Armenia IT sector crisis deepening, companies already closing

The vast majority of Armenia’s IT companies export their products and are paid in foreign currency. As expected, the sharp drop in the exchange rates of the US dollar and the euro has led to serious problems for these companies.

Some companies have started reducing their employees, some have gone freelance and left the tax field, and some have started suspending education-related programs. And some companies simply closed down.

Goodbye, revenues!

The average profitability of companies operating in the IT sector is 20%. However, due to the Armenian dram’s increase in value, the revenues of Armenia’s IT companies decreased by 25%. As a result, even well-established companies started working at a loss.

Moreover, not all IT companies have income; some companies are still in the investment stage. And many of them may not have enough money to spend months investing in a project that still has neither a finished product nor revenue.

As Gevorg Safaryan—a member of the board of the Union of Advanced Technology Enterprises (UATE) and director of Earlyone and LimeTech companies—told reporters, today it is especially difficult for those projects that have received investments for a specific program.

"Let's imagine that the startups received a $1 million investment. It was supposed to be invested in development, but that 1 million became 700,000. It means that the chance of success of the startup has decreased by that much," he said.

Many IT companies have closed, but hide it

How IT many companies have closed due to the situation in Armenia? To this question of NEWS.am Tech, Gevorg Safaryan answered that he cannot give an exact number because many people hide that they have closed in order not to lose their name.

And those companies that still exist lose their competitiveness.

According to experts, the problems related to the dram’s strengthening and the US dollar’s sharp devaluating affect not only Armenian, but also Russian companies, as many of them have moved to Armenia in recent months. If there are favorable conditions in Armenia, they will stay at us for a long time, pay taxes, and create many new jobs, bringing many benefits to our economy. But if things stay as they are today, most of these companies, like the local ones, will either close down or move to other countries.

Armenia's international standing is suffering

The created situation also inflicts painful blows on the international standing of Armenia.

As Arsen Baghdasaryan, the head of DataArt's Armenia office, says, IT specialists have been working for years to create a favorable standing for Armenia, trying to show the world that the IT sector is advancing and developing with confident steps.

Today, more than 90 percent of Armenia’s IT companies work with foreign partners. And it is unlikely that these partners will like it if their partners in Armenia start asking for more money every month than they initially agreed on, explaining their request with the increase in the value of the of national currency.

We are losing great professionals

The reductions in IT companies, the closing of these companies lead to the fact that many specialists who are free appear on the market, which, in turn, can lead to a decrease in salaries in this sector. However, the demand for these specialists in other countries is still very high, and therefore our IT specialists can go to other countries, or simply start working in foreign companies, or even choose the freelance path.

And then we will lose specialists who could have created something for Armenia and paid taxes to our country.

Also, Arsen Baghdasaryan believes that Armenia is facing a serious threat of personnel outflow today.

"Even if there is no outflow, it will be inevitable to leave the tax field and switch to freelance work. After all, people will not find protection in either large or small companies, knowing that these companies may also close down soon," he said.

Education, scientific research, security

IT companies have a great contribution in education, research and security, and therefore, according to director Arman Poghosyan of Instigate company, they are of strategic importance for Armenia.

"From the point of view of our company, let me say investments in secondary professional, technological education are 200 million drams per year, research work—candidate theses, master's programs—all of them suffer. We carry out trainings where non-specialists become IT specialists in all sectors; we have trained about 2,000 specialists there at our expense. All of that is carried out with the investments of the sector," he says.

When IT companies face financial problems, they have to stop social, educational, and other programs important for the whole country.

"Future specialists suffer, the security of the country suffers, its economy suffers,” emphasizes Arman Poghosyan. “Our country has already considered the development of this sector as a strategic direction decades ago, and it is unclear why the policy that would lead to the recovery of this sector, to avoid damages, is being delayed. This inaction is counterproductive on the part of the state."

Ways out of the situation?

In an interview with NEWS.am Tech, Gevorg Safaryan noted that there are still ways out of the current situation, and all is not lost. For example, the income tax refund mechanism will somewhat mitigate the losses suffered by IT companies in Armenia and give them more opportunities to "survive" until better times come.

Experts suggested applying the income tax refund for a longer period, but until now even the tax refund drat for the months of September-December has not been implemented; it has not even been submitted to the government.

"Even this version of the draft is ignored. There has been no response for two months now, the situation has worsened, as the dram has gained even more value," said Gevorg Safaryan.

It is true that the tax refund draft, even if finally implemented, will not solve the global problem because we are talking about a 25% loss, whereas the income tax refund, which is envisioned for 4-5 months, will alleviate only 10-15% of the losses.

"There can be long-term programs, for example, in the form of tax benefits. For example, in Russia, taxes have been lowered to prevent IT companies from leaving the country. Many companies may also leave Armenia—firstly due to unfavorable conditions, secondly due to layoffs—, which will lead to the fact that people will start working in foreign companies and leave the tax field," he said.

The market will recover one day, but IT sector may be irrevocably destroyed

If the government does not take timely and competent steps, even more IT companies will be closed in Armenia, there will be more layoffs, and as VOLO company director Armen Kocharyan noted, this will cause even greater damage to the sector, which is already in a difficult situation. And it will take years to recover.

"When the market recovers, it may suddenly turn out that there are no more Armenian exports, or in the best case, 50 percent of the rest will remain. In this stressful situation, the state has something to do. The short-term proposal of the Ministry of Economy is understandable to us and can be considered as a mitigation measure. It has not been discussed by the government for weeks, months; that is, there is inaction on the part of the government. After two, three months, it may be too late," he emphasized.