Software Buzz Brightens Armenia’s Economic Reality

YEREVAN (RFE/RL)–Amid the gloom of Armenia’s depressed economy there is one bright spot that leaves some hope about its potential for recovery. Far from public eyes more used to industrial graveyards–it is quietly becoming one of the most promising avenues of economic development.

The computer software industry has registered a major upswing in Armenia in the past several years–thanks to an influx of foreign investmen’s. It is now a rare area where Western–mainly American–firms pull the strings–offering the country an opportunity to preserve some of the hi-tech orientation it boasted in the Soviet times.

At least 12 US software companies are known to have their subsidiaries in Armenia at present. The number should grow in the coming months. European companies are said to be following the suit–with several of them already present in the country.

For Armenia’s unemployment-stricken economy this has meant hundreds of jobs and good prospects for the creation of new ones. So good that government officials now view computer programming and wider information technologies as one of the main potential engines of economic growth.

"Herein lies our future," says Aleksandr Adamian–deputy directory of HPLA–the Armenia’subsidiary of the California-based Heuristic Physics Laboratories. Founded in 1995–HPLA is one of the pioneers of Western hi-tech investment in Armenia. It started off with just 5 programmers and now boasts more than 60. Company officials see the possibility of further expansion. HPLA specializes in the development of a special software that is used for detecting defects in electronic microchips.

It was HPLA’s positive experience that inspired another Silicon Valley company–Credence Systems–to launch operations in Armenia two years ago. Its Yerevan branch now employs about 50 people and may also be expanded. The business is "very promising," according to its manager–Manuk Gevorgian.

Chilli Technologies–a Yerevan-based company also owned by Americans–was opened six months ago but already has more employees than Credence. Its manager–Vasily Turovtsev–is equally enthusiastic: "I believe that this is one of the best ways of developing our economy."

The West is a key but not sole market for Armenian-made software. Bever Computers is one of those local firms that get orders from Russia. Bever produces computer programs of automated financial management for Russian defense enterprises–capitalizing on its managers’ old Soviet-era connections. Most of its programmers used to work for Yerevan’s famous Mergelian Institute of Mathematical Machines–the once secretive research center that produced electronic equipment for the Soviet military. Mergelian’s sprawling building is desolate these days–reflecting the economic decline of the past decade. The institute has been trying to adapt to the harsh realities of market economy. It is now said to be working on joint projects with China. Thousands of former Mergelian workers left jobless by the end of the Cold War and the Soviet collapse are a valuable human resource–which foreign and domestic firms are making use of.

It is the shared opinion of industry insiders that the low cost of skilled labor is the primary factor attracting foreign investors to the sector. An experienced programmer working in an American-owned firm in Armenia is paid an average of $500 a month–20 times less than their counterpart in the US.

The overall volume of investmen’s needed for launching a software subsidiary is fairly low compared with other sectors of the economy. The high transportation costs resulting from Armenia’s geographical position and the Nagorno-Karabakh conflict are irrelevant to information technologies.

In the words of HPLA’s Adamian–this makes the software business all the more beneficial for the country. "What we need to have is some industries that are unaffected by the transportation problems as much as possible," he says. "What you produce here is delivered within seconds."

Also important is the fact that the sector is export-oriented thanks to foreign companies. The more than 30 local firms must themselves look for markets abroad. Some of them have been highly successful in the domestic market where most banks and other businesses use Armenian software to keep their computerized financial records. But very few have found export markets on their own. "You may lose five or even ten years trying to enter the Western market," Adamian says.

Information technologies is now one of the few areas where Armenia may soon be faced with a shortage of skilled specialists. The government has already increased the number of places in computer science programs of state-run universities to keep up with the demand. The high likelihood of finding a decent job lures many young people to computer departmen’s–making the application process there one of the most tightly contested in the country.

The problem is that many university graduates are not qualified enough to work for software companies because of the general decline in educational standards–industry executives say. "There should be no illusions about skilled programmers in Armenia. There aren’t too many of them," says Hakob Duvalian–head of the Yerevan branch of the US firm Virage Logic.

The adequate training of future specialists is thus high in the list of deman’s addressed to the Armenian government by the software sector. Its "strategic importance" is recognized by the ministry of industry and trade which has come up with a program of fostering the spread of information technologies with "state assistance."It outlines those important directions which should enjoy state privileges and an appropriate legal framework," the deputy minister–Armen Grigorian–said in a recent newspaper interview.

One of the ideas considered in this context is the creation of a "technopark" near Yerevan – a sort of tax haven for hi-tech businesses. The government hopes to secure funding from the World Bank for that purpose.

Despite the robust growth–the Armenian software industry still has a modest size. Its annual production volume is at best $15 million – a drop of water in the sea of global market worth trillions of dollars. As HPLA chief executive Andranik Hovannisian puts it: "Most Western software firms don’t even know of Armenia’s existence."

If the government is to ensure a greater influx of foreign capital–Hovannisian and other industry insider say–it has to meet a number of specific conditions. A large part of software companies’ grievances has to do with high taxation and customs administration. Customs officials are widely accused of arbitrary taxation of imported computer equipment and programs. "They are killing the business," Adamian complains.

The official monopoly on Internet services enjoyed by the ArmenTel national telecom operator is also thought to be stifling growth. Companies that do not have a satellite connection with the outside the world have to rely on ArmenTel’s services–which are expensive even by international standards. There is also the question of compulsory military service. Armenian university graduates serve two years in the armed forces and as company executives say–need some time to restore their skills after returning home.

"The loss of a single programmer who gets drafted to the army–may seriously hinder the ongoing projects and the business in general," Hovannisian warns.

Other obstacles to the sector’s development are less fundamental. Under Armenian law–only those business transactions that are sealed by ink have legal force. In the era of electronic commerce this is seen as an anachronism.

The Armenian state has so far had little involvement in the emergence of the software industry. Analysts say that the government can no longer stand by and just let the process go on if it is intent on turning the IT sector into a manufacturing leader. A comprehensive government strategy for hi-tech development would be a welcome boost.

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