Azeri Oil Fund Ignites Debate

Friday, 4 July, 2003

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Nurlana Gulieva

With expectations rising every month about Azerbaijan's expected oil boom, the debate about how to use the country's state oil fund has moved centre stage.

Over the next 20 years, Azerbaijan is expecting to earn massive revenues from its new big oil and gas projects in the Caspian Sea. A recently published report by the organisation Caspian Revenue Watch, set up by George Soros's Open Society Institute, "Caspian Oil Windfalls: Who Will Benefit?" estimates that assuming an oil price of 25 US dollars a barrel, Azerbaijan will earn more than 17 billion dollars between 2003 and 2010 from its Azeri-Chirag-Gunashli oilfields. If the oil price is 18 dollars a barrel, the revenues will be 8.7 billion dollars.

The vast bulk of that money - up to 14 billion dollars, or more if the oil price goes higher - will go into the State Oil Fund of Azerbaijan, SOFAZ, giving it a central role in determining the country's future over the next two decades.

And yet, as a nervous meeting on July 1 between the oil fund's leadership and Azerbaijani non-governmental organisations showed, there is precious little public understanding of what the role of the fund is and how the money will be spent.

The fund was set up in 2000 after international organisations warned Azerbaijan that it risks falling victim to so-called "Dutch Disease," the phenomenon where a big surge of oil or gas profits actually damages a country's economy more than it helps - as has happened in Nigeria and Venezuela.

The creation of an oil fund is supposed to buffer a country against this kind of economic turbulence.

The International Monetary Fund, IMF, has told Azerbaijan it is likely to have a 20-year energy honeymoon, but if no new fields are found, oil production will fall back to current levels by 2024.

In a letter to the Azerbaijani government in May, the IMF said, "Any profits from the sale of oil and gas which are greater than the expected forecast should accumulate in order to counter possible oil price falls in the future."

John Wakeman-Linn, deputy head of the IMF's Second European Department, recommended that the Azerbaijani government use its fund to boost non-oil sectors of the economy, which are likely to suffer from a strengthened Azerbaijani currency.

"It would be possible to invest in the reconstruction of the irrigation system, provide gas and electricity to the provinces, build roads and lower tax rates for the non-oil sector," Wakeman-Linn said.

SOFAZ currently has holdings of almost 810 million dollars. So far it has spent one million dollars on setting up its own office, 75 million dollars on building houses for refugees from the Nagorny Karabakh conflict, 127 million dollars on financing Azerbaijan's part in the Baku-Tbilisi-Ceyhan pipeline and 0.6 million dollars in profit tax.

Caspian Revenue Watch is leading calls for the fund's managers to clarify its mission and objectives. At the moment, the Caspian Revenue Watch authors say, it is not clear which expenditures and investments fall inside the fund's mandate and which do not.

This confusion at the fund's mandate was evident at last week's meeting between SOFAZ chief Samir Sharifov and Azerbaijani non-government organisations, NGOs.

The NGO representatives appealed to Sharifov for funding. Azai Guliev, president of the National Forum of NGOs, said this would help reduce Azerbaijani organisations' dependence on foreign funding. Sevgim Rakhmanov, head of the Union of Producers and Traders, suggested fund money should be given as credits to local businessmen in the non-oil sector.

One guest at the meeting, Nijat Abbasov, who runs a charity called Nijat, even asked Sharifov to give him money for his office to buy a new state-of-the-art computer. Sharifov diplomatically turned him down.

After the meeting Sharifov told IWPR that the oil fund publishes its quarterly reports and results of audits. "But I understood that is not enough," he said. "I think that we should have regular meetings with NGO representatives."

Ingilab Akhmedov, director of the Institute of Economic Analysis and one of the authors of the Caspian Revenue Watch report, raised concerns about how October's presidential elections might affect spending.

"The risk of losing the trust of voters and the desire to get a positive reaction from society will push the government towards populist measures, which generally do not coincide with the long-term interests of society," Akhmedov said.

The Caspian Revenue Watch report also called on Azerbaijan to improve the public accountability of the fund.

The fund has a supervisory council to oversee its activities. However questions have been asked about the council's role given that it's stuffed full staffed by government appointees.

Economist Nazim Imanov suggested that the supervisory council should be changed to include foreign experts, NGO leaders and opposition politicians. "These are the most radical changes, which could prove the transparency of the government's activities."

"Unless the parliament, the judiciary, or civil society can serve as counterweights, the president of Azerbaijan can breach the rules of the Oil Fund or liquidate it altogether at any moment," the Caspian Revenue Watch report notes. "While the current leadership may demonstrate a commitment to good spending, what guarantee is there that future presidents will do the same? The current rules, with their absence of checks and balances, leave too much to chance."

Under IMF pressure, the government has already agreed to clarify the legal basis of the oil fund and coordinate its spending with the state budget. Parliament is now debating amendments to the law on budgets, which were recommended by the IMF and the World Bank.

"That ought to put an end to all speculation that parliament is not controlling the activity of the SOFAZ," Sharifov said. "It's a great pity that the IMF has played such a part in inflating what is a non-existent problem. It's well known that the IMF does not welcome the creation of natural resource funds like this, while the world community believes they are useful."

In a final public gesture of the government's commitment to the theme of openness in corporate governance, Ilham Aliev, the president's son and first vice-president of the national oil firm SOCAR, attended last month's London conference organised by British prime minister Tony Blair on the subject of transparency in business. And on July 4, Ilham was registered as a presidential candidate for the October poll, alongside his father.

Nurlana Gulieva is a journalist with Ekho newspaper and Rufat Abbasov is a reporter with Olaylar newspaper in Baku.