Armenia’s economic boom hurts tech sector

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An influx of Russians has pushed up the value of the dram, undercutting Armenia’s exporters and the celebrated IT industry.

Business was great for Azat Tovmasyan. The Yerevan-based entrepreneur had won an innovation grant of 50,000 euros to perfect a unique product: an internet-enabled billfold with security features such as cameras and GPS tracking. He raised $3 million and began hiring. Sales were taking off.

But then Russia invaded Ukraine. Fleeing Russians and their money started flooding into Armenia, causing the dram to skyrocket in value and erasing Tovmasyan’s competitive edge. He has now shelved plans to expand.

On the surface, Armenia’s economy is booming: The IMF expects real GDP growth to hit 7 percent this year. Government debt has fallen. Investments are flowing in as Russian businesses relocate.

The problem is that the billions of dollars from Russia are fueling demand for drams. That pushes up the value of the local currency – by 25 percent against the dollar and almost 40 percent to the euro since Russian tanks rolled into Ukraine in February. A stronger dram makes Armenian exports – everything from foodstuffs to cigarettes to software – less competitive. And companies that measure receipts in dollars must spend more to buy drams to make payroll.

“We attract capital and investments in dollars, conclude contracts with our partners also in dollars, and pay taxes and salaries in drams. In this regard, the devaluation of the dollar is a double blow to our business,” said Tovmasyan.

In recent years, the information technology (IT) industry has been an exporting bright spot for Armenia, celebrated for putting the country’s brain power to use and encouraged by generous tax breaks. These companies are responsible for 5 percent of Armenia’s output, the economy minister said in April. IT firms pay far above average salaries and employ almost 25,000 people – offering a clean, middle class lifestyle in a small country routinely short of good jobs. They also contribute tens of millions of dollars to state coffers: 2.6 percent of budget revenues in the first nine months of 2022, according to a data from Yerevan-based Modex, a consultancy.

For startups like Tovmasyan’s, raising prices is not an option.

“There are signed contracts and prescribed prices, it is impossible to change them now,” he told Eurasianet. “We will lose customers and our competitiveness. After all, countries like India and Turkey compete with us in this market [for IT services]. […] In the current situation, IT companies either must reduce their staff or cut salaries for their employees, which ultimately will negatively affect the companies’ potential and, in general, the prospects for the development of this sector in Armenia.”

While IT firms face bleak prospects, the labor market has also been upended. Russian firms can relocate without trouble. And Russian citizens can easily get residency in Armenia, a member of the Eurasian Economic Union, a Russia-led customs bloc.

Between February and July, the number of IT firms registered in Armenia grew over 40 percent to 2,195 (about one-third of these have only one employee), according to Modex. Two American-headquartered firms employing over 250 people moved their Russia offices to Armenia.

“The Russian IT companies that moved to Armenia somewhat softened the blow,” said Anahit Sargsyan, executive director of the Armenian Code Academy, which hosts the largest IT job fair in the country each November. “Many Armenian professionals who lost their jobs in Armenian companies, or their incomes were cut due to the depreciation of the dollar, were hired by Russian companies that began operating in Armenia after February.”

If at previous job fairs, 70-80 percent of attendees were young – perhaps looking for their first job out of college – this time over 50 percent were “middle and even top-level specialists,” Sarkisyan explained, adding that this year the job fair, held on November 19, broke attendance records.

For experienced IT workers, that means competition. For companies with cash, it means a broad talent pool.

“Because the supply [of jobs] has dwindled and there are now so many job openings on the market, it has become easier for many financially stable companies that previously experienced a shortage of quality staff to find them. Now these workers are fighting for a good place in the companies, and not vice versa,” Tovmasyan said.

Yeghishe Karapetyan, a 30-year-old developer, quit his job earlier this year. “I waited a few months after the devaluation of the dollar, but I realized that it would last for a long time. And then I went to work as a freelancer,” said Karapetyan, who now makes more money working directly for an American company. He also pays less in taxes to the Armenian government.

Many qualified specialists will quit to freelance or emigrate, predicts Arsen Baghdasaryan, director of DataArt, a software developer with a presence in 15 countries.

“Due to the devaluation of the dollar, Armenian technology startups will be dealt a very serious blow in the coming years,” Baghdasaryan said. “Both the IT sector and Armenia, which has been branded as an IT country for many years, will suffer from this.”

Tech leaders hope for some sort of government relief. The Economy Ministry confirmed it is working on a bill to refund four-months’ worth of income tax to IT workers, but declined to comment on its chances for passage by parliament.

Economist Haykaz Fanyan doubts the government will be so generous. “We are talking about 16 billion drams [about $40 million], 0.8 percent of the budget revenue […] a very large amount to direct only to one sector, where specialists already receive very high salaries,” Fanyan said.

A bigger concern for policymakers is the impact of rising prices, which affects everyone.

Core inflation, at over 9 percent most of this year, is far above the central bank’s target of 4 percent and higher than it has been since the 2008 financial crisis. Focused on taming inflation, the bank is raising interest rates, maintaining upward pressure on the dram.

Former finance minister Vardan Aramyan is concerned that authorities are not doing enough to restore stability to currency markets and warns that Armenia should brace for a sharp decrease in exports, a phenomenon known to economists as Dutch disease.

“Due to the strengthening of the dram, local producers’ competitiveness in foreign markets is decreasing, and in parallel, there is an outflow of labor to the non-export sector,” Aramyan told Eurasianet. “There are distortions in the economy, in fact, very similar to signs of Dutch disease.”\

Source: Eur Asia Net