Azerbaijan strengthens financial sovereignty Reserves amid challenges

Despite complex global developments affecting foreign trade dynamics, Azerbaijan has steadily increased its total strategic foreign exchange reserves. As of July 1 this year, their volume exceeded $77 billion, marking an 11% increase since the beginning of the year.

As before, the responsibility for building the country’s financial “safety cushion” lies with the State Oil Fund of Azerbaijan (SOFAZ), which accounts for more than five-sixths of the nation’s total reserves. In recent months, SOFAZ has pursued a rather flexible approach to managing its assets. The Fund has significantly reduced investments in bonds and money market instruments, while actively investing in gold and real estate. It has also increased the share of investments in high-rated equities, including on the Italian market.

The global recession of 2023, which significantly slowed industrial activity across the world, led to a decline in both demand and prices for hydrocarbon resources and fuel. In the aftermath, the negative effects of this downturn could not be fully offset, and high price volatility in global hydrocarbon markets persisted throughout 2024 and into the first half of the current year.

Last year, weaker global demand and relatively low oil and gas prices had a substantial impact on reducing Azerbaijan’s foreign trade surplus. At the same time, the country has been facing a steady decline in well productivity at oil fields in the Azerbaijani sector of the Caspian Sea. For example, oil production (including condensate) totalled 13.7 million tonnes in January–June of this year—down 4.86% compared to the same period in 2023.

These factors have directly affected the inflow of funds into Azerbaijan’s foreign exchange reserves, particularly those of the SOFAZ, which currently accounts for approximately 85.6% of the country’s total reserves.

Established in December 1999, SOFAZ is tasked with accumulating revenues from international oil and gas contracts. These include proceeds from the sale of the state’s share of profit oil and gas, transit fees for hydrocarbon transportation through Azerbaijani territory, income from leasing state-owned property, and other related sources.

The trends outlined above continued into the first half of the current year: SOFAZ revenues from the sale of profit oil from the Azeri-Chirag-Gunashli (ACG) block amounted to just over $2.604 billion in January–June, which is 13.3% lower compared to the same period in 2024.

Nevertheless, the gas segment showed signs of stabilisation during the reporting period. In particular, SOFAZ’s revenues from the development of the Shah Deniz field totalled $249.02 million, representing a 2% increase.

Despite the unfavourable external environment and the decline in domestic hydrocarbon production, the profitability indicator of the State Oil Fund remains in positive territory. As of July 1 this year, SOFAZ’s assets exceeded $66.515 billion — a 10.8% increase since the beginning of the year.

Overall, in January–June of the current year, the Fund’s foreign currency reserves grew by 8.833 billion manats (approximately $5.196 billion), of which approximately 5.743 billion manats (roughly $3.379 billion) came from the execution of oil and gas agreements — including the sale of profit oil and gas, acreage fees, bonus payments, and transit revenues.

At the same time, it is important to highlight that beyond revenues from oil and gas contracts and raw material sales, a substantial portion of SOFAZ’s income is generated through asset and capital management. In the first half of 2025 alone, the Fund earned nearly 3.090 billion manats (approximately $1.818 billion) from asset management activities.

The State Oil Fund is widely recognised for its traditionally cautious and well-balanced investment strategy. According to credit ratings, nearly 70% of its bond and money market portfolio is invested in highly secure instruments with an AAA rating. Until recently, two-thirds of SOFAZ’s assets were allocated to bonds, treasury obligations, and other government securities — followed by investments in equities, commercial real estate, and gold.

In recent years, however, the Fund has undertaken a large-scale diversification of its asset structure. As a result, its allocation to bonds has been significantly reduced: the share of bonds and money market instruments in SOFAZ’s total assets fell from 53.3% to 38.9%. As of January 1, 2025, these assets were valued at just over 42.583 billion manats (approximately $25.049 billion), representing a 14.8% decline compared to the beginning of 2024.

Conversely, the Fund has increased its holdings in precious metals, commercial real estate, and — to a lesser extent — high-yield corporate equities. By July 1, the share of real estate in SOFAZ’s total investment portfolio had grown to 6.7%, up from 6%. As of early 2025, investments in commercial real estate were valued at nearly 4.565 billion manats (around $2.685 billion), marking a 9.15% increase compared to January 1, 2024.

Investments in precious metals grew at an even faster pace, and by the beginning of the current year, the share of gold in SOFAZ’s overall portfolio had increased from 14.8% to 28.8%. Notably, one of the core tracks of SOFAZ’s new investment policy in recent years has aligned with a global trend — the accumulation of gold reserves by the world’s leading central banks.

Amid heightened risks to the investment portfolio caused by adverse developments in global financial markets, the State Oil Fund raised its share of gold holdings from 13.1% to 13.9% of total assets as early as 2022. By the start of 2023, SOFAZ had reserved approximately 101.8 tonnes of gold, and by the end of the third quarter of last year, it had acquired more than 25 additional tonnes.

Investing in gold allows the Fund to hedge against risks stemming from currency fluctuations and declines in securities prices. Overall, SOFAZ’s gold investments exceeded 21 billion manats (approximately $12.35 billion) as of early 2025.

"The total volume of gold in the Fund’s assets reached the target level outlined in the initial investment plan, amounting to 181.1 tonnes by mid-2025. For this reason, new gold investment operations have been temporarily suspended," SOFAZ said in a statement. The Fund also noted that, depending on market conditions and the overall state of the investment portfolio, "this decision may be reviewed in the future."

Notably, as part of its new asset diversification policy, SOFAZ is increasing its investments in high-rated corporate sector equities through stock indices that offer significantly higher returns. SOFAZ’s policy involves passive investment in the shares included in the global MSCI World Index (Morgan Stanley Capital International World Index), which comprises the largest companies from 23 developed countries and covers 11 economic sectors.

The index includes a total of 1,410 companies with a combined market capitalization of around $77 trillion. The Fund acquires shares proportionally to the market capitalization of these companies.

As of January 1, 2025, SOFAZ’s investments in equities grew by 16.5%, exceeding 22.710 billion manats (around $13.36 billion). Consequently, the share of corporate securities in the Fund’s overall portfolio increased from 20.35% to 22.1%.

SOFAZ has recently strengthened its ties with Italy in its European investment strategy. The Fund’s investment portfolio in the Italian capital market has already reached approximately $3 billion. A natural continuation of this trend was the deal concluded on July 18, 2025, in Rome, where SOFAZ acquired a 49% stake in a portfolio of solar power plants with a total capacity of 402 MW owned by Enfinity Global.

In addition to renewable energy, the Fund’s assets also include investments in other Italian infrastructure projects, real estate, and shares in private companies.

Notably, in February of this year, SOFAZ invested €34.5 million (around $38 million) in Italo – Nuovo Trasporto Viaggiatori S.p.A., Italy’s leading high-speed rail operator.