Azeri $34 Billion Fund to Remake Holdings After Aussie, Gold

Azerbaijan’s State Oil Fund is weighing expansion into new currencies to reflect the impact of faster growing economies after starting to buy Australian dollars and gold last year, its chief investment officer said.

With $34.1 billion in assets on Jan. 1, equivalent to almost 50 percent of the Caspian Sea nation’s economy, the fund, known as Sofaz, has broadened its mandate to keep as much as 5 percent of its assets in Australian dollars, Russian rubles and Turkish lira, Israfil Mammadov said in a March 13 interview in the capital, Baku.

“Sofaz is constantly exploring new currencies with a view of further diversification of its investment portfolio,” Mammadov said. “If we start investing in new currencies, the weight of our existing currencies will of course diminish.”

The former Soviet Union’s biggest oil producer after Russia and Kazakhstan is expanding its currency allocation for the first time since its establishment in 1999 and diversifying reserves by adding investments in real estate and gold. The price of oil has more than quadrupled over the past 10 years, raising the revenue of exporting countries such as Azerbaijan and Norway.

The Azeri wealth fund, which manages all state revenue from oil and natural gas, increased assets 15 percent in 2012 from the previous year. It’s overseen by a supervisory board and reports to President Ilham Aliyev, according to its website.

Ruble, Lira

Sofaz’s holdings were kept in euros, U.S. dollars and British pounds before 2012, when it began investing in other currencies, gold and real estate. At the end of February, the fund had the equivalent of $470 million in lira assets, with $209 million in Australian dollars and $100 million in Russian rubles.

“Azerbaijan has very close ties with these neighboring countries, and we know those markets well,” Mammadov said. “Of course we also look into the economic situation and investment opportunities in those countries as well. Both Turkey and Russia are rapidly developing economies, major emerging markets.”

Central bank holdings denominated in dollars, pounds, euros and yen made up 94.4 percent of the $5.6 trillion of allocated reserves as of 2011, compared with 98.4 percent in 2001, according to International Monetary Fund data. Central bank claims in other currencies rose to $297 billion from $20.1 billion during the decade that ended in 2011, the figures show.

The Washington-based lender said in November that it’s considering classifying the Australian and the Canadian dollars as reserve currencies.

Euro Destination

The euro-area debt crisis hasn’t eroded the common currency’s appeal, with the bloc set to remain a “major part of the global economy and, as such, an important destination for investment from institutional investors like us,” Mammadov said.

Plans by the European Union’s eastern members to revive their bids to join the currency union will further boost the euro’s prospects, according to Sofaz. Latvia and Lithuania plan to seek euro adoption in 2015, with Poland reiterating plans to make the switch later. In the former communist east, Slovenia, Slovakia and Estonia already use the currency.

Euro, Poland

“The size of the euro market will increase substantially with the joining of new countries like Poland,” Mammadov said. “In the long term, this could be beneficial for the euro in general.”

Sofaz, which began gold purchases in the first quarter of last year and has bought 17.4 metric tons as of March 1, targets keeping 5 percent of holdings in the precious metal, he said.

The Azeri fund is also seeking to broaden its investments in real estate after buying properties in London, Paris and Moscow last year, with plans to pursue acquisitions in Southeast Asia and Turkey, according to Mammadov. Sofaz, which spent about $600 million on real estate in 2012, wants to allocate about $1.6 billion to $1.7 billion, or 5 percent of its portfolio, for property investment, he said.

“The current priority is countries of Southeast Asia,” Mammadov said. “When it comes to our real estate investment strategy it is aimed at investing in core, prime office space in key capitals with high market transparency, depth, liquidity, landlord-friendly laws and the practice of very long leases.”

$10 Billion

State-run wealth funds from China to Norway made 38 property investments valued at almost $10 billion in 2012, according to the Sovereign Investment Lab at Bocconi University in Milan, accounting for 21 percent of all sovereign fund investments last year, the highest percentage on record and topping the 2011 high of 16 percent.

Sofaz will also allocate financing for energy projects in the region including the proposed Trans-Anatolia Pipeline, or Tanap to deliver Caspian natural gas to Europe via Turkey, Mammadov said.

Azerbaijan and Turkey agreed in June to build the 2,000-kilometer (1,300 mile) link for an estimated $7 billion to $10 billion. State Oil Co. of Azerbaijan, or Socar, holds 80 percent of Tanap with the remaining 20 percent held by Turkey’s government pipeline company Boru Hatlari Ile Petrol Tasima AS, or Botas, and Turkiye Petrolleri AO.

The fund will spend 86.4 million manat ($110 million) this year for the Azeri government’s share of the Tanap link and also plans to finance the Star refinery in Turkey’s Izmir region, a petrochemical complex in Azerbaijan and construction of offshore drilling rigs for use in the Caspian sea, according to Mammadov.

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