Where oil is exported by or on behalf of the state, the foreign currency it earns is typically paid into a sovereign fund rather than sold into the local market. It reaches the market later, when the fund sells foreign currency to finance transfers to the budget. Azerbaijan works this way: the State Oil Fund of the Republic of Azerbaijan, established by decree on 29 December 1999 as an extra-budgetary fund separate from both the government and the central bank, sells foreign currency at weekly auctions, and the International Monetary Fund recorded those sales as having more than doubled in 2024 against 2023.
A commodity currency is usually explained by what the country sells. That explanation skips a step, and in a state-heavy resource economy the skipped step is the one that decides how the currency behaves. The oil earnings do not arrive at the currency market. They arrive at a fund.
Key Takeaways
- Where the state is a party to the export, the foreign currency it earns is public money and is not sold into the market when it is received.
- Azerbaijan's State Oil Fund, established by decree on 29 December 1999, holds those earnings as an extra-budgetary fund separate from both government and central bank.
- The earnings become available foreign exchange only when the fund sells them, at weekly auctions, to finance transfers to the budget.
- The fund's assets dwarf the central bank's reserves, so the larger part of the country's external buffer sits outside the monetary authority.
- The manat is recorded as free floating in law and as a stabilised arrangement in practice, held at one level against the US dollar since April 2017.
Where the money goes first
To a public account, because a large part of it is public money from the moment it exists.
In a resource economy the state is normally a party to the export itself, through production sharing agreements, royalties, taxes on the operators, or a national oil company that is an exporter in its own right. What lands is foreign currency owed to the state. It is not a private exporter's receipt that has to be converted into local currency to pay wages and suppliers, so nothing about it obliges it to reach the market at all.
Azerbaijan put a named institution in that position. The State Oil Fund of the Republic of Azerbaijan was created by a decree signed on 29 December 1999, and its own account describes it as an extra-budgetary fund and a legal entity separate from the government and the central bank. Its stated purpose is to safeguard and prudently manage energy-related earnings for present and future generations, and it accumulates the revenue arising from the country's oil production sharing agreements, including the 1994 agreement it calls the Contract of the Century.
That is a design decision with a currency consequence attached to it. Money paid into such a fund is, in the ordinary case, invested abroad. It is a foreign asset that did not pass through the local market on its way there.
How it comes back
Through a sale, on a schedule.
The fund's other function is to finance the state. Where a budget is written on the expectation of resource transfers, the fund has to convert foreign assets into local currency to make them, and the conversion is a foreign exchange transaction that somebody in the domestic market is on the other side of. That is the point at which oil revenue becomes foreign exchange an importer or a household can buy.
The International Monetary Fund's 2025 Article IV consultation records how that runs in Azerbaijan. The fund sells foreign currency at weekly auctions; its sales in 2024 more than doubled compared with 2023, with those auctions running close to the amounts the government had programmed, unlike the year before. The Fund also notes that demand for foreign currency in official auctions rose over the same period, and that the country's buffers continue to support the arrangement the rate is held under.
Read the mechanism rather than the numbers and the shape is clear. The supply of foreign exchange into this market is a budgetary quantity. It is decided by how much the state intends to transfer and settled at an auction on a published calendar, not by exporters converting receipts as they come in.
Why the fund's size matters to the rate
Because it determines who is actually holding the country's external buffer.
| Position at the end of 2024 | Held by | Size | Import cover |
|---|---|---|---|
| Gross international reserves | Central bank | About US$11 billion, 15 per cent of GDP | 6.6 months of next year's imports |
| Fund assets | State Oil Fund | About US$60 billion, 81 per cent of GDP | Combined liquid assets equal 45 months |
On the Fund's figures roughly three quarters of the oil fund's assets sit in liquid instruments, mostly fixed income, equities and gold. Set beside the central bank's own reserves, that puts the great majority of the country's usable external assets outside the monetary authority's balance sheet, in an institution whose mandate is intergenerational rather than monetary.
The Fund's assessment is that reserve coverage on this basis is more than adequate, and that the country scores better than most emerging markets on every criterion of its reserve adequacy metric even after adjusting for heavy reliance on oil exports. What the arrangement also means is that the answer to "what stands behind this currency" is not held in one place, and only part of it is held by the institution that would have to defend the rate.
The rate the mechanism produces
Stable, and classified twice.
The Fund records the de jure exchange rate arrangement as free floating, and classifies the de facto arrangement as a stabilised one, held at the same level against the US dollar since April 2017. Two descriptions of one currency, one describing what the framework provides for and the other what the staff observe. The manat became sole legal tender on 1 January 1994, and the country has accepted the obligations of Article VIII of the Fund's articles, maintaining an exchange system free of multiple currency practices and of restrictions on current international payments and transfers, other than restrictions notified for security reasons.
Holding a rate steady while the price of the export moves is exactly what a fund of this kind is for, and the Fund's real exchange rate work shows the accumulated effect: the real effective exchange rate at the end of 2024 was 35 per cent stronger than in 2017.
There is a limit written into the arrangement, and the Fund states it in fiscal terms. Its measure of how much the state is spending beyond its resource revenue is the non-oil primary deficit, which fell to 20.5 per cent of non-oil gross domestic product in 2024 from 22.1 per cent the year before. The level it puts as consistent with a real annuity across generations is around 6 to 6.5 per cent, and it recommends an adjustment of roughly 1.5 to 2 percentage points of non-oil output a year for about a decade to approach it. What that comparison establishes is not the size of any particular transfer, which is a budget decision, but that the transfers are running well above the level the Fund treats as sustainable across generations.
What this changes for a conversion from Australia
It changes what to watch.
For a currency that tracks a commodity through the ordinary trade channel, the export price does the work and the rate moves with it. Where a fund and an auction sit in between, there are two decisions in the path, and both are public: how much the government has programmed to transfer, and how much the fund actually sells. A commodity currency of this shape is not tracking a price so much as tracking a budget that was written against a price.
The practical translation for the Australian dollar to manat pair is that the manat's own side has been deliberately quiet for years, so most of the movement in the pair comes from the Australian dollar against the US dollar. That is the same arithmetic any pegged or closely managed currency produces, arrived at by a different route.
Where to look next
when the commodity currency label does not fit is the other side of this question, and why central banks hold gold covers a different way of holding an external buffer. For the live figures, see the AUD to AZN page.
Sources
- International Monetary Fund, Republic of Azerbaijan: 2025 Article IV Consultation, Country Report No. 25/98 - the weekly foreign exchange auctions and sales more than doubling in 2024 against 2023 while running close to programmed amounts, rising demand in official auctions, central bank reserves of about US$11 billion at 15 per cent of GDP and 6.6 months of next year's imports, fund assets of about US$60 billion at 81 per cent of GDP with roughly three quarters liquid, combined liquid assets of 45 months of imports, the reserve adequacy assessment, the de jure free floating and de facto stabilised classification held at one level against the US dollar since April 2017, the manat as sole legal tender from 1 January 1994, the Article VIII acceptance, the real effective exchange rate 35 per cent stronger than 2017 at the end of 2024, and the non-oil primary deficit of 20.5 per cent of non-oil GDP in 2024 against 22.1 in 2023 with a sustainable level of around 6 to 6.5 per cent
- International Monetary Fund, IMF Executive Board Concludes 2025 Article IV Consultation with the Republic of Azerbaijan - the board's summary of the same consultation
- State Oil Fund of the Republic of Azerbaijan, History - the founding decree of 29 December 1999, the fund's structure as an extra-budgetary fund and a legal entity separate from the government and the central bank, its statement of purpose for present and future generations, and the accumulation of revenue from production sharing agreements including the 1994 Contract of the Century
General information about sovereign funds and how resource revenue reaches a currency market. Not financial advice, and not a recommendation of any product or institution. Reviewed by the Tradergy editorial team, September 2026.
Common questions
Why does oil revenue not reach the currency market directly?
Because in most resource economies the state is a party to the export, through production sharing agreements, royalties or a national oil company, so a large share of the earnings is public money the moment it arrives. Public money in foreign currency is normally paid into a fund or a treasury account rather than sold, and it becomes foreign exchange available to anybody else only when the state chooses to sell it.
What is the State Oil Fund of Azerbaijan?
A sovereign fund established by decree on 29 December 1999, structured as an extra-budgetary fund and, in its own description, a legal entity separate from the government and from the central bank. It states its purpose as safeguarding and managing energy-related earnings for present and future generations, and it accumulates revenues from oil production sharing agreements.
How large is the fund relative to the central bank?
Considerably larger. On the International Monetary Fund's figures for the end of 2024 the central bank held about US$11 billion of gross international reserves, equal to 15 per cent of gross domestic product and 6.6 months of the following year's imports, while the fund held about US$60 billion, equal to 81 per cent of gross domestic product, roughly three quarters of it in liquid instruments. Taken together the liquid assets were equivalent to 45 months of the next year's imports.
What does the fund selling foreign currency actually do?
It converts a public asset held abroad into local currency the budget can spend, and in doing so it supplies the domestic market with foreign exchange. The Fund recorded the sales as having more than doubled in 2024 compared with 2023, with weekly auctions running close to the amounts the government had programmed. The size of that supply is therefore set by a budget decision rather than by the day's trading.
Why does the International Monetary Fund classify the manat two ways?
Because the legal framework and the observed behaviour differ. The Fund records the de jure exchange rate arrangement as free floating and classifies the de facto arrangement as a stabilised one, held at the same level against the US dollar since April 2017. The double classification is the Fund's standard way of recording an arrangement a country has adopted in law alongside how the rate has actually moved.