Abstract:

The two main functions of any Natural Resource Fund (NRF) are to use the accumulated resource revenues to stabilise budget expenditures in times of low resource prices and to save the excess revenue for future generations. In theory, by doing this, NRFs should be able to mitigate the negative effects of the resource curse phenomenon. But there are strong arguments that NRFs in institutionally weak societies cannot effectively impede their governments from accessing and misusing the accumulated revenues.

At first glance, this applies to the State Oil Fund of Azerbaijan (SOFAZ), which has been a key part of the country’s fiscal system. Alongside the traditional NRF functions, SOFAZ has also funded national socio-economic development projects and provided large annual transfers to the national budget. Crucially, the withdrawals from the fund are outside the scope of normal budget procedures and are fully within the discretion of the President without the need for any legislative approval. These transfers, which on average form around 40 percent of the budget, have allowed the government to provide certain socio-economic benefits to the population, keep taxes low, and dispense strategic patronage.

Yet, at the same time, while the stabilisation function of the fund is clearly a failure, as evidenced by high share of budget transfers, its saved assets have shown a notable growth dynamic based specifically on governmental savings and not the investment return, which for SOFAZ remains quite low. This suggests that the government has counterintuitively continued saving some portion of the revenues annually instead of simply syphoning it all into the budget to fund the increasing spending. Additionally, recently, with oil reserves and revenues decreasing, the Azerbaijani government has introduced reforms aimed at lowering the share of SOFAZ transfers in the national budget, despite the ongoing increase in government expenditures due to reconstruction in post-war Karabakh.

This paper attempts to explain such behaviour by focusing on societal expectations about the fund and aims to understand if such technocratic reforms, which crucially do not in any shape or form remove unilateral presidential control over the withdrawals, will succeed in the long term and what political effects they might have during the post-oil era.

The paper is part of the author’s doctoral thesis that researches the effectiveness of SOFAZ, its Kazakhstani counterpart, the National Fund of the Republic of Kazakhstan, and the Petroleum Fund of Timor-Leste.