STABILIZATION FUND WINDFALL

Caspian Business News, 9 August 2004
By Gulnaz Guliyeva

BAKU, Azerbaijan - Oil prices have continued to beat records this year and have resulted in rising public revenues in oil-rich countries like Azerbaijan. But international finance organizations predict that this rapid increase may entail steep drops in the price of oil in the future.

In order to protect itself against negative effects of such a decrease, the government of Azerbaijan created a special fund that has accumulated up to $82 million over an 18-month period.

The Stabilization Fund, which was created by the Ministry of Finance last year, has accumulated extra public revenues from the margin of current tax proceeds from the State Oil Co. of Azerbaijan (SOCAR) and those that were indicated in the budget. These revenues are accumulated in special accounts of the State Treasury in the International Bank of Azerbaijan and the United Universal Bank.

The Ministry of Finance accumulated 276.3 billion manat ($56.3 million) for January-June this year, said Minister of Finance Avaz Alakparov. This is twice as much as was amassed during the whole of last year, when the ministry garnered 126 billion manat ($25.7 million).

For this year's budget, the government predicted and the Parliament approved 2004 revenues based on a price of $20 per barrel, while the actual price has been almost double that in 2004. Assets of this fund will be likely to go up due to the continuation of the rising price for crude in the second half of this year.

On Aug. 5, oil prices have hit a record high, climbing close to $45 after a fire at a large U.S. refinery and a renewed threat to Russian oil major Yukos underlined the strain on world supplies, according to Reuters. At the same time, the Urals crude price increased to $38.89 per barrel. Azerbaijan's oil, Azeri Light, is exported through the Baku-Supsa western pipeline and Ural oil via the Baku-Novorossiysk northern route.

Rising income from oil export has brought extra income to the State Oil Fund of Azerbaijan (SOFAZ) as well and creates ground for increasing the amount of the fund's transfer to the state budget for funding projects within the state investment program, which comprise mostly projects for the improvement of infrastructure outside Baku. SOFAZ must transfer 650 billion manat ($132.5 million) to the country's budget in accordance with approved budget for 2004 and has already allocated 299 billion manat ($61 million).

According to the Sharg news agency, by designing the state budget for next year, the government is likely to increase the forecasted amount of SOFAZ's transfer for 2005, which will depend on the cost of investment projects. The government has made preliminary forecasts and determined the minimum and maximum amount will be between 750 billion manat ($153 million) and 900 billion manat ($183 million).

Some governmental officials believed the amount of SOFAZ's transfer to the country's budget could be cut due to rising budget revenue and assets of the Stabilization Fund, but recently the minister of finance made this issue clear. "These funds in the Stabilization Fund can be used only for stabilization of the country's budget if the oil price drops less than that is indicated in the state budget," he said. "The decision about the use of these funds can be made by the government or the Parliament, which should determine directions of their utilization."

Taking in to account the growing price for crude in the world market, the Azeri government is considering designing the state budget for 2005 based on oil prices of $22 per barrel, which is equal to the minimum level of world price for crude determined by the Organization of the Petroleum Exporting Countries (OPEC).