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Akbar Novruz

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Last week, Azerbaijan's sovereign wealth fund SOFAZ released one of its traditional monthly reports. Despite the previous increases in its statistics, this time, however, the revenue has dropped slightly, raising the question of whether this signals a risk warning or simply a recalibration. Well, the mathematics of Azerbaijan's State Oil Fund in the first six months of 2026 looks promising, at least at face value. Its total assets were $72.6 billion in July, representing a 9.1% rise from last year and an easy beat of the $64.8 billion that SOFAZ's own investment strategy had estimated as its weighted-average asset size in 2026. SOFAZ's portfolio of investments has indeed expanded. Its equity exposure is up. It has invested in Italian solar plants, UK airports, and private equity firms based in Dubai. The numbers, to sum it all up, look good. Dig a little deeper into the issue, and one gets an even more revealing picture.

During the first six months of the year, real income of SOFAZ was less than its expenses; the difference was 1.5 billion manats (approximately $882.4 million), to be exact. And the deficit had to be covered by spending the existing reserves. The off-budget deficit of the fund was about 3.7 billion manats (approximately $2.18 billion), mainly due to changes in exchange rates and due to the decline in gold prices during the first quarter (which resulted in the loss of value of significant gold reserves held by the fund). About 22 tonnes of gold were officially sold by the fund during the first quarter to balance the portfolio within legal limits; however, according to analysts, it is a coincidence that this occurred during January-February, when oil prices were at their lowest.

SOFAZ Overview in exact numbers for H1 2026 are like this:

$72.6 billion - Total assets as of July 1, 2026, reflecting a 9.1% increase year-on-year.

178.1 tonnes - Gold reserves remain at 178.1 tonnes, unchanged since the end of Q1, despite a 22-tonne sale in January-February.

28.1% - The equities share of the portfolio has risen by 2.4 percentage points year-on-year, now constituting 28.1%.

$109 - The current Azerbaijani crude oil price has increased to $109, driven by disruptions from the US-Iran conflict.

All of this is not a warning, but it is an interesting development in itself, a sovereign wealth fund approaching the transition point that all energy-based institutions eventually reach, the point where the energy sector that created the fund begins to decline structurally and inevitably. The production at the Azeri-Chirag-Gunashli group, the offshore Caspian cluster that has been the source of income for SOFAZ since the signing of the “Contract of the Century” in 1994, amounted to 7.9 million tonnes of oil in the first six months of 2026. The production is declining, and it will continue to do so. The revenue of the fund from the ACG for the first six months of 2026 was 1.2 per cent down compared to the same period last year, a slight drop, yet a much bigger one could have happened due to the US-Iran crisis making the price of Azerbaijani oil $109 per barrel.

Fund's diversification imperative

SOFAZ understands this development well, and has been responding to it, slowly at first, and now more purposefully. Its usual asset allocation was dominated by fixed income instruments, such as US Treasuries, European government securities and investment grade debt. It was safe, liquid and fitting for a stabilization fund that had one core task: to become available whenever it was needed by the government. This allocation has been decreasing. The proportion of bonds and money market instruments dropped 5.1 percentage points annually to 33.8 per cent. Equities, 28.1 per cent of total assets, are growing, while real estate, 6.7 per cent, is steady. And SOFAZ has been making a number of alternative investments, which signify a fundamental change in its investment strategy.

Let us take a look at the track record. As of July 2025, SOFAZ purchased a 49 percent stake in 14 solar power stations in Italy owned by Enfinity Global, which had a total installed capacity of 402 megawatts, all of which were working under the terms of long-term power purchase agreements. Also, in October 2025, the fund participated in an investment of £50 million in London Gatwick Airport in collaboration with Global Infrastructure Partners, which in turn belongs to BlackRock. In the earlier period of 2025, the fund invested in Italian rail operator Italo via the GIP entity and invested €20 million in a private equity fund domiciled in Dubai.

There has also been a shift in the geographical breakdown of the portfolio. North America currently forms 27.5 percent of the investment portfolio, which is an increase by 2.2 percentage points from the previous year, whereas Europe now forms 27 percent, down by 4.4 percentage points. Asia has increased to 9.9 percent. The fund has been increasing its investments in China and Gulf countries, and its chief investment officer has commented that the geographical diversification strategy was designed to de-risk the portfolio and take advantage of high-growth economies. SOFAZ has partnerships with BlackRock, Brookfield, JP Morgan, Franklin Templeton, Blackstone, Neuberger Berman and KKR as its external managers.

'Famous gold question' and the long horizon

The gold question is particularly telling in regard to the problems currently faced by SOFAZ. The fund has been increasing its positions in gold in recent years up to 26 per cent of the portfolio and nearly $16 billion worth of gold, as its chief investment officer called it, a strategic decision to increase Azerbaijan’s gold reserves within its reserve management policy. This decision is quite logical, as gold helps to diversify against a slightly weakening dollar, is a hedge on geopolitics, and has risen substantially during the last three years due to central banks’ purchases. Yet the US-Iran conflict has brought an unforeseen twist. Gold provided a negative contribution to the total AUM in Q1, at the same time as the oil revenues were at the lowest level possible. Two hedges worked against each other.

The decision of the fund not to sell any of its gold in Q2 and keep its holdings stable at 178.1 tonnes can be taken as either a sign of confidence about the continued strength of the strategy, or the unwillingness to lock in losses at this time. The ratio of gold in the overall portfolio has fallen to 31.4 per cent, compared to 35.6 per cent as of April, mainly because the gold price has come down. Whether this is a temporary correction, or the start of a more permanent move out of precious metals into other assets, is something that SOFAZ's next investment policy will have to consider.

The most critical aspect of the fund, and the one that sets it apart from simply being a stabilisation buffer, is that the fund has been set up for generations to come. Since inception, SOFAZ has channelled over $135 billion into the state budget, which is quite an impressive amount for a nation of just 10 million people, while at the same time creating an investment portfolio that should produce gains even when the ACG stops producing. It is precisely the balancing act between these two aspects that is the key challenge of today. When oil revenue is high, the fund can provide generous budget support and continue growing. When production falls and oil prices are volatile, where does the budget receive the funds? The fund typically addresses this question by pursuing greater diversification as much as possible, at least to a certain extent.

With the price of crude standing at $109 per barrel, Azerbaijan is content for the moment. But the dispute between the US and Iran has, strangely enough, allowed the fund to enjoy a period of high income and take steps towards diversifying that will make that income irrelevant in time. Whether SOFAZ takes advantage of that opportunity by expanding its infrastructure and alternative investments, lessening its reliance on oil prices, and constructing an investment portfolio that earns independently of Caspian crude is the issue that outweighs any half-yearly report. The bottom line is good; the job is tough, and it has only just started.