The U.S. Energy Information Administration (EIA) had the following to say about Azerbaijan in its annual report, "The Caspian region is one of the oldest regions in the world where oil was continually extracted, and its importance as a source of global energy production is growing rapidly."
This post-Soviet Republic suffers from a democracy deficit like all the other post-Soviet states, but with very significant differences. Azerbaijan is a bona fide and rapidly emerging democracy that is building all of the governmental and civic infrastructure and institutions necessary to a healthy democracy. In addition, as the result of a conservative program of economic reforms and creation of the functional and transparent State Oil Fund (SOFAZ-State Oil Fund of the Azerbaijan Republic), the population of this Caucasian republic enjoys real benefits of economic growth, expanding employment and educational opportunities for Azerbaijani youth and presents an island of stability in this region.
According to the data published by International Monetary Fund (IMF), GDP per capita increased by six fold since 2006 to reach nearly $6000 in Azerbaijan by 2012. The government of Azerbaijan has drawn a fair amount of criticism in the Western press for its lack of quick embrace of the Western standards of democracy, however a more nuanced and realistic look at Azerbaijan's long-term trends and a national program of targeted investments into domestic transportation, IT and satellite communications, national system of higher education shows a greater level of maturity and civic responsibility than many governments of the former USSR republics, including Russia.
According to an IMF report published in June 2013, “Using the oil revenue, Azerbaijan's economy has been one of the fastest growing over the last decade and fared well through the 2009 global crisis.” Many of these smart investments, as a trendy political term goes, would not have been possible without an important national institution created in Azerbaijan by a former President Heydar Aliyev.
By the way, Azerbaijani Azerbaijan's GDP growth in the first half of 2013 was 5%, compared to an estimated 1,7% growth this year in the United States. In the country that emerged as a new important oil and gas exporter, with Azerbaijan's 7 billion barrels in proven reserves of oil, the expectations of the so-called Dutch disease in Azerbaijan have not materialized. The detrimental effects on the national economic development, due to the dependence on the petrochemical exports as the sole driver of economy so obvious in Russia, were avoided by an astute management and creative thinking of the President Ilham Aliyev's economic team under his leadership. As President Ilham Aliyev reported at the extended meeting of the cabinet of ministers in July 2013, the non-oil sector of Azerbaijan, a small country in the South Caucasus that produces just over one million barrels per day, the non-oil sector accounted for 11% of the national GDP in the first quarter of this year.
SOFAZ was founded by the forward thinking, if not to say visionary, former President Heydar Aliyev in December 1999, just seven years after this post-Soviet state declared its independence. After examining different national funds established by other petrochemicals-exporting nations, Heydar Aliyev's administration selected the Norwegian model for the Azerbaijani fund. This model was created several decades ago by the Norwegian government and is known as Norway's Statens pensions fond-Utland or Pension Fund, formerly known as the National Oil Fund.
Norway is the world's fifth-biggest oil exporter and Western Europe's largest natural gas exporter. Norway's Pension Fund's assets are almost twenty times higher those of SOFAZ. Reaching $747 billion by 2013; it was nearly $70,000 per capita for Norway's 4.69 million people, an amount nearly twice as big as Norway's 2006 $353 billion gross domestic product. The fund was not allowed to invest in Norway to prevent currency inflation. Until 2007, the Pension Fund pursued a cautious investment strategy, placing 40 percent of its portfolio in stocks and 60 percent in bonds, but in an effort to diversify into other assets, including real estate. In the case of Azerbaijan, this government entity that manages oil and gas revenues, currently has a treasure chest of $30 billion, a figure that is expected to grow to $34 billion by the end of 2012 and soar to $50 billion over next five years. At its creation in 1999, SOFAZ’s assets totaled less than $300 million. In the post-crisis period between 2009 and 2011, SOFAZ accounted for 46.5% of GDP.
Azerbaijan’s State Oil Fund gained the reputation as one of the most transparent national institutions of this type in the world.
According to the International Sovereign Wealth Fund Institute that monitors financial and political transparency of such institutions, Azerbaijan's State Oil Fund has the highest ranking of 10, the same as such developed countries Australia, the United States-State of Alaska and Norway compared to Russia-5, Iran -5 and Saudi Arabia-4.
Like Norway's Pension Fund,
SOFAZ invests in foreign government securities, debt issued by foreign governmental agencies, debt issued by financial institutions and banks, deposits and money market instruments such as credit and equity-linked notes. In an effort to assure investor confidence, SOFAZ employs Deutsche Bank AG and Clariden Bank (Credit Suisse) as external asset managers.
This solid reputation of SOFAZ as a national fund with a track record of success has even attracted attention of Israeli policy makers who are facing typical problems associated with windfall multi-billion discoveries of natural gas and gas condensate and their commercial exploitation. Hence, an idea emerged to create an Israeli gas national fund. Currently, Israel is in the process of establishing its national Fund following the model of State Oil Fund of the Azerbaijan Republic and experts of Israel are studying the experience of Azerbaijan. As the Israeli ambassador to Azerbaijan Rafael Harpaz observed: “It is imperative [for Israel] to study Azerbaijan's experience in this area. We do not have any experience in the field of energy. We have just recently set up at the fund like your Oil Fund. Now in Israel, we are conducting discussions on the issue to which countries and at what price to export natural gas resources. So, for us it is important to learn from your experience.”
Looking back over the last twenty years of the development of this young state freed from the fetters of the Soviet state-run economy, Azerbaijan is an unrivalled success. The key factors in this unprecedented rise of a former state on the Soviet periphery were obviously its oil riches. But an honest observer has to acknowledge an outstanding leadership and wisdom of Ilham Aliyev’s father and Ilham Aliyev’s steadfast leadership and grasp of fast-changing reality in this tough neighborhood.
Alexander Murinson, PhD, is a professor at the Begin-Sadat Center for Strategic Studies, Bar-Ilan University International Advisory Board member of Outre-Terre, the European Journal of Geopolitics