With oil prices at record-high levels, a collateral question is how post-Soviet states emerging from the debris of a centrally planned economy will absorb and invest the massive revenues from their burgeoning energy trade. Investment models range all the way from Norway's Statens pensjonsfond-Utland or Pension Fund, formerly known as the National Oil Fund, through the U.S. models of the Alaska Permanent Fund and Texas's oil revenue-funded Permanent University Fund to the woeful example of Nigeria, whose anti-corruption drive last May estimated that during the period 1960-1999 more than $380 billion in oil revenue was stolen or squandered, a staggering amount equivalent to about five years of national output. While the evidence is mixed, it appears that endemic corruption in Azerbaijan is having an ongoing pernicious effect on the disposition of oil revenues to the State Oil Fund of the Republic of Azerbaijan.

The issue is not insignificant for Azerbaijan's 8.1 million citizens, as SOFAZ stated that as of Feb. 1 the Oil Fund's assets totaled $1.538 billion. The issue is which of the world's various oil revenue funds SOFAZ might adapt as a model.

Norway is the world's fifth-biggest oil exporter and Western Europe's largest natural gas exporter. Norway's Pension Fund's assets dwarf those of SOFAZ, stand at $327.5 billion and are projected to top $640 billion by 2010; it is nearly $70,000 per capita for Norway's 4.69 million people, an amount nearly equal to Norway's 2006 $353 billion gross domestic product. The fund is 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, it was allowed in April to increase its investment in stocks to 60 percent.

Many financial experts laud Norway's Pension Fund as an exemplary transparent model for disclosure of portfolio strategy, holdings and methods but note that its agenda is heavily influenced by a progressive political agenda, as when it recently withdrew its investment in Wal-Mart over accusations the big-box retailer violated child-labor laws and thwarted employees' efforts to unionize.

Oil funds in the United States have taken a different approach, from investing in state infrastructure to providing annual benefit payments. Alaska's Permanent Fund, established in 1976 after oil revenue began to flow from the state's Prudhoe Bay North Slope fields, is a legislatively controlled appropriation. From a 1977 initial investment of $734,000, the fund has soared on record-high energy prices, with earnings divided among combating inflation, operating expenses, and the state's annual Permanent Fund Dividend, which provides every Alaskan with an annual stipend, which has varied from $331.29 in 1984 to $1963.86 in 2000. For the fiscal year ending June 30, the Alaska Permanent Fund returned 17.1 percent on capitalization of $37.8 billion.

The oldest oil revenue fund is Texas's Permanent University Fund, established in 1876 under the Texas Constitution to fund state universities, underwritten by proceeds from leases and royalties on state land. The early 20th century oil boom dramatically increased the PUF, which in fall 2005 stood at approximately $15 billion, second only to Harvard University's endowment.

At the other end of the revenue-sharing system is Nigeria, where rampant corruption has largely denied most of the country's 135 million citizens any significant benefit from oil export revenues. Since the Nigerian government nationalized the oil industry in 1971, it has controlled the nation's energy revenues, which soared to more than $60 billion in 2005. Little of this largesse has tricked down to the average citizen: A recent U.N. report noted that in quality of life, Nigeria rates below all other major oil nations, from Libya to Indonesia, with an annual per capita income of only $1,400, producing conditions that led the World Bank to categorize Nigeria as a "fragile state" torn by armed conflict, epidemic disease and failed governance. Analysts estimate that 1 percent of Nigeria's population controls 85 percent of the country's oil revenues.

Thanks to the opening last year of the $3.6 billion Baku-Tbilisi-Ceyhan oil pipeline, with a carrying capacity of 1 million barrels per day, Azerbaijan is now one of the world's fastest-growing economies, with a projected revenue stream from BTC as high as $230 billion over the next two decades. In the last three years Azerbaijan's state budget quadrupled, while since 2003 SOFAZ has transferred $1.01 billion to the state budget.

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.

The SOFAZ currency allocation is U.S. dollars (55 percent), euros (35 percent), and British pounds (5 percent).

A major concern of foreign financial analysts is that according to its bylaws, SOFAZ is accountable only to Azerbaijan's president, who appoints its head and advisory council. The current president is Ilham Aliyev, who in October 2003 succeeded his father Heidar in elections widely condemned by foreign observers as not conforming to international standards.

According to the U.S. State Department, in 2006 some SOFAZ revenue, which provided about 17 percent of government revenue and contributed to an 84 percent increase in the government's budgetary spending, besides being allocated to social and infrastructure projects, was spent on the Azeri military.

In 2006, Transparency International, which monitors global corruption, placed Azerbaijan 137th on a list of 159 corrupt countries, while during an address at Lehigh University, international relations Professor Rajan Menon said that about 90 percent of the oil industry's profit ends up in the pockets of government officials overseeing it. Still, others see the situation in Azerbaijan as improving; in May, SOFAZ won the 2007 U.N. Public Service Award in the category of "Improving transparency, accountability and responsiveness in the Public Service."

Currently, Azerbaijan's oil economy seems to hover midway between Norway's highly praised investment program and Nigeria's outright lawlessness. Given the scale of Western investment in Azerbaijan, it will be interesting to see if Western companies can ameliorate the more rapacious inclinations of Azeri officials in the booming oil industry. The ultimate yardstick will be how much trickles down to the one-fifth of the population that subsists on $2 a day. Given the country's Muslim heritage and proximity to volatile Middle Eastern countries, quickly ameliorating the country's social inequities may be the Aliyev regime's best hope for retaining power.

(e-mail: [email protected])

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