Azeri Oil Fund to Invest $500 Million in Yuan, Keep Ruble Assets

Azerbaijan’s State Oil Fund, known as Sofaz, will invest $500 million in yuan assets this year and continue to pursue real estate across Asian markets to diversify its portfolio, the fund’s executive director said.

“At the end of last year, we approved a quota to invest in the renminbi,” Shahmar Movsumov said in an interview in Davos, Switzerland, referring to the Chinese currency also known as the yuan. “We’re completing all the necessary paperwork and this year will start investing the whole amount” of $500 million.

Sofaz, established in 1999 to manage the Caspian Sea nation’s income from energy sales, started investing in gold, Australian dollars, Russian rubles and real estate in 2012, buying prime office and trade centers in London, Paris, Moscow and Seoul. The fund’s $37.3 billion of assets on Oct. 1 equaled about half of the nation’s economy.

The Azeri fund is following its peers in countries from Norway to Singapore by moving into real estate as the lowest crude prices since 2009 erode revenue of the third-biggest oil producer among ex-Soviet republics. Azerbaijan relies on hydrocarbons for more than 90 percent of exports and 45 percent of gross domestic product, according to the International Monetary Fund.

“We’ll continue to look at South Korea” for properties, Movsumov said. “We’re looking at Japan, Hong Kong, Singapore and China. All the main hubs in Europe are in our agenda. We’re looking for very prime assets, which are intended to actually replace our very low-yield bonds that we have in our portfolio.”

Ruble Holdings

While Sofaz broadens its investments, it will hold on to its ruble holdings even after the Russian currency’s worst crisis since 1998. The fund last year bought 3 percent of VTB Group, Russia’s second-biggest bank.

“We will keep our ruble investment,” Movsumov said. “VTB is a very long-term strategic investment. We believe in VTB Bank. It’s one of the strongest banks in Russia.”

Azerbaijan has responded to the plunge in oil prices by defending its currency even as economic growth slowed. GDP expanded 2.8 percent last year after a 5.8 percent gain in 2013 as its crude output fell more than 2 percent. The country’s central bank used $1.13 billion from its currency holdings to support the manat in December.

Movsumov said crude prices will probably stabilize and recover in the second half of the year.

Oil Outlook

“Obviously, nobody expects them to come up as rapidly as it happened in 2009 and 2010, but they will come up from the levels we see right now,” he said.

Lower oil prices will mean Sofaz’s assets may shrink by about $3 billion, according to Movsumov.

Sofaz predicts this year’s revenue at 10.3 billion manat ($13 billion) if oil prices hover around $90 a barrel, according to its budget approved by President Ilham Aliyev. The fund’s spending is forecast at 11.8 billion manat, 88 percent of which will be transferred to the state budget.

Sofaz will also allocate 997 million manat to finance Azerbaijan’s share of the South Gas Corridor project to pipe natural-gas to Europe from 2019 via pipelines slated to be built across Azerbaijan, Georgia, Turkey, Greece and Albania.

Movsumov said the reserves accumulated in Sofaz will help the country ride out the difficulties.

“We’ll be able to protect our currency,” he said. “Although we’ll reduce spending, we’ll do so in a very controlled manner without damaging the real economy.”

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