Caspian Approach to Sovereign Wealth Funds in the Global Financial Crisis

The worldwide financial crisis has raised many questions about the efficiency and role of sovereign wealth funds (SWFs): large, state-controlled investment funds typically carrying a mix of assets. The sudden and recent increase in the finances of these funds has become a concern for some international financial institutions (IFIs) and even the governments of the beneficiary countries. International experts are putting an emphasis on the implementation of new transparency initiatives for the effective management of these budding funds.

The issues described above are incredibly pertinent for resource-rich countries of the Caspian Basin, notably Russia, Kazakhstan and Azerbaijan. Combined SWF assets accumulated in these countries amount to more than USD 250 billion. The governments of these countries are not experienced enough in managing major revenue streams, governing legislation is relatively undeveloped, and generally since the judicial and legislative powers depend on the executive branch, there are no effective tools for mitigating the risks of mismanagement. The existence of weak democratic institutions, fragile civil society and virtually no independent media further exacerbates the situation. Lack of a strategic vision and frequent conflicts of interests between the state owners of international assets and foreign managers of those assets, especially during the global financial crisis, has led to ineffective utilization of these assets for mitigating negative impacts of the crisis on domestic economy. 

The Public Finance Monitoring Center (PFMC), a non-governmental organization in Azerbaijan, has undertaken a two-year study of the SWFs of several countries in the region: the State Oil Fund of the Republic of Azerbaijan, the National Fund of the Republic of Kazakhstan, and the Oil Stabilization Fund of the Russian Federation. The main purpose of the project is to influence policies to increase SWF predictability in Caspian region to avoid the steps that might impact the financial architecture of the region and to increase effective asset management during this financial crisis period.