Armenia is home to a civilisation that predates the Egyptian pyramids. It is no stranger, therefore, to the vagaries of the economy. Over the past decade, the country has been in the throes of dampened economic growth compared with the feverish pace set in the 1990s and (especially) the 2000s.
Although gross domestic product has performed strongly at times, with 2019 registering 7.6% growth, annual figures have remained subdued since the global financial crisis of 2008. Meanwhile, foreign direct investment (FDI) inflows have shrunk dramatically for more than a decade, as per the below chart.
As well as the impact of the global financial crisis, resource-rich Armenia was hit hard by the 2015 commodities crisis – indeed, mining is one of the country’s largest export industries. Then came the difficult, but important, political disruption caused by the Armenian Revolution of 2018, which led to a reformist government that introduced more favourable laws for foreign investors. Finally, there was then the devastating impact of Covid-19.
In short, the past decade has slowed Armenia’s all-important economic diversification – the country has long been dependent on mining and agriculture (and home to large foreign names such as Dundee Precious Metals). Nonetheless, two sectors have emerged to become Armenia’s fast-rising stars: tech and tourism, and both industries are centred in Armenia's economic powerhouse, Yerevan.
The rise of Armenian tourism
Yerevan is marked by grand Soviet-era architecture and the Republic Square, straddled by musical water fountains and colonnaded government buildings.
However, it is the city’s rich history, much of which is on display, that has endeared it (and the wider country) to a fast-growing stream of international tourists – with 2019 witnessing record-high numbers. That same year, Armenia rose five places in the Travel and Tourism Competitiveness Report 2019 from the World Economic Forum, ranking 79th out of 110 countries.
Among some of the city’s historic gems are the Matenadaran Library, housing thousands of ancient Greek and Armenian manuscripts, and the 1920s History Museum of Armenia that contains archaeological objects such as a 3500BC leather shoe. Armenia’s ancient wine tradition is another big pull for tourists.
Little wonder, therefore, that foreign investment in hotels and tourism has been a key theme in the country over the past five years, with the arrival of large names such as Hilton in 2016. Listings for new tourist sites or amenities (including two ski resorts) were at the top of the list in some of the country's key investment maps, before the pandemic. Unfortunately, like all economies around the world, Yerevan’s tourism industry has been devastated by Covid-19, but not killed.
The rise of Armenian tech
While tourism in Armenia has suffered badly during the pandemic, turnover in the country's high-tech industry grew by 20% in 2020, making it the fastest-growing major sector. Yerevan has been at the heart of this.
In fact, the city is arguably the regional tech hub for the South Caucasus, outshining the likes of Baku and Tbilisi too, whose countries have not prioritised innovation and tech for as long. Yerevan’s tech scene has certainly generated the most international media attention, possibly due to its proximity to the EU (indeed, Armenia boasts the EU-Armenia Comprehensive and Enhanced Partnership Agreement).
A recent Investment Policy Review for Armenia, conducted by the UN Conference on Trade and Development, says Armenia’s tech scene is one of the key areas for foreign investment. Meanwhile, a 2020 report from the World Bank on the country’s tech potential says that “high-tech digital exports will continue to be key to Armenia's growth [since] Armenia is a landlocked country with comparatively high trading costs in physical goods”.
Reflecting this is the fact that Armenia’s free economic zones (FEZs) are very focused on the IT and high-tech sectors. As things stand, there are four zones in the country, most of which are in or near the capital. The Alliance FEZ houses the Yerevan Computer R&D Institute and specialises in the production and export of innovative technologies in the areas of electronics, precision engineering and pharmaceuticals, among others.
Meanwhile, the ECOS FEZ specialises in high tech, with an emphasis on IT start-ups using blockchain technology and AI. Another free zone in Gyumri will be built in 2022, focusing on manufacturing, high tech and blockchain. All FEZs in Armenia provide companies in the tech space with preferential treatment on corporate profit tax, VAT, property tax and customs duties.
Generally, Armenia does not impose restrictions on foreign control and rights to private ownership and establishment, and business registration procedures are fast. The country has made great progress towards the liberalisation of its economy over the past decade – ranking first among the Commonwealth of Independent States in terms of FDI appeal, according to the World Bank.
Yerevan is learning from some of the best
The maturity of Armenia’s tech scene (by regional standards) also stems from the country’s institutions of higher education. Proof of this is Armenia’s strong pool of highly qualified IT specialists, which come at very competitive costs.
Little wonder, therefore, that many of the leading global technology companies – including Intel, Microsoft, Google, IBM, and Synopsys – have a physical presence in the country. Mentor Graphics (a Siemens business), VMWare, D-Link and Oracle are also present, while Cisco carries out research and development functions in Armenia.
Alongside its universities, Armenia boasts the Enterprise Incubator Foundation – a government entity to support the start-up scene – as well as the Microsoft Innovation Center, the IBM Innovative Solutions and Technologies Center, the Armenian-Indian Center of Excellence, and the mLab Nokia Center.
The acceleration of Armenia’s start-up ecosystem is highlighted by an increasing number of business ideas competitions, 'hackathons' and grant programmes. The first venture fund, Granatus Venture Fund I, was created in 2013 to capitalise on this trend, investing in early-stage, high-tech start-ups. The fund’s portfolio includes some 13 local companies that have raised more than $60m (29bn dram).
Some of Armenia’s most successful start-ups include Picsart (which attracted $45m, in part from the US’s Sequoia), Monitis (which was acquired by Malta’s GFI Software), Integrien (acquired by US-based VMWare for $100m), and LiveLook (acquired by Oracle). Vineti, a cloud-based platform created to simplify access to cell and gene therapy, is another star. Its 30-person team, coming from Armenia, Iran, Poland and Russia, have raised $47m.
As Armenian tech gains evermore international attention, Yerevan is fast becoming the region’s standout tech hub and driver of much-needed economic diversification. For foreign direct investors, tech and tourism are, by far, the city’s most exciting spaces for non-traditional investment, so to speak.
This is the fifth in Investment Monitor's 'Future of Eurasian Cities' series. Click here to read about Baku, here for our profile on Tbilisi, here for our feature on Almaty and here for the piece on Tashkent. In the coming weeks, we will cover Nur-Sultan.