Strategy for State Oil Fund of Azerbaijan Republic

We have oil. It is like winning a lottery ticket, it is like getting a huge patrimony and it is like a gift from heaven. And like a winning lottery ticket, a patrimony and a gift, oil can easily spoil. It will spoil if the resources are spent to satisfy short-term interests.

Contrarily, oil may become an advantage, if managed wisely, through properly defining and keeping in mind the long-term interests of the entire society owning the resources. This will ensure that the improvements are cumulative, sustainable and consistent. And when these interests are not well-defined, agreed and followed, there remains no other way to spend life and resources than to act randomly and satisfy short-term and small group interests only.

The paper analyses different scenarios of using oil money and advocates for a strategy that would involve the following:
- All oil revenue needs to be isolated from the economy, and collected in the Oil Fund, meaning that it should not be transferred into the State Budget, and at the same time the Fund should not replicate any of the functions of the State Budget
- The Fund should select the savings strategy and employ a smooth distribution function at the expense of a stabilisation function
- The Fund resources should initially be invested only abroad
- The diversification principle needs to be prepared to illustrate that the ceilings expressed in percentages of the Fund’s resources can be allocated in each country, each type of business, and each company
- Ethical principles need to be prepared to outline the countries, the businesses and the companies where the Fund money cannot be allocated
- A correlation needs to be determined, where the more the Fund grows, the more the percentage share of it can be invested in equity shares rather than in T-bills
- The relationship between the risk, expected return, number of investments and overall Fund resources needs to be determined for investors to serve the maximisation principle, sticking to the Fund’s rules but not at their own discretion that may have a goal not fully in line with the Fund’s goal
- Principles need to be developed for future possibilities in investing in the domestic business sector, in the form of a separate bank that would expect a return for the Fund from investing in local business that would be higher than the return from investment abroad.