USD sharp devaluation hits Armenia IT industry hard: What steps need to be taken?

At the beginning of this year, serious changes took place in the foreign currency market of Armenia, which were contributed by a number of factors, including the Russian-Ukrainian events. The first blow was given to the US dollar exchange rate, and then the euro was also “dethroned.” All this seriously hit the IT sector.

As a result of discussions with Armenian state agencies in order to slightly compensate the losses suffered by IT companies, a draft government decision was drawn up which assumes returning the income tax to IT organizations for the months of September-December.

However, there is no “movement” in this matter until now.

The project supporting IT companies has not yet entered the government

According to Hayk Chobanyan, Executive Director of the Union of Advanced Technology Enterprises (UATE) of Armenia, since the high-tech sector is 90% or more exportable, it means that orders are paid in foreign currency, therefore, due to the Armenian dram’s appreciation, the incomes of organizations working in this sector have decreased by 20-25%. As a result, many companies suffered serious losses, some were forced to reduce staff, and others even closed.

"This is a huge blow to the sphere of strategic importance for Armenia. I would like to point out that the role of the high-tech sector in all strategic documents is up to 70 percent. This means that when we talk about the sector's long-term losses, it is a serious strategic damage to Armenia's economy," he said in an interview with NEWS.am Tech.

According to Chobanyan, since April, there have been dozens of meetings with both the Central Bank of Armenia and the heads of all state departments. As a result, in June-July, a draft of the government's decision on the support subsidy of the IT sector was presented, which, as mentioned above, was supposed to partially compensate—through the return of income tax for the months of September-December—the losses that the IT companies have suffered and will still suffer due to the rise of the dram.

At first glance, the idea of the draft is good, and it can at least somewhat help IT organizations facing serious problems. However, not everything is so easy.

"That draft has not been discussed in the state system and has not been accepted to date," said Chobanyan.

The problem lies in the state's attitude towards business

"In my opinion, the problem lies in the political decision and the state's attitude towards business and industry," said Hayk Chobanyan.

In other countries, according to Chobanyan, the attitude of the state towards business is radically different from the attitude that exists in Armenia today.

"I was once in Taiwan, and I saw how government officials go around businesses. And when I tried to understand the mechanism, they explained to me that government officials are there to support businesses to do their jobs better because industry is what keeps the country going.

We [in Armenia] have the opposite approach. It seems to us that business owes everyone and should do everything independently. I think that the moment when we put the real producer, the organizer at the top of that hierarchy, and after that the consumers, including the state officials, will be critical and pivotal for our country, our society," emphasized Hayk Chobanyan.

Today, unfortunately, there is no proper respect for business in Armenia. Moreover, government officials attempt to blame IT companies for the problems they have faced. They speak as if the IT companies were obliged to predict, plan, and undertake something.

Moreover, all this is said by people who have never created a company in their life. I never accept this behavior. If someone is an official in the government—I was also an official—, it does not mean that he is more than the heads of these enterprises. On the contrary, these companies have for years paid taxes that generate salaries—including those of government officials.

There should be respect and support for these enterprises, instead of trying to give one-sided assessments—having no moral or other right to do so."

How to save IT sector in Armenia?

Hayk Chobanyan has his own formulas for saving the high-tech sector of Armenia.

Of course, in order to have a good result, it was necessary to react very quickly, as in these months many companies suffered irreversible losses, including losing customers with whom they worked for years.

In the interview with NEWS.am Tech, Chobanyan said that this is one of the cases when speed is very important, and such drafts—for example, the above-mentioned income tax return draft—which resolve a short-term issue, should be adopted within a month. Otherwise, there is a delayed decision.

However, in addition to short-term solutions, the sector also needs long-term solutions, which are at least somewhat stable for the coming years will provide support for local organizations.

"The most acceptable tool among them is the hedging tool, which enables to specify an exchange rate together with banks for a certain period of time—half a year or a year. This will enable at least new contracts to be implemented with a fixed exchange rate to avoid fluctuations in the exchange rate. There are also other tools that the whole world uses; it is the special economic zones, it is the special fiscal policy towards strategic sectors," he said.

According to Chobanyan, having a consensus with the banking system and the Armenian government by the end of this year is very important to make the activities of IT sector companies more predictable in 2023 and beyond.

According to experts, today a lot can be done—even with a delay—to help Armenia’s IT companies to get back on their feet. But the problem is that today all this is simply not done. An even bigger problem is that if nothing is done, the IT sector in Armenia will suffer irreversible losses. The situation in the foreign exchange market will be settled one day, of course; sooner or later it shall happen. But will the affected companies be able to recover?