Diminished Returns: Managing Oil Revenues in Azerbaijan

Abstract

Azerbaijan’s government established a national oil fund in 1999 to address the challenges associated with oil-rich countries, such as addressing revenue fluctuations, saving for future generations and investing in development. However, as described in precept 7 of the Natural Resource Charter, a fund in itself is no panacea: it can only achieve its aims with clear rules governing its operation, as well as transparency and oversight. Azerbaijan is heavily dependent on natural resources. The oil and gas sector contributed to more than 90 percent of export earnings and more than threequarters of the state budget revenues in 2013. The State Oil Fund of the Republic of Azerbaijan (SOFAZ) since held some US $36.6 billion as of July 2014, representing approximately 50 percent of GDP. These revenues are distributed among the state budget, the financing of infrastructure projects, and saved in foreign financial assets. Oil and gas revenue is expected to begin declining permanently in 2015, and while Azerbaijan’s savings are large in comparison with other countries, the loss in revenue will not be compensated by the returns on SOFAZ’s financial assets. This is a particular challenge for Azerbaijan since the government has not found alternative sources of fiscal revenue. To maintain current spending levels, taxes will have to rise or the government will need to borrow.