchange rates at the date when the fair value was
determined.
The preparation of the Fund’s consolidated financial statements requires management to make estimates
and judgments that affect the reported amounts of assets and liabilities at the reporting date and the
reported amount of income and expenses during the year ended. Management evaluates its estimates
and judgments on an ongoing basis. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates under different assumptions or conditions. The following
estimates and judgments are considered important in reflecting the Fund’s financial condition and
financial performance.
Differences between the contractual exchange rate of a transaction in a foreign currency and the Central
Bank exchange rate on the date of the transaction are included in gains less losses from dealing in
foreign currencies.
Valuation of financial instruments
As at the reporting date, the assets and liabilities of the entities whose functional currency is different
from the presentation currency of the Fund are translated into AZN at the rate of exchange ruling at the
reporting date and, their statements of financial performance are translated at the weighted average
exchange rates for the year. The exchange differences arising on the translation are taken to the separate
component of net assets/equity. On disposal of a subsidiary or an associate whose functional currency
is different from the presentation currency of the Fund, the deferred cumulative amount recognized in
surplus or deficit in the consolidated statement of financial performance.
Rates of exchange
The exchange rates used by the Fund in the preparation of the financial statements as at year-end are
as follows:
Financial instruments that are classified at fair value through surplus or deficit are stated at fair value.
The fair value of such financial instruments is the estimated amount at which the instrument could be
exchanged between willing parties, other than in a forced or liquidation sale. If a quoted market price
is available for an instrument, the fair value is calculated based on the market price. When valuation
parameters are not observable in the market or cannot be derived from observable market prices, the
fair value is derived through analysis of other observable market data appropriate for each product
and pricing models which use a mathematical methodology based on accepted financial theories.
Pricing models take into account the contract terms of the securities as well as market-based valuation
parameters, such as interest rates, volatility, exchange rates and the credit rating of the counterparty.
Where market-based valuation parameters are absent, management will make a judgment as to its
best estimate of that parameter in order to determine a reasonable reflection of how the market would
be expected to price the instrument. In exercising this judgment, a variety of tools are used including
proxy observable data, historical data, and extrapolation techniques. The best evidence of fair value of
a financial instrument at initial recognition is the transaction price unless the instrument is evidenced
by comparison with data from observable markets. Any difference between the transaction price and
the value based on a valuation technique is not recognized in the statement of financial performance
on initial recognition. Subsequent gains or losses are only recognized to the extent that it arises from a
change in a factor that market participants would consider in setting a price.
107
ANNUAL REPORT
2012
106
Foreign currency translation
2012
0.7850
1.0377
1.2694
0.0258
Interest earned on assets at fair value is classified within interest income.
AZN/1 US Dollar
AZN/1 Euro
AZN/1 GB Pound
AZN/1 Russian Ruble
The Fund considers that the accounting estimates related to valuation of financial instruments where
quoted markets prices are not available are a key source of estimating uncertainty because: (i) they
are highly susceptible to change from period to period because it requires management to make
assumptions about interest rates, volatility, exchange rates, the credit rating of the counterparty, valuation
adjustments and specific feature of the transactions and (ii) the impact that recognizing a change in the
valuations would have on the assets reported in the statement of financial position as well as its profit/
(loss) could be material.
ANNUAL REPORT
2012
The Fund holds investments in companies, including those that do not trade in an active market. Future
adverse changes in market conditions or poor operating results could result in losses that may not
be reflected in an investment’s current carrying value, thereby requiring an impairment charge in the
future. The Fund regularly reviews its investments to determine if there have been any indicators that the
value may be impaired. These reviews require estimating the outcome of future events and determining
whether factors exist that indicate impairment has occurred.
Measurement of fair value of investment properties and property and equipment (building)
Fair value of investment properties as well as at the property and equipment (building) is determined
by independent professionally qualified appraisers. Fair value is determined using the combination of
internal capitalization method (also known as discounted future cash flow method), sales comparison
method and also based on the highest and best use method.
The estimates described above are subject to change as new transaction data and market evidence
becomes available.
Deferred tax assets
The management of the Fund considers that valuation allowance against deferred tax assets at the
reporting date is considered necessary, because it is more likely that the deferred tax asset will not be
realized.
Cash and cash equivalents comprise:
Money market funds
Bank accounts
Deposits
Total cash and cash equivalents
2012
475,826
262,286
444,197
1,182,309
2011
545,535
225,560
771,095
Money market funds
Investments in money market funds represent share ownership in funds, payable on demand. Investments
in money market funds are highly liquid. Money market funds invest their assets in short-term debt
and debt related instruments, such as commercial paper, certificates of deposit, bonds bearing floating
interests, US treasury bonds, Eurobonds and asset-backed securities. Interest and dividends payable to
the Fund are reinvested.
The Fund had the following investments in the money market funds with AAA credit ratings:
BlackRock ICS-Institution Liquidity Funds plc
Royal Bank of Scotland plc, Global Treasury Funds plc
Total money market funds
2012
475,826
475,826
2011
545,305
230
545,535
Bank accounts
Bank accounts were denominated in the following currencies:
AZN
USD
AUD
GBP
RUB
EUR
TRY
Total bank accounts
2012
156,525
101,629
2,155
1,672
279
22
4
262,286
2011
133,767
91,643
76
74
225,560
The Fund holds AZN accounts with the Central Bank of the Republic of Azerbaijan and the International
Bank of Azerbaijan. At 31 December 2012 the Fund had AZN 156,506 thousand and AZN 59 thousand,
held at bank accounts in the Central Bank of the Republic of Azerbaijan and the International Bank of
Azerbaijan (2011: AZN 133,755 thousand and AZN 31 thousand), respectively.
109
ANNUAL REPORT
2012
108
Impairment of investments held to maturity
5. Cash and cash equivalents
Had management used different assumptions regarding the interest rates, volatility, exchange rates, the
credit rating of the counterparty and valuation adjustments, a larger or smaller change in the valuation
of financial instruments where quoted market prices are not available would have resulted that could
have had a material impact on the Fund’s reported net surplus.
Other accounts originated in foreign currencies were opened with non-resident banks with long-term
ratings BBB/Baa (Standard & Poor Fitch/Moody’s) and above.
Deposits
110
T.C. Ziraat Bankasi A.S.
Akbank T.A.S, Istanbul
Turkiye Is Bankasi A.S. Istanbul
Gazprombank, Moscow
BNP Paribas, London
VTB Bank JSC
Jefferies Bache, London
Total deposits
2012
137,261
136,890
91,312
78,536
86
66
46
444,197
2011
-
As at 31 December 2012, the Fund placed AZN 444,197 thousand in deposits with non-resident banks
maturing in January 2013 with credit ratings of BBB/Baa (Standard & Poor’s/ Fitch/Moody’s) and above.
6. Financial assets at fair value through surplus or deficit
Foreign government debt securities
Corporate debt securities
Financial institution debt securities
Equity securities
Standard and Poor's Depository Receipt (“SPDR”) Trust
Securities of USA agencies
Total financial assets at fair value through surplus or deficit
Corporate debt securities
Corporate debt securities are represented by investments in debt securities issued by corporations of
Europe, Asia, Africa, Australia and America. These securities bear fixed interest ranging from 1% p.a.
to 9.625% p.a. and USD LIBOR with the spread ranging from +0.20% p.a. to +1.4% p.a. (2011: from
1.25% p.a. to 11.875% p.a. and USD LIBOR with the spread ranging from +0.15% p.a. to +0.95% p.a.)
and mature during the period from January 2013 to February 2017 (2011: January 2012 to December
2016). Discount securities are also included in this group. As at 31 December 2012 total accrued interest
on these securities amounted AZN 52,913 thousand (2011: AZN 63,486 thousand). These securities
were held in the portfolio managed both directly by the Fund as well as the Fund’s external managers,
Deutsche Bank AG and Credit Suisse.
Financial institution debt securities
2012
11,006,880
6,865,143
5,719,139
520,389
9,460
6,388
24,127,399
2011
11,087,696
6,434,710
4,726,843
11,614
8,348
13,269
22,282,480
As at 31 December 2012 the Fund held AZN 780,983 thousand (USD 994,882 thousand) under asset
management agreements with financial institutions (“external managers”) including cash and cash
equivalents (2011: AZN 210,364 thousand (USD 267,469 thousand)). The management fees in 2012 to
these institutions were AZN 795 thousand (2011: AZN 969 thousand). During 2012 the Fund’s external
managers were Deutsche Bank AG, Credit Suisse (on 2 April 2012 Clariden Leu legally merged with
Credit Suisse, who acquired all of Clariden Leu’s assets and liabilities and assumed all of its rights and
obligations), the International Bank for Reconstruction and Development (IBRD – World Bank Group),
State Street Global Advisors (SSgA) and UBS. Whereas during 2011 the Fund’s external managers were
Deutsche Bank AG, Clariden Leu Ltd. and International Bank for Reconstruction and Development (World
Bank Group). All securities are held in the custodian - Bank of New York Mellon.
Financial institution securities are represented by investments in debt securities issued by various
European, Asian, Australian and American financial institutions. These securities bear fixed interest
ranging from 0.52% p.a. to 6.75% p.a. and USD LIBOR, GBP LIBOR and EURIBOR with the spread ranging
from +0.13% p.a. to +2.5% p.a. (2011: from 1.875% p.a. to 6.75% p.a. and USD LIBOR, GBP LIBOR and
EURIBOR with the spread ranging from +0.09% p.a. to +3.5% p.a.) and mature during the period from
January 2013 to February 2016 (2011: from January 2012 to February 2016). Discount securities are also
included in this group. As at 31 December 2012 total accrued interest on these securities amounted AZN
13,895 thousand (2011: AZN 18,755 thousand). These securities were held in the portfolio managed
both directly by the Fund as well as the Fund’s external managers, Deutsche Bank AG, Clariden Leu Ltd.
and IBRD.
111
ANNUAL REPORT
2012
Financial assets at fair value through surplus or deficit comprise:
Foreign government securities are represented by investments in debt securities issued by various
sovereign and international organizations of Europe, Asia, Africa, Australia and America. These securities
bear fixed interest ranging from 0.25% p.a. to 9.875% p.a. and USD LIBOR, EURIBOR, GBP LIBOR with
the spread ranging from +0% p.a. to +1.2% p.a. (2011: from 0.25% p.a. to 9.875% p.a. and USD LIBOR,
EURIBOR with the spread ranging from +0% p.a. to +1.4% p.a.) and mature during the period from
January 2013 to June 2018 (2011: from January 2012 to January 2018). Discount securities are also
included in this group. As at 31 December 2012 total accrued interest on these securities amounted AZN
49,651 thousand (2011: AZN 76,483 thousand). These securities were held in the portfolio managed
both directly by the Fund as well as the Fund’s external managers, Deutsche Bank AG, Credit Suisse and
IBRD.
ANNUAL REPORT
2012
The Fund’s investments in deposits comprise:
Foreign government debt securities
Equity securities
These are comprised of corporate bonds of:
Consumer
Finance
Telecommunication and information technologies
Industrial
Healthcare
Energy
Materials
Private equity
Utilities
Total equity securities
2012
106,456
98,434
76,725
53,292
51,307
49,894
33,846
33,798
16,637
520,389
2011
915
252
475
100
504
160
239
8,969
11,614
SPDR Trust
In its internally managed portfolio SOFAZ invests in S&P 500 stock index incorporated in the United
States via SPDR Trust. S&P 500 index consists of a portfolio representing 500 large-cap stocks such as
Apple Inc, Exxon Mobil Corp, IBM, Microsoft Corp, Chevron Corp, General Electric, Johnson & Johnson,
Procter & Gamble, AT&T Inc, Pfizer Inc. The main sectors are Oil & Gas, Computers, Pharmaceuticals,
Banks, Retail, Telecommunications and etc.
112
Securities of USA Agencies are represented by investments in debt securities issued by Freddie Mac
and Federal Home Loan Banks in 2012 (2011: Fannie Mae, Freddie Mac, Federal Farm Credit Bank
and Federal Home Loan Banks). These securities bear fixed interest rates ranging from 0.215% p.a. to
2.75% p.a. (2011: from 0.5% p.a. to 3.05% p.a.) and mature during the period from December 2014 to
November 2015 (2011: from April 2012 to June 2015). As at 31 December 2012 total accrued interest on
these securities amounted to AZN 15 thousand (2011: AZN 22 thousand). These securities were held in
the portfolio managed by the Fund’s external manager IBRD.
2011
384,102
384,102
On 26 September 2012 the Fund purchased bonds of Mercury Investments and Holdings Ltd. (which
is a 100% owned subsidiary of State Oil Company of Azerbaijan Republic) at face value of USD 200,000
thousand. As of 31 December 2012 amount of these bonds equaled to AZN 157,828 thousand (2011: nil).
The maturity date of the bonds is 31 December 2027 and the coupon rate is 6-month LIBOR+1.335%.
The purchase was made in accordance with the decree #519 of the President of Azerbaijan Republic
dated 27 October 2011 on “Rules on management of foreign currency assets of the State Oil Fund
of the Republic of Azerbaijan”. Main aim of the bond issuance is to improve and reconstruct the Ship
Construction Plant of the Republic of Azerbaijan.
On 5 July 2011 the Fund purchased bonds of AzACG Ltd. (which is a 100% owned subsidiary of State Oil
Company of Azerbaijan Republic) at face value of USD 485,000 thousand. The purchase of the bonds
was made under “The framework (program) of the main directions of utilization of Oil Fund’s assets
for 2011” approved by the Decree of the President of the Republic of Azerbaijan dated 28 December
2010. According to the program SOFAZ may invest in the securities of oil and gas companies operating
in the Caspian Sea basin. The issuer of these securities or its parent company should have a longterm investment grade credit rating. As of 31 December 2012 amount of these bonds equaled to AZN
356,664 thousand (2011: AZN 384,102 thousand). The maturity date of the bonds is 31 December 2024
and the coupon rate is 6-month LIBOR+1%.
The custodian service for holding both securities is provided by the National Depository Center of the
Republic of Azerbaijan. The management of the Fund has intention and ability to hold the bonds until
the scheduled maturity date for the purpose of earning of interest income over the holding period.
8. Gold bullions
In accordance with the “Rules on Holding, Placement and Management of Foreign Assets of The State
Oil Fund of the Republic of Azerbaijan” approved by Decree #511 of the President of the Republic of
Azerbaijan dated 19 June 2001 as amended by Decrees #607 dated 21 December 2001, #202 dated 1
March 2005, #216 dated 10 February 2010 and #519 dated 27 October 2011 gold bars conforming to
the requirements of the London Bullion Market Association may be included in the Investment Portfolio
of the Fund. The Fund bought 480,146 fine troy ounces of gold during 2012.
7. Financial investments held-to-maturity
Financial investments held-to-maturity comprise:
Current portion of Financial investments held–to–maturity
Non-current portion of Financial investments held–to–maturity
2012
157,828
356,664
514,492
2012
57,523
456,969
514,492
2011
57,143
326,959
384,102
As of 31 December 2012 gold bullions deposited in foreign banks consisted of 325,000 fine troy ounces
amounting to AZN 422,870 thousand (2011: nil).
113
ANNUAL REPORT
2012
Securities of USA Agencies
Mercury Investments and Holdings Ltd.
Azerbaijan (ACG) Ltd (AzACG Ltd)
ANNUAL REPORT
2012
The carrying value of equity securities consists of the following at 31 December:
9. Investment properties
10. Property and equipment
Movement of investment properties:
Opening balance at 1 January
Purchase of “Gallery Actor” complex
Purchase of “78 St James’s Street” office complex
Closing balance at 31 December
2012
102,677
235,380
338,057
2011
-
ANNUAL REPORT
2012
Rental income derived from investment properties
Direct operating expenses
Net profit arising from investment properties carried at fair value
2012
857
(250)
607
2011
-
Acquisition of JSC Tverskaya 16
On 21 December 2012, the Fund acquired 100% of voting shares of JSC Tverskaya 16. Its main activity
is management of business and retail centre called “Gallery Actor” located in the Central Administrative
District of Moscow, Russia. From the date of acquisition, the JSC Tverskaya 16 has contributed AZN
234 thousand of rental income and AZN 157 thousand to the net profit before tax of the Fund. The
acquisition is accounted for as an asset acquisition.
Establishment of 78 St James’s Street Unit Trust (the “Unit Trust”)
The Unit Trust was established by the Fund on 22 November 2012 under the provision of the Trust
Instrument. SOFAZ Re Limited in its capacity as general partner of the SOFAZ RE UK L.P. has a 99%
holding of the Unit Trust. SOFAZ Re Min Limited has a 1% holding of the Unit Trust. SOFAZ Re Limited,
SOFAZ Re UK L.P. and SOFAZ RE Min Limited are ultimately owned by the State Oil Fund of Azerbaijan.
The Unit Trust invests in real estate located in the United Kingdom. The Unit Trust is established, resident
and domiciled in Jersey, Channel Islands. From the date of acquisition, the Unit Trust has contributed
AZN 623 thousand of rental income and AZN 450 thousand to the net profit before tax of the Fund.
The Fund has no restrictions on the realizability of its investment properties and no contractual obligations
to purchase, construct or develop investment properties or for repairs, maintenance and enhancements.
As at 31 December 2012 investment properties are stated at fair value, which has been determined
based on valuations performed by professional valuation company, an accredited independent
appraiser. The appraiser is an industry specialist in valuing these types of investment properties. The fair
value represents the amount at which the assets could be exchanged between a knowledgeable, willing
buyer and a knowledgeable, willing seller in an arm’s length transaction at the date of valuation. The
fair values of the properties have been primarily derived using prices for comparable properties, market
information, discounted cash flow method (income approach) and the expert opinion of independent
accredited valuators who have advised on current market levels.
Net book value
Office
equipment
Furniture
Other
property and
equipment
Total
4,350
(2,074)
2,276
2,276
330
22
(5)
347
1,232
1,579
400
45
(42)
403
138
541
156
11
(14)
153
18
171
5
5
611
616
5,241
78
(61)
(2,074)
3,184
1,999
5,183
-
(80)
(48)
3
(125)
(72)
(197)
(320)
(40)
42
(318)
(40)
(358)
(127)
(12)
14
(125)
(12)
(137)
(4)
(1)
(5)
(1)
(6)
(531)
(101)
59
(573)
(125)
(698)
4,350
2,276
2,276
250
222
1,382
80
85
183
29
28
34
1
610
4,710
2,611
4,485
In accordance with Resolution #99 of the Cabinet of Ministers, dated 27 May 2002, the Fund received an
administrative building from the Government. As at 31 December 2012 and 2011 the building owned
by the Fund was revalued to market value according to the report of an independent appraiser. The
following methods were used for the estimation of their fair value: discounted cash flow method (income
approach), integrated cost estimation method (cost based approach), method of sales comparison
(comparative approach). For the estimation of the final value, certain weights were assigned to the
results obtained using different approaches, depending on the degree to which the estimates met
the following characteristics: reliability and completeness of the information, specifies the estimated
property and other. As a result, the carrying value of the buildings amounted to AZN 2,276 thousand as
at 31 December 2012 (2011: AZN 2,276 thousand).
The Fund engaged an independent appraiser to determine the fair value of its buildings. Fair value
is determined by reference to market-based evidence. If the buildings were measured using the cost
model, the carrying amounts would be as follows:
Cost
Accumulated depreciation
Net carrying amount
2012
559
(119)
440
2011
559
(119)
440
115
ANNUAL REPORT
2012
114
Accumulated depreciation
31 December 2010
Depreciation charge
Disposals
31 December 2011
Depreciation charge
31 December 2012
Vehicles
Investment properties consist of “Gallery Actor”, mixed-use office and retail complex located in Moscow
central business district at 16 Tverskaya Street and “78 St James’s Street” an office complex in London.
Both properties are leased out on a commercial basis.
Revalued amount or cost
31 December 2010
Additions
Disposals
Revaluation
31 December 2011
Additions
31 December 2012
Building
11. Other non-current and intangible assets
12. Capital contributions
Other non-current and intangible assets comprise:
The movements in capital contributions to the Fund were as follows:
2012
76,281
807
29
77,117
Deferred costs
Intangible assets
Used equipment held for sale
Total non-current assets
2011
51,639
710
44
52,393
ANNUAL REPORT
2012
13,130,042
101,666
66,784
15,451,696
The movements of intangible assets were as follows:
Licenses
Total
At cost
31 December 2010
Additions
Disposals
31 December 2011
Additions
31 December 2012
Computer
software
13. Transfers by the Fund
241
280
(214)
307
135
442
761
2
(160)
603
10
613
1,002
282
(374)
910
145
1,055
During 2012 transfers to the State Budget, as well as to the state institutions, state-owned entities and
companies were made in accordance with:
Accumulated amortization
31 December 2010
Amortization charge
Disposals
31 December 2011
Amortization charge
31 December 2012
(135)
(64)
160
(39)
(37)
(76)
(137)
(24)
(161)
(11)
(172)
(272)
(88)
160
(200)
(48)
(248)
106
268
366
624
442
441
730
710
807
Net book value
● Law of the Republic of Azerbaijan “On the State Budget for 2012” dated 6 October 2011;
● Decree #570 of the President of the Republic of Azerbaijan “On Ratifying the Budget of The State
Oil Fund of the Republic of Azerbaijan for the year 2012” dated 29 December 2011, “Program
on main directions of Expensing of Assets of The State Oil Fund of the Republic of Azerbaijan for
2011” as approved by Resolution #1266 of the President of the Republic of Azerbaijan dated 28
December 2010 “On some measures for execution of the budget of The State Oil Fund of the
Republic of Azerbaijan for 2011”, and
● Decree of the President of the Republic of Azerbaijan #589 “On Amendments and changes to
the Budget of The State Oil Fund of the Republic of Azerbaijan for 2012” dated 8 February 2012
and decree #666 dated 2 July, 2012.
14. Interest income
Interest income on financial assets at fair value through surplus or deficit
Interest income on assets carried at amortized cost:
Interest on term deposits
Income from financial investments held-to-maturity
Income from money market funds
Interest on demand deposits
Total interest income
2012
425,455
2011
495,534
28,844
7,197
5,232
154
466,882
38,533
2,650
3,346
198
540,261
117
ANNUAL REPORT
2012
116
2011
15,257,482
7,502
1,346
15,730
1,186
As at 31 December 2012 deferred cost represent services and charges incurred in relation to the
construction of administrative office building of the Fund.
Contributions received from sales of profit oil and gas
Pipeline transit tariffs
Acreage fees
Bonuses
Other
Proceeds from implementation of the first phase of Shahdeniz oil and gas
project
Payments on Baku-Tbilisi-Ceyhan project
Total capital contributions
2012
13,117,355
7,891
3,008
1,573
215
15. Foreign currency translation differences
Standard corporate income tax rates for companies operating in the Republic of Azerbaijan and Russian
Federation comprised 20% for 2012 and 2011. Whereas the Jersey subsidiaries are subject to UK income
tax at a rate of 0.2% on net rental income less any deductible expenditure and any adjustments for
capital allowances. Luxembourg and French subsidiaries are subject to income tax at a rate of 29.22%.
Net foreign currency translation differences comprise of:
Net unrealized gain/(loss) on foreign currency translation differences
Net realized loss on foreign currency translation differences
Total net gain/(loss) on foreign currency translation differences
2012
296,384
(42,997)
253,387
2011
(695,520)
(54,231)
(749,751)
Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Temporary
differences relate mostly to different methods of income and expense recognition as well as to recorded
values of certain assets.
The effective income tax differs from the statutory income tax rates. A reconciliation of the income tax
expense based on statutory rates with actual is as follows:
ANNUAL REPORT
2012
118
Net gain/(loss) on financial assets at fair value through surplus or deficit comprises:
Unrealized gain/(loss) on change in fair value adjustment
Realized loss on trading operations
Net gain/(loss) on financial assets at fair value through surplus or deficit
2012
122,832
(45,722)
77,110
2011
(331,381)
(32,449)
(363,830)
Operating expenses are comprised of:
2012
(2,222)
(2,003)
(1,214)
(983)
(347)
(490)
(173)
(459)
(7,891)
2011
(1,957)
(6,315)
(462)
(929)
(303)
(267)
(189)
(372)
(10,794)
18. Income taxes
Financial assets at fair value
through surplus or deficit
Tax losses carried forward
Accruals
Property and equipment
Intangible assets
Other assets
Net deferred tax (liability)/
asset
Unrecognised deferred tax
asset
2010
Origination and
reversal of temporary
differences
In the statement of
financial performance
Origination and
reversal of temporary
differences
In the statement of
financial performance 2012
2011
34,349
45,297
(632)
(2)
(14)
49,669
67,117
15
415
(22)
7
84,018
112,414
15
(217)
(24)
(7)
(84,018)
(112,414)
(15)
217
24
7
-
78,998
117,201
196,199
(196,199)
-
(78,998)
(117,201)
(196,199)
196,199
-
-
-
-
-
-
The Fund provides for income taxes based on the tax accounts maintained and prepared in accordance
with the tax regulations of the Republic of Azerbaijan, Jersey Islands, Russian Federation and Luxembourg
which may differ from IPSAS.
Deferred tax asset/
(liability)
According to the Presidential decree №- 509-IVQD dated 21 December 2012, and law of State Parliament
regarding changes to the Tax Code of Azerbaijan Republic dated 29 December 2012 starting from 1
January 2013 SOFAZ is exempted from corporate income tax.
A temporary difference of AZN 20,457 thousand (2011: nil) exists between the carrying amount of
investment property and their tax base for which no deferred taxation has been provided because of the
initial recognition exemption in IAS 12.
119
ANNUAL REPORT
2012
2011
(584,114)
20%
116,823
(117,201)
378
-
Deferred tax assets and liabilities as of 31 December and their movements for the respective years
comprise:
17. Operating expenses
Wages, salaries and employee benefits
Bank commissions
Professional fees
Rental expenses
Communication expenses
Other employment expenses
Depreciation and amortization (Notes 10 and 11)
Other operating expenses
Total operating expenses
2012
790,345
20%
(158,069)
112,414
83,785
(41,338)
(3,208)
Statutory tax rate
Theoretical income tax benefit/(expense) at the statutory rate
Utilized tax losses carried forward, not recognized previously
Change in deferred tax asset not recognized
Tax effect of permanent differences
Income tax expense
16. Net gain/(loss) on financial assets at fair value through surplus or deficit
19. Fair value of financial instruments
The Fund uses the following hierarchy for determining and disclosing the fair value of financial
instruments by valuation technique:
● Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
● Level 2: techniques for which all inputs which have a significant effect on the recorded fair value
are observable, either directly or indirectly; and
● Level 3: techniques which use inputs which have a significant effect on the recorded fair value
that are not based on observable market data.
ANNUAL REPORT
2012
Level 1
20,015,182
Level 2
4,078,419
Level 3
33,798
Total
24,127,399
At 31 December 2011
Level 1
17,893,566
Level 2
4,379,945
Level 3
8,969
Total
22,282,480
Level 3 financial assets consist of investment in International Finance Corporation (IFC) Private Equity
fund. IFC African, Latin American and Caribbean Fund has been set up with the purpose of making
investments in businesses in Africa, Latin America and the Caribbean.
20. Risk management
Management of risk is an essential element of the Fund’s operations. Risks inherent to the Fund’s
operations are those related to credit exposures, liquidity, market and operational risks. A summary
description of the Fund’s risk management policies in relation to those risks is discussed below.
Credit risk
The Fund is exposed to credit risk which is the risk that one party to a financial instrument will cause a
financial loss for the other party by failing to discharge an obligation. The Fund is subject to credit risk
from its portfolio of cash and cash equivalents and its investments. The Fund manages its credit risk in
accordance with the “Rules on Holding, Placement and Management of Foreign Currency Assets of The
State Oil Fund of the Republic of Azerbaijan” approved by Decree #511 of the President of the Republic
of Azerbaijan dated 19 June 2001 as amended by Decree #607 dated 21 December 2001, Decree #202
dated 1 March 2005, Decree #216 dated 10 February 2010, Decree #519 dated 27 October 2011, as
well as “Program on Expensing of Assets of The State Oil Fund of the Republic of Azerbaijan for 2012”
as approved by Decree #570 of the President of the Republic of Azerbaijan, dated 29 December 2011.
Credit risk is managed and controlled through proper selection of investment assets, credit quality of
investment assets and setting limits on the amount of investment per investment asset.
The following table details the credit ratings of financial instruments held by the Fund. The credit rating is
issued by internationally regarded agencies S&P’s and Moody’s. If the agencies have assigned different
credit ratings to an asset, the highest one was used.
Cash and cash
equivalents
Financial assets at fair
value through surplus
or deficit
Financial investments
held–to–maturity
NonSecurities
investment without
rating
rating
Total
2012
AAA
AA
A
BBB
478,257
-
103,373
600,679
-
-
1,182,309
7,936,878
2,481,712
7,675,411
5,211,403
292,230
529,765
24,127,399
-
-
-
514,492
-
-
514,492
AAA
AA
A
Cash and cash
equivalents
545,535
91,761
11
value through surplus
or deficit
8,240,732 3,154,050 6,369,922
-
BBB
Noninvestment
rating
Securities
without
rating
Total
2011
133,755
33
-
771,095
4,495,473
22,303
-
22,282,480
384,102
-
-
384,102
As at 31 December 2012 and 2011, the minimum long term credit ratings of securities or of their issuers
were Baa3 (Moody’s) or BBB- (Standard & Poor’s). Fund possessed three governmental securities issued
by Eksportfinans ASA (Norway) and Portugal government that have carrying amount (fair value) of AZN
292,230 thousand in its portfolio that were classified as Non-investment rating:
121
ANNUAL REPORT
2012
120
At 31 December 2012
March 2005, #216 dated 10 February 2010 and #519 dated 27 October 2011, foreign currency assets
of the Fund could be invested in debt obligations with investment grade credit rating not less than Ba3
(Moody’s) or BB- (Standard & Poor’s, Fitch) and up to 5% of foreign currency assets of the Fund could
be placed into debt obligations that have credit rating not less than (Ba3 (Moody’s) or BB- (Standard &
Poor’s, Fitch).
The Fund’s valuation approach and fair value hierarchy categorisation for certain significant classes of
financial instruments recognized at fair value are as follows:
In accordance with Decree of the President of the Republic of Azerbaijan “Program on Expensing of
Assets of The State Oil Fund of the Republic of Azerbaijan for 2012” dated 29 December 2011, the
maximum weight of one financial institution or one investment in the investment portfolio is set at 15%
of total amount of the investment portfolio.
Securities
ISIN
EXPT Fl 04/13
EXPT FL 10/13
Portug Fl 11/14
US28264QU939
US282649BY75
XS0467362223
Nominal
value
Currency
(‘000s)
35,250
250,000
100,000
USD
USD
USD
Trade
date
Settlement
date
29.03.11
14.10.10
10.11.09
05.04.13
07.10.13
17.11.14
Rating as
of trade
date
(Moody’s/
S&P)
Aa1/AA
Aa1/AA
Aa2/A+
Rating as of
December
31, 2012
(Moody’s/
S&P)
Ba1/BB+
Ba1/BB+
Ba3/BB
In accordance with the “Rules on Holding, Placement and Management of Foreign Currency Assets
of The State Oil Fund of the Republic of Azerbaijan” approved by Decree #511 of the President of the
Republic of Azerbaijan dated 19 June 2001 as amended by Decrees #607 dated 21 December 2001,
#202 dated 1 March 2005, #216 dated 10 February 2010 and #519 dated 27 October 2011, currency
settlement accounts of the Fund may be held in banks with long-term credit ratings not lower than AA(Standard & Poor’s, Fitch) or Aa3 (Moody’s).
The Fund is allowed to maintain funds in the Republic of Azerbaijan only in the Central Bank of the
Republic of Azerbaijan and the International Bank of Azerbaijan.
Depository services
March 2005, #216 dated 10 February 2010, and #519 dated 27 October 2011, the Fund’s depository
services may be provided by commercial banks and other financial institutions with long-term credit
ratings not lower than A- (Standard & Poor’s), A (Fitch) or A3 (Moody’s).
Financial market counterparties
March 2005, #216 dated 10 February 2010, and #519 dated 27 October 2011, the Fund’s counterparties
at international financial markets may involve commercial banks and other financial institutions with
long-term investment credit ratings (Standard & Poor’s, Fitch or Moody’s).
External managers
March 2005, #216 dated 10 February 2010, and #519 dated 27 October 2011, when an external manager
is engaged in management of the Fund’s currency assets, the external manager or its principal founder
should have investment credit ratings (not lower than Baa3 (Moody’s) or BBB- (Standard & Poor’s, Fitch))
or have at least five years of positive history of management of assets, or be experienced in managing
assets with a value not less than one billion USD.
“Program on main directions of Expensing of Assets of The State Oil Fund of the Republic of Azerbaijan
for 2012” as approved by Decree #570, dated 29 December 2011, specified requirements for Investment
Policy (investment trend) of the Fund for 2012 and currency basket of the Fund’s portfolio for 2012. In
accordance with these requirements, 50% of the total amount of the investment portfolio of the Fund
invests in assets denominated in USD, 40% in assets denominated in EUR, 5% in assets denominated in
GBP, whereas 5% of the total amount of the investment portfolio can be invested in currencies specified
in an article 2.2.1 of Presidential Decree #511 dated 19 June, 2001. In case of noncompliance the Fund
is to rebalance the portfolio during 10 business days subsequent to the end of each quarter. As at 31
December 2012, 50.96% of the Fund’s investment portfolio was denominated in USD (2011: 52.28%),
41.81% in EUR (2011: 41.53%) and 4.27% in GBP (2011: 5.62%).
The table below summarizes the Fund’s exposure to foreign currency exchange rate risk at the reporting
date:
2012
AZN
USD
EUR
GBP
TRY
AUD
RUB
Total
Financial assets
394,350
170,289
14,710
365,466 2,154
78,815 1,182,309
Cash and cash equivalents 156,525
value through surplus or
deficit
12,252,650 10,624,071 1,087,634
163,044
24,127,399
514,492
514,492
Total financial assets
156,525 13,161,492 10,794,360 1,102,344 365,466 165,198 78,815 25,824,200
Other financial liabilities
Total financial liabilities
Open position
67
67
2,318
2,318
Open position
1,098
1,098
-
-
1,196
1,196
4,757
4,757
156,458 13,159,174 10,794,282 1,101,246 365,466 165,198 77,619 25,819,443
0.61%
50.97%
41.81%
4.26%
1.41% 0.64% 0.30%
2011
Financial assets
Financial assets at fair value through surplus
or deficit
78
78
AZN
USD
EUR
GBP
Total
133,767
472,799
52,706
111,823
771,095
133,767
11,396,608
384,102
12,253,509
9,679,982
9,732,688
1,205,890
1,317,713
22,282,480
384,102
23,437,677
103
103
268
268
58
58
-
429
429
133,664
0.57%
12,253,241
52.28%
9,732,630
41.53%
1,317,713
5.62%
23,437,248
123
ANNUAL REPORT
2012
122
Currency risk is defined as the risk that the value of a financial instrument will fluctuate due to changes
in foreign exchange rates. The Fund is exposed to the effects of fluctuations in the prevailing foreign
currency exchange rates on its financial position and cash flows.
ANNUAL REPORT
2012
Bank accounts
Currency risk
Currency risk sensitivity
Geographical concentration
The tables below indicate the currencies to which the Fund had significant exposure at 31 December
2012 and 2011 on its monetary assets and its forecast cash flows. The analysis calculates the effect of
a reasonably possible movement of the currency rate against the AZN, with all other variables held
constant on the statement of financial performance. The effect on net assets/equity does not differ from
the effect on the statement of financial performance.
2012
AZN/EUR
AZN/USD
+11.49%
-11.49%
1,240,263
(1,240,263)
AZN/EUR
AZN/GBP
+26.01%
-26.01%
286,434
(286,434)
AZN/GBP
AZN/TRY
+21.46%
-21.46%
78,429
(78,429)
AZN/AUD
+12.84%
-12.84%
21,211
(21,211)
AZN/RUB
+20.97%
-20.97%
16,277
(16,277)
Impact on surplus/(deficit)
for the year
31 December 2011
+5.09%
623,690
-5.09%
(623,690)
+14.55%
-14.55%
1,416,097
(1,416,097)
+10%
-10%
131,771
(131,771)
Net position
2011
Commodity price risk
The Fund is affected by the volatility of gold prices. The following table shows the effect of price changes
in gold:
31 December 2012
Impact on surplus/(deficit) for the year
Financial
liabilities
Other financial
liabilities
Total financial
liabilities
17.33%
108,267
AZN/XAU
-17.33%
-108,267
Financial assets
Cash and cash
equivalents
Financial assets at
fair value through
surplus or deficit
Financial
investments held–
to–maturity
Total financial
assets
Financial
liabilities
Other financial
liabilities
Total financial
liabilities
Net position
America
Asia
Africa
156,566
924,688
101,055
-
-
-
15,351,487
4,261,212
514,492
-
-
671,058
2,352,392 127,767
-
-
Australia
International
and
organizations
Oceania
Total
-
-
1,182,309
784,307
1,250,234
24,127,399
-
-
514,492
1,250,234
25,824,200
16,276,175 4,362,267 2,352,392 127,767 784,307
2,463
2,294
-
-
-
-
-
4,757
2,463
2,294
-
-
-
-
-
4,757
1,250,234
25,819,443
668,595
16,273,881 4,362,267 2,352,392 127,767 784,307
Azerbaijan
Europe
America
Asia
Africa
Australia
and
Oceania
International
organizations
Total
133,786
546,436
90,873
-
-
-
-
771,095
-
15,452,916
3,467,644
1,355,347
193,108
568,832
1,244,633
22,282,480
384,102
-
-
-
-
-
-
384,102
193,108
568,832
1,244,633
23,437,677
517,888
15,999,352 3,558,517 1,355,347
429
-
-
-
-
-
-
429
429
-
-
-
-
-
-
429
193,108
568,832
1,244,633
23,437,248
517,459
15,999,352 3,558,517 1,355,347
125
ANNUAL REPORT
2012
124
AZN/USD
for the year
31 December 2012
+3.82%
502,680
-3.82%
(502,680)
Europe
ANNUAL REPORT
2012
Risk management and monitoring is performed within above set limits, by the Investment Committee
and the Fund’s Management. All recommendations/decisions are proposed/made by the Investment
Committee and subsequently are subject to the approval by the management of the Fund. Daily risk
management is performed by the Risk Management Department.
Financial assets
Cash and cash
equivalents
Financial assets at
fair value through
surplus or deficit
Financial
investments held–
to–maturity
Total financial
assets
Azerbaijan
Interest rate sensitivity
Liquidity Risk
At 31 December 2012 deposits and debt securities were interest-bearing and, therefore, were exposed
to the interest rate risk. Depending on the market conditions the Fund is managing this risk by
gradually increasing or decreasing the duration of assets in the investment portfolio. Risk management
and monitoring is performed within above set limits, by the Investment Committee and the Fund’s
Management. All recommendations/decisions are proposed/made by the Investment Committee and
subsequently are subject to the approval of the management of the Fund. Daily risk management is
performed by the Risk Management Department.
Management’s guiding policies are to maintain conservative levels of liquidity to ensure that the Fund
has the ability to meet its obligations under all conceivable circumstances.
ANNUAL REPORT
2012
Impact on surplus/(deficit) before tax:
Assets:
Net impact on surplus/(deficit) before tax
31 December 2012
31 December 2011
Interest rate Interest rate Interest rate Interest rate
+1%
-1%
+1%
-1%
13
(94,069)
(94,056)
(13)
94,069
94,056
15
(81,843)
(81,828)
(15)
81,843
81,828
126
The above tables demonstrate the effect of a change in a key assumption while other assumptions remain
unchanged. In reality, there is a correlation between the assumptions and other factors. It should also be
noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or
extrapolated from these results.
The sensitivity analyses do not take into consideration that the Fund’s assets and liabilities are actively
managed. Additionally, the financial position of the Fund may vary at the time that any actual market
movement occurs. For example, the Fund’s financial risk management strategy aims to manage the
exposure to market fluctuations. As investment markets move past various trigger levels, management
actions could include selling investments, changing the investment portfolio allocation and taking
other protective action. Consequently, the actual impact of a change in the assumptions may not have
any impact on the liabilities, whereas assets are held at market value on the statement of the financial
position. In these circumstances, the different measurement bases for liabilities and assets may lead to
volatility in net assets/equity.
Other limitations in the above sensitivity analyses include the use of hypothetical market movements to
demonstrate potential risk that only represent the Fund’s view of possible near-term market changes that
cannot be predicted with any certainty; and the assumption that all interest rates move in an identical
fashion.
Financial assets
Financial investments held–
to–maturity
Liquidity gap
2011
Financial assets
Financial investments held–
to–maturity
Liquidity gap
Up to
1 month
1 month to 3 months to
3 months
1 year
1 year to
5 years
Over
5 years
Maturity
undefined
Total
1,182,309
-
-
-
-
-
1,182,309
2,127,141
3,904,496
6,178,959
11,334,804
52,234
529,765
24,127,399
30,329
3,339,779
3,904,496
27,195
6,206,154
155,641
11,490,445
301,327
353,561
529,765
514,492
25,824,200
(2,463)
(2,463)
3,337,316
(2,294)
(2,294)
3,902,202
6,206,154
11,490,445
353,561
529,765
(4,757)
(4,757)
25,819,443
1 year to
5 years
Over
5 years
Maturity
undefined
Total
Up to
1 month
1 month to 3 months to
3 months
1 year
771,095
-
-
-
-
-
771,095
2,017,784
2,461,882
5,157,833
12,200,388
424,631
19,962
22,282,480
29,897
2,818,776
2,461,882
27,246
5,185,079
136,233
12,336,621
190,726
615,357
19,962
384,102
23,437,677
429
429
2,818,347
2,461,882
5,185,079
12,336,621
615,357
19,962
429
429
23,437,248
Price risk
Price risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market
prices whether those changes are caused by factors specific to the individual security or its issuer or
factors affecting all securities traded in the market. The Fund is exposed to price risks of its products
which are subject to general market and specific fluctuations.
The Fund manages price risk through periodic estimation of potential losses that could arise from
adverse changes in market conditions and establishing and maintaining appropriate stop-loss limits
and margin and collateral requirements.
Risk management and monitoring is performed within above set limits, by the Investment Committee
and the Fund’s Management. All recommendations/decisions are proposed/made by the Investment
Committee and subsequently are subject to the approval of the management of the Fund. Daily risk
management is performed by the Risk Management Department.
127
ANNUAL REPORT
2012
Limitations of sensitivity analysis
2012
The following table presents a net impact of change of the fair value of securities, when market interest
rate changed by 1%. Sensitivity analysis of interest rate risk has been determined based on “reasonably
possible changes in the risk variable”. The level of these changes is determined by management and is
contained within the risk reports provided to key management personnel.
An analysis of the liquidity risk of financial position items is presented in the following tables:
31 December 2012
1% increase in
securities price
31 December 2011
1% decrease in
securities price
1% increase in
securities price
1% decrease in
securities price
before tax
240,802
(240,802)
221,237
(221,237)
Impact on net assets/equity
192,642
(192,642)
176,990
(176,990)
Related parties or transactions with related parties, as defined by IPSAS 20 “Related party disclosures”,
represent parties that directly, or indirectly through one or more intermediaries: control, or are controlled
by, or are under common control with, the Fund; have an interest in the Fund that gives them significant
influence over the Fund; and that have joint control over the Fund.
All government entities are considered to be entities under common with the Fund. Transactions with
such entities are disclosed below as related party transactions:
State Oil Company
of the Republic of
Azerbaijan
Azerbaijan Gas
Supply Company
Operating
Companies
The State Budget
Ministry of Finance
of the Republic of
Azerbaijan
“Azerbaijan
Melioration and
Water-sludge
system” OSC
Ministry of
Education of
the Republic of
Azerbaijan
International Bank
of Azerbaijan
119,028
161,926
299,982
-
-
-
-
-
2011
2012
-
139,974
-
-
-
156,506
-
-
2011
2012
2011
2012
-
32,567
19,977
-
-
133,755
-
-
-
2011
2012
2011
-
14,999
-
-
-
59
31
-
-
Transactions with related parties are described in Notes 5, 12, 13, 22 and 23.
21. Transactions with related parties
Related parties
“Azersu” OSC
-
Contributions Transfers Payables
Year received from to related to related
related parties parties
parties
Receivables
Bank
Income Off-balance
from
accounts
Tax
sheet
related
with related
expense transactions
parties
parties
-
2012
12,772,844
-
-
2011
2012
2011
2012
2011
2012
2011
2012
15,019,238
287,161
288,834
57,350
51,076
-
9,905,000
9,000,000
-
-
20,117
-
-
-
277,225
2011
2012
-
199,997
-
-
-
-
276,107
-
2011
-
199,998
-
-
-
-
-
Key management personnel
The senior management group consists of the Fund’s Executive Director and heads of administrations.
The aggregate remuneration of members of the senior management group and the number of managers
determined on a full-time equivalent basis receiving remuneration within this category are:
Aggregate remuneration
Number of persons
2012
111
3
2011
87
3
22. Commitments and contingencies
Off-balance sheet transactions
On 11 August 2006 the Fund signed an Asset Management Agreement on “Granting free budget
(balance) Funds to trustworthy management” with the Ministry of Finance of the Republic of Azerbaijan.
According to this agreement free budget Funds of the Ministry of Finance of the Republic of Azerbaijan
are to be transferred to and managed by the Fund within the asset management rules set in the
agreement with the Ministry of Finance of the Republic of Azerbaijan. The Fund manages these assets
free of charge, on its own behalf and in favor, at the expense and at the risks of the Ministry of Finance
of the Republic of Azerbaijan. At 31 December 2012 assets received under the above agreement were
AZN 277,225 thousand (USD 285,207 thousand, EUR 51,174 thousand and GBP 185 thousand) (2011:
AZN 276,107 thousand (USD 284,687 thousand, EUR 51,068 and GBP 184 thousand)) including accrued
interest.
129
ANNUAL REPORT
2012
128
Operational risk is the risk of loss arising from systems failure, human error, fraud or external events.
When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory
implications, or lead to financial loss. The Fund cannot expect to eliminate all operational risks, but a
control framework and monitoring and responding to potential risks could be effective tools to manage
the risks. Controls should include effective segregation of duties, access, authorization and reconciliation
procedures, staff education and assessment processes, including the use of internal audit.
2012
2011
2012
ANNUAL REPORT
2012
Operational risk
The Ministry of
Transportation
The State Refugees
Committee and
Internally Displaced
People’ Social
Development Fund
Central Bank of
the Republic of
Azerbaijan
Legal proceedings
ANNUAL REPORT
2012
The calculation of profit tax in Azerbaijan tax legislation can be subject to various interpretations and this
may lead to certain possible additional obligations of the Fund, including additional taxes, penalties and
interest. Tax years for the calculation of profit tax, Value Added Tax, personal income tax, withholding
taxes and other taxes remain open to review by the tax authorities for three years. The last tax audit of
the Fund was conducted by the Chamber of Accounts in 2010 and covered the calendar years 2008
and 2009. Management believes that the Fund has already made all necessary tax payments due, and
therefore no provisions have been made in these financial statements for any other potential liabilities.
Operating environment
The Fund is established and operates in the Republic of Azerbaijan and its subsidiaries operate in Russia,
Jersey Islands, United Kingdom of Great Britain and Luxembourg. Laws and regulations affecting the
business environment in these countries subject to rapid changes and the Fund’s and subsidiaries
assets and operations could be at risk due to negative changes in the legal, regulatory, and political
environment.
23. Events after the reporting period
Receivables and transfers
In accordance with Presidential Decree #803 on “Ratifying the Budget of The State Oil Fund of the
Republic of Azerbaijan for 2013” dated 30 December 2012, the Fund’s budgeted income and expenses
for 2012 are estimated at AZN 11,482,040 thousand and AZN 13,403,099 thousand, respectively. The
following main types of expenses for 2013 are budgeted:
● Transfer to the State Budget of the Republic of Azerbaijan – AZN 11,350,000 thousand;
● Financing of the measures for improvement of social conditions of refugees and internally
displaced people – AZN 300,000 thousand;
● Construction of new Baku-Tbilisi-Kars railway line – AZN 138,275 thousand;
● Reconstruction of Samur-Absheron irrigation system – AZN 107,438 thousand;
● Financing of the construction of high speed fiber optic network providing an access to all
settlements of Azerbaijan Republic – AZN 103,556 thousand;
● Financing of the share of Azerbaijan Republic in the construction project of the Oil-Gas and
Petrochemical Consortium (OGPC) – AZN 211,950 thousand;
● Financing of the share of Azerbaijan Republic in the construction of the STAR oil refinery project
in Turkey - AZN 596,600 thousand;
● Financing of the share of Azerbaijan Republic in the construction of the TANAP project –
AZN 86,350 thousand;
● Financing of the share of Azerbaijan Republic in the construction of new driling rig in the Caspian
Sea – AZN 388,575 thousand;
● Expenses related to managing the Fund – AZN 86,300 thousand.
External asset manager
One of five external managers - Credit Suisse has discontinued to provide external manager services to
SOFAZ effective 28th of February, 2013.
Income tax exemption
Effective 1 January 2013 based on Presidential Decree #509-IVQD dated 21 December 2012, and law of
State Parliament regarding changes to the Tax Code of Azerbaijan Republic dated 29 December 2012
starting from 1 January 2013 SOFAZ is exempted from Corporate income tax.
Acquisition of 8 Place Vendome
On 19 March 2013 the Fund has finalized the acquisition of 8 Place Vendome, an investment property
comprising of an office, retail and residential building located in Place Vendome 8, Paris, France, for EUR
135,000 thousand.
131
ANNUAL REPORT
2012
130
Taxation
● Financing the State Program on Education of Azerbaijan youth in foreign countries during
2007-2015 – AZN 34,056 thousand;
In 2004, a legal action totaling approximately six million USD was brought against the Government
of the Republic of Azerbaijan along with a number of Azerbaijan governmental institutions, including
the Ministry of Communications of the Republic of Azerbaijan, the State Oil Company of the Republic
of Azerbaijan and the Fund. This legal action was brought by First International Merchant Bank (the
“Claimant Bank”) in the District Court of Rotterdam (the “Court”), the Netherlands. In an interim-verdict
dated 24 December 2008, the Court ruled that the Claimant Bank should submit additional evidence
supporting the major facts on legal proceeding. Further, in a verdict dated 17 February 2010 (the
“Verdict”), the Court has rejected the claims of the Claimant Bank. Currently, the claim is at the court of
appellate jurisdiction. The Management of the Fund believes that there is no possibility of any outflow
in the settlement and there is no need for provision.
ùSANTIAGO PRINCIPLESú
APPENDIX
SOVEREIGN WEALTH FUNDS
GENERALLY ACCEPTED PRINCIPLES AND PRACTICES
“SANTIAGO PRINCIPLES”
ANNUAL REPORT
2012
The key features of the SWF’s legal basis and
structure, as well as the legal relationship
between the SWF and other state bodies,
should be publicly disclosed.
http://www.oilfund.az/en/content/25
GAPP 2. Principle
The policy purpose of the SWF should be
clearly defined and publicly disclosed.
Narration of Principles /
Sub-Principles
Responses
A. Legal Framework, Objectives, and Coordination with Macroeconomic Policies
132
GAPP 1.1. Subprinciple
The legal framework for the SWF should
ensure legal soundness of the SWF and its
transactions.
SOFAZ was established for the purpose
of accumulation and management of the
revenues generated from implementation of
oil and gas agreements.
SOFAZ’s primary objectives are to help
maintain macroeconomic stability in the
country (neutralize negative impact of the
currency inflows) and to generate wealth for
present and future generations.
http://www.oilfund.az/en/content/25/9
Legal framework of SOFAZ is clearly defined
in the “Statute of the State Oil Fund of the
Republic of Azerbaijan” (hereinafter “Statute
of SOFAZ”) approved by the decree of the
President of the Republic of Azerbaijan.
GAPP 3. Principle
SOFAZ is a legal entity separate from the
government or central bank. The Fund's
operation is guided by the Constitution and
laws of the Republic of Azerbaijan, Presidential
Decrees and Resolutions, and the Fund's
Regulations.
Where the SWF’s activities have significant
direct domestic macroeconomic implications,
those activities should be closely coordinated
with the domestic fiscal and monetary
authorities, so as to ensure consistency with
the overall macroeconomic policies.
According to its bylaws, SOFAZ is not
permitted to invest domestically. Expenditures
of SOFAZ constitute part of the consolidated
state budget which is approved by the
Parliament. According to Budget System
Law the consolidated state budget is being
prepared in close consultation with all relevant
institutions (Ministry of Finance, Ministry of
Economic Development, etc.) and involvement
of SOFAZ.
133
ANNUAL REPORT
2012
GAPP 1. Principle
The legal framework for the SWF should be
sound and support its effective operation and
the achievement of its stated objective(s).
All relevant documents related to the legal
basis and structure and the legal relationships
between SOFAZ and the other government
agencies are publicly disclosed and they are
available on the Fund’s website.
Self-Assessment
April, 2013
APPENDIX
B. Institutional Framework and Governance Structure
GAPP 4. Principle
There should be clear and publicly disclosed
policies, rules, procedures, or arrangements
in relation to the SWF's general approach to
funding, withdrawal, and spending operations.
ANNUAL REPORT
2012
The general approach to withdrawals from
the SWF and spending on behalf of the
government should be publicly disclosed.
The governance framework for the SWF should
be sound and establish a clear and effective
division of roles and responsibilities in order
to facilitate accountability and operational
independence in the management of the SWF
to pursue its objectives.
GAPP 5. Principle
The relevant statistical data pertaining to the
SWF should be reported on a timely basis to the
owner, or as otherwise required, for inclusion
where appropriate in macroeconomic data
sets.
SOFAZ submits statistical reports on a
monthly basis to the President and Ministry
of Finance and on a quarterly and yearly basis
to the State Statistical Committee. SOFAZ
also reports on its revenues and expenditures
to the Parliamentary Chamber of Accounts
and on other relevant information to the
Ministry of Taxes, State Social Protection Fund
and other relevant government agencies.
Additionally, SOFAZ regularly provides the
relevant information on its activities to the
World Bank and International Monetary Fund.
All relevant statistical data pertaining to the
fund are available on the Fund’s website
(audited annual reports, quarterly statements,
etc.).
http://www.oilfund.az/en/account
SOFAZ has a three-tier governance structure,
with the President of the country being a
supreme governing and reporting authority
for the Fund.
SOFAZ's activities are overseen by a
Supervisory Board which is headed by the
Prime Minister and consists of the ViceSpeaker of Parliament, Minister of Finance,
Minister of Economic Development, Governor
of the Central Bank, the Economic Advisor to
the President and the President of National
Academy of Sciences.
The operational management of SOFAZ is
vested in the Executive Director. The relevant
duties and responsibilities of the President of
the country, Supervisory Board and Executive
Director are clearly defined in the “Statute of
SOFAZ”.
GAPP 7. Principle
The owner should set the objectives of the
SWF, appoint the members of its governing
body(ies) in accordance with clearly defined
procedures, and exercise oversight over the
SWF's operations.
The objectives of SOFAZ are clearly defined
in “Statute of SOFAZ” approved by the
President of the Republic of Azerbaijan.
President appoints the members of the Fund’s
Supervisory Board and Executive Director.
135
ANNUAL REPORT
2012
134
The source of SWF funding should be publicly
disclosed.
GAPP 6. Principle
SOFAZ’s Funding and Withdrawal rules are
clearly defined by the “Statute of SOFAZ”
and "Rules on the preparation and execution
of the annual program of revenues and
expenditures (budget) of the State Oil Fund of
the Republic of Azerbaijan" (hereinafter “Rules
on the budget of SOFAZ”) which are publicly
disclosed on the Fund’s website.
APPENDIX
GAPP 8. Principle
The governing body(ies) should act in the best
interests of the SWF, and have a clear mandate
and adequate authority and competency to
carry out its functions.
GAPP 11. Principle
In order to ensure the adequate authority of
the Fund’s Supervisory Board, the Board has
to consist of representatives of the Parliament,
Government and academic community. All
roles and responsibilities of the Supervisory
Board are clearly defined in the relevant
legislation.
An annual report and accompanying financial
statements on the SWF's operations and
performance should be prepared in a timely
fashion and in accordance with recognized
international or national accounting standards
in a consistent manner.
Since the start of its operations, SOFAZ has
prepared annual reports and accompanying
financial statements.
ANNUAL REPORT
2012
GAPP 9. Principle
The operational management of the SWF
should implement the SWF’s strategies in an
independent manner and in accordance with
clearly defined responsibilities.
GAPP 12. Principle
The SWF's operations and financial statements
should be audited annually in accordance with
recognized international or national auditing
standards in a consistent manner.
Since the start of its operations SOFAZ has
been audited by reputable international audit
firms, and all annual reports and accompanying
financial statements are available on the
Fund’s website.
SOFAZ also has an internal auditor who
prepares periodic internal audit reports.
GAPP 10. Principle
The accountability framework for the SWF's
operations should be clearly defined in the
relevant legislation, charter, other constitutive
documents, or management agreement.
Accountability framework of SOFAZ is clearly
defined in the “Statute of SOFAZ”, “Investment
guidelines” and “Rules on the budget of
SOFAZ” all of which are available on the
Fund’s website. Fund produces and discloses
audited annual reports and quarterly reports.
Information about Fund’s activities is also
disseminated by regular press conferences
and published on the Fund’s website.
http://www.oilfund.az/pub/tiny_upload/
Inv_guide.pdf
GAPP 13. Principle
Professional and ethical standards should
be clearly defined and made known to the
members of the SWF's governing body,
management and staff.
Professional and ethical standards are clearly
defined in the "Investment Guidelines".
Management and staff of the Fund have to
comply with ethical norms and rules of the
International Financial Markets Association
(ACI, Paris).
Inv_guide.pdf
137
ANNUAL REPORT
2012
136
“Statute of SOFAZ”, “Rules on management of
foreign currency assets of the State Oil Fund
of the Republic of Azerbaijan” (hereinafter
“Investment guidelines”) and “Rules on the
budget of SOFAZ” clearly define the role and
responsibilities of the Executive Director. In
accordance with these role and responsibilities
Executive Director has independence in
operational management.
All annual reports and accompanying financial
statements which are prepared in accordance
with IFRS standards are published on the
Fund’s website.
APPENDIX
GAPP 14. Principle
Dealing with third parties for the purpose of
the SWF's operational management should
be based on economic and financial grounds,
and follow clear rules and procedures.
GAPP 17. Principle
Fund’s activities related to third parties are
based on economic and financial grounds.
Fund’s
"Investment
Guidelines"
and
“Investment Policy” regulate SOFAZ’s dealing
with third parties.
Relevant financial information regarding
the SWF should be publicly disclosed to
demonstrate its economic and financial
orientation, so as to contribute to stability in
international financial markets and enhance
trust in recipient countries.
ANNUAL REPORT
2012
SWF operations and activities in host
countries should be conducted in compliance
with all applicable regulatory and disclosure
requirements of the countries in which they
operate.
Fund conducts its operations and activities in
host countries in compliance with all applicable
regulatory and disclosure requirements of
those host countries.
GAPP 16. Principle
The governance framework and objectives,
as well as the manner in which the SWF's
management is operationally independent
from the owner, should be publicly disclosed.
Fund’s governance framework, objectives
and its operational independence are clearly
defined in the relevant legislation.
C. Investment and Risk Management Framework
GAPP 18. Principle
139
The SWF’s investment policy should be clear
and consistent with its defined objectives, risk
tolerance, and investment strategy, as set by
the owner or the governing body(ies), and
be based on sound portfolio management
principles.
Fund’s investment and risk management
policies are defined by "Investment Policy"
which is annually approved by the President
after the review of the Supervisory Board and
"Investment Guidelines".
Financial risk limits are set out in Fund’s
Investments Guidelines which prohibits the
use of any leverage. Derivatives (i.e. swaps,
forwards, futures, etc) may only be used
for hedging or optimizing the currency
composition and asset allocation of the
Investment Portfolio.
The investment policy should guide the SWF's
financial risk exposures and the possible use
of leverage.
ANNUAL REPORT
2012
138
GAPP 15. Principle
Inv_guide.pdf
Inv_policy1.pdf
Audited financial statements are published
in Fund’s annual report, which is publicly
available. Quarterly reports and all other
relevant financial information about the Fund’s
activities are published on the Fund’s website.
Disclosed financial information includes AUM,
asset allocation, benchmark, annual rates of
return, etc.
APPENDIX
A description of the investment policy of the
SWF should be publicly disclosed.
Fund's
“Investment
guidelines”
and
“Investment Policy” are available on its website.
If investment decisions are subject to other
than economic and financial considerations,
these should be clearly set out in the
investment policy and be publicly disclosed.
http://www.oilfund.az/pub/tiny_upload/Inv_
policy1.pdf
The management of an SWF’s assets should
be consistent with what is generally accepted
as sound asset management principles.
GAPP 20. Principle
The SWF should not seek or take advantage
of privileged information or inappropriate
influence by the broader government in
competing with private entities.
guide.pdf
policy1.pdf
“Statute of SOFAZ” does not allow the
Fund to invest domestically. According to
the “Investment guidelines”, SOFAZ makes
investment decisions independently of the
government. The legal framework of SOFAZ
ensures that the Fund does not seek or take
advantage of any privileged information.
guide.pdf
GAPP 19. Principle
The SWF's investment decisions should aim to
maximize risk-adjusted financial returns in a
manner consistent with its investment policy,
and based on economic and financial grounds.
According to its “Investment Policy”, Fund’s
investment decisions should aim at maximizing
the risk adjusted returns. Fund’s all investment
decisions are made purely on an economic
and financial basis according to the sound
asset management principles.
GAPP 21. Principle
SWFs view shareholder ownership rights
as a fundamental element of their equity
investments' value. If an SWF chooses to
exercise its ownership rights, it should do so in
a manner that is consistent with its investment
policy and protects the financial value of its
investments. The SWF should publicly disclose
its general approach to voting securities of
listed entities, including the key factors guiding
its exercise of ownership rights.
In 2012 SOFAZ started investing in public
equities. At the initial stage, equity investments
are done through external managers and
with passive investment mandate. SOFAZ has
chosen not to exercise its ownership rights at
this stage.
141
ANNUAL REPORT
2012
140
All aspects of dealing with external managers
are clearly defined in relevant documentation
about Fund’s activity. Fund's external managers
can invest only in asset classes permissible
by the Fund's “Investment guidelines”.
Appointment of external managers is carried
out in compliance with the current legislation
of Azerbaijan Republic on “State Procurement”.
External managers are selected on the basis of
the criteria, such as credit rating of manager,
assets under management, experience in the
asset management industry, proposed rate
of return and risk, proposed fees schedule
etc. Compliance of the external managers’
investments to their mandate is monitored
daily. Performance of external managers’
portfolios is monitored monthly.
ANNUAL REPORT
2012
The investment policy should address the
extent to which internal and/or external
investment managers are used, the range
of their activities and authority, and the
process by which they are selected and their
performance monitored.
APPENDIX
GAPP 22. Principle
The SWF should have a framework that
identifies, assesses and manages the risks of
its operations.
The risk management framework should
include reliable information and timely
reporting systems, which should enable the
adequate monitoring and management of
relevant risks within acceptable parameters
and levels, control and incentive mechanisms,
codes of conduct, business continuity
planning, and an independent audit function.
Inv_guide.pdf
http://www.oilfund.az/uploads/Inv_policy1.
pdf
The assets and investment performance
(absolute and relative to benchmarks, if any)
of the SWF should be measured and reported
to the owner according to clearly defined
principles or standards.
Comprehensive reports on assets of SOFAZ
(including information on breakdown by
foreign currencies, asset class, credit ratings,
maturities and geographic regions) are
disseminated through the quarterly press
releases. The performance of the Fund’s
investments is measured according to best
industry standards and reported on an annual
basis. Annual reports and quarterly statements
are posted on the Fund’s website.
GAPP 24. Principle
A process of regular review of the
implementation of the GAPP should be
engaged in by or on behalf of the SWF.
This report was first published on SOFAZ’s
official website in April, 2011 and it is reviewed
on an annual basis.
143
ANNUAL REPORT
2012
142
The general approach to the SWF's risk
management framework should be publicly
disclosed.
Identification, assessment and management
of the risks of the Fund’s operations play
crucial role in the Fund’s overall management
framework. SOFAZ’s risk management system
is supported with appropriate legal framework
(“Investment Guidelines”, "Investment Policy”,
etc), a specialized risk unit (Risk Management
Department), internal and external audit
functions and tools like RiskManager 4 by
RiskMetrics and proprietary models.
“Investment Guidelines” and "Investment
Policy” set the main principles of risk
management framework and clearly define
limits on major factors for market, credit,
concentration and liquidity risks. Certain
pre-trade limits are set based on these
factors. Furthermore, these risk factors are
monitored on a daily basis via regular risk
and performance reports. In addition to the
factors set in the “Investment Guidelines” and
“Investment Policy”, a more in-depth analysis
and monitoring of the market risk is performed
on a regular basis through: interest rate
sensitivity analysis (key rate durations, PV01,
etc.), risk concentration analysis (duration by
groups, VaR by groups, marginal VaR, etc.),
tail events (conditional VaR, stress tests) and
scenario analyses.
Operational risk is managed in accordance
with Fund's Operational Manual and business
continuity planning.
ANNUAL REPORT
2012
GAPP 23. Principle
24 Neftchilar Avenue, Dalga Plaza,
Baku, Republic of Azerbaijan, AZ1000
+99412 498 77 53
www.oilfund.az

ANNUAL REPORT 2012.indd

Transcription

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