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November 2001

Wired to the World: Armenia Logs On to the Information Revolution

By Haygaz Baghian and Narine Khachatrian | Yerevan

Silicon Valley Armenia  |  Armenian Software Industry Growth  |  Armenia's Comparative Advantages
Technoparks and Venture Capital  |  The European Unions e-Caucasus Initiative and Conference
Obstacles to the Success of the Armenian IT sector  |  ICT Assessment Report, USAID
Comparative salaries for software development teams (Arcas Survey)  |  Making Connections
Debit Becomes a Credit For Banking System

The global economy being created through advances in information technology simultaneously presents new opportunities and challenges for Armenia in the transition from a command to a market-based society. Developments in computing and communications offer the prospect of taking a leap forward to a modern knowledge-based economy, bypassing many of the phases passed through by industrialized countries in the West.

If the prize is great, so are the demands. Fundamental reforms are required to create the necessary legal, educational, and telecommunications infrastructure so that Armenia can fulfill its potential as an e-economy hotspotin the region.

The will to succeed is clear among many of those working in the field. Serge Adamian, President of SolarEn International Corporation, based in Minnesota, said: When we had an opportunity we succeeded. When chances present themselves again, we will succeed over again. SolarEn, one of the leading high-tech companies in Armenia, operates as a technology incubator, developing clean energy and renewable power projects as well as applications for use on mobile devices.

This optimism is shared by a number of international organizations, from the World Bank to the United Nations Development Programme (UNDP) and the US Agency for International Development. Experts from these bodies have all rated very highly Armenia's potential as an active participant in the global Information Technology (IT) industry.

It is also demonstrated by the sharp and continual growth in Armenia's IT sector, fuelled by the arrival of more than 60 foreign companies, a break-neck inflow of investments into the Armenian market, and a doubling of trainers at IT educational institutions in recent years.

These apparent successes are vividly reflected in the UN's Global Human Development Report for 2001, where they have been a significant contributor to Armenia's rise from 93rd place last year to 72nd in its index of human capital. Armenia has now overtaken all of its neigbours Georgia holds 76th position, Azerbajan 79th, Turkey 82nd and Iran 90th.

The index of human capital is calculated based on a country's per capita income, average life expectancy, and level of education. According to Davit Hakobian, UNDP Assistant Resident Representative in Armenia, the republic's income per capita increased by 10 percent, the education index by eight percent and average life expectancy by two years, reaching 72.7 years, over the period in question.

Although neighboring countries have higher per capita incomes than Armenia, they lag behind on other elements of the index, particularly in the educational field. Currently, 99 percent of Armenia's population is literate, the vast majority having completed ten years of education, and 13.1 percent hold a university degree. That high level of education is a key factor in the emergence of Armenia's IT industry during the economic transition period now.

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Silicon Valley Armenia

Even before independence, Armenia had a reputation as a Soviet "Silicon Valley." Although one of the smallest republics in the former Soviet Union, Armenia was considered among the most technologically advanced. The republic's 130 scientific research institutes employed 20,000 people, half of whom worked at the Yerevan Research Institute of Mathematical Machines producing both computer hardware and software programs.

Many high precision instruments used in Soviet space stations and satellites were designed and manufactured in Armenia. The republic was the third largest contributor to research in the USSR after Russia and Ukraine. It was also second only to Russia in the number of scientists and specialists with degree-level qualifications per thousand of the population.

Armenia's Ministry of Industry and Trade estimates that almost 30 percent of high-tech computer and electronic equipment used for Soviet defense and space systems were developed and produced in the republic. By 1990, more than 100,000 people, or about 10 percent of the labor force, were working in the field of electronics.

The collapse of the Soviet Union dealt a body blow to this scientific community, which was suddenly deprived of funds and purpose. Newly independent Armenia, overwhelmed by the consequences of the 1988 earthquake, the economic blockade from Azerbaijan, and the catastrophic domestic energy crisis, could not offer any real support. As a result, the number of researchers shrunk by four-fold to just 5,000 in the five years between 1990 and 1995.

With the reopening of the Metzamor nuclear power plant, Armenia succeeded in meeting its energy needs in 1994 in contrast, for example, to Georgia, which continues to have daily power outages. The rapid privatization of large parts of the economy and the emergence of a private business sector created new opportunities to restore the shattered legacy of Armenian science through IT.

Growth was slow at first but by 1998 the sector had launched onto its present spectacular expansion. According to the International Trade Center, the technical cooperation agency of the United Nations Conference on Trade and Development and the World Trade Organization, the Armenian IT market was worth $250 million in 2000. This was an increase of 25 percent on the 1998 level local experts estimate the market to be worth even more, perhaps $350-400 million.

The production of computer and data communication hardware accounted for 20 percent of the market, totaling $50 million, an increase of 25 percent in two years. The largest segment was telecommunications equipment at a time when ArmenTel was investing heavily in the development of mobile telephony and digital switching  which was worth $100 million by 2000.

The Armenian Internet Users Group, a non-governmental organization set up to represent the interests of Internet users, estimates that there are around 50,000 computers in the country and that 4,000 machines are bought annually. The number of computers connected to the Internet is put at 15,000 and there are more than 200 Web servers operating in the republic.

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Armenian Software Industry Growth

Software and services companies, although representing only about eight percent of the current market, have seen spectacular growth. They doubled in value to $20 million between 1998 and 2000, largely because of the increased demand within Armenia itself for networking products, packaged application solutions and software support.

Garegin Chookaszian, executive director of the Information Technology Foundation (ITF) in Yerevan, a non-governmental organization focusing on the use of computers in education, describes the surge in software production as one of the brightest spots in the recent industrial development of Armenia. Chookaszian also advises Robert Kocharian on Internet issues as a member of the Information Technologies Council established by the President.

According to Vahram Stepanian, co-author of the Armenian Software Industry Sector Study, which was funded by the World Bank, production and exports by software companies in Armenia, both local and foreign-owned, have been at least doubling each year from 1997 to 2000. By the end of 2000, estimated total annual sales in the sector amounted to between $18-20 million. The sector accounted for about five percent of Armenia's total exports in 2000. The growth rate of exports from Armenia's software is about twice that of other local industries over the same period.

Viktoria Ter-Nikoghossian, executive director of the Union of Information Technology Enterprises of Armenia, representing about 20 software, training, and Internet service companies, said the success of the software industry has driven the expansion of other IT sectors including Internet services, electronic data processing hardware, and educational courses.

A quarter of the 400 companies currently operating in Armenia's IT market are engaged in software development. They are also the largest employers among the IT workforce, with around 3,000 staff. There remains a large pool of talent to draw on, however, since about 4,000 graduates with IT qualifications and aged under 40 do not have jobs in this field. Karen Vardanian, head of the IT development directorate at the Ministry of Industry and Trade, estimated that they need only three to six months of training to raise their skills to the level required by most companies.

Of the 42 foreign software companies established in Armenia, 26 are US-based businesses with others coming from the United Kingdom, Ireland, Belgium, France, and Russia. Although accounting for slightly fewer than half of software enterprises in the republic, their operations tend to be bigger and they employ some 60 percent of programmers.  Since there is a broad range of specialties available in Armenia, companies develop a wide variety of software products. These range from accounting and banking software to multimedia educational applications, database management systems, Web design, and business-to-business programs.

Foreign software companies in Armenia export most of their products, which include secure e-business solutions, e-commerce software, and wireless applications for clients ranging from corporations to governments.

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Armenia's Comparative Advantages

Software packages developed by local companies are introduced and applied in many fields of the economy. For instance, banking and financial software packages are widely used in by financial companies in Armenia.

Multimedia educational programs are another promising area of development for Armenian companies. Grigory Vahanian, coordinator for the Internet Access and Training Program in Armenia, said such software could provide the basis for the development of distance learning courses in the republic, provided access to high-quality telecommunications services improves. The program, which provides training in the use of the Internet, is funded by the International Research and Exchange Board, a nonprofit organization based in the US.

Several companies complained that ArmenTel's monopoly of telephone services was slowing the development of Internet technologies in Armenia because the cost of accessing the World Wide Web is high. Tariffs have dropped by 40 percent, but Internet access remains, relatively, several times more expensive in Armenia than in many other countries. As a result, use of the Internet has spread only slowly throughout society, with perhaps only 40,000-50,000 users nationwide.

However, some businesses are working with foreign companies, including those from Canada, Ireland, Russia, and the US, on Web design and development.  Their emergence is evidence of the comparative advantages that Armenia enjoys. As well as high levels of technical expertise, labor costs are highly competitive and the republic benefits from the established networks and contacts of professionals in the Armenian Diaspora. Unlike many other businesses, Internet companies are not affected by transportation difficulties and the costs involved in moving products to market.

Salaries of software developers working for local companies range from $200 to $400 per month, depending on their expertise and experience. The rate is typically much higher among foreign companies and often starts at $600 or more per month.

A study carried out by the Arcas Group, a private research company in Yerevan, recently concluded that Armenia represented the best value location in the world for IT products taking into account the "high technical level and the low cost of development." The quality-price ratio was considerably better even than in India, where a thriving computer services industry has grown up in recent years.

Most Armenian experts are convinced, however, that foreign investors are attracted more by the high quality of products, meeting international requirements, rather than by the low cost of labor. Vardanian said: "Cost effectiveness is an additional attraction for them, but the quality factor comes first."

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Technoparks and Venture Capital

Tony Moroyan, president of ViaSphere International in Californias Silicon Valley, established the ViaSphere Technopark in July, the first technology park in Armenia, based at the Transistor plant in Yerevan. The 10,000 square meter facility is already home to four successful IT companies and offers state-of-the-art infrastructure including reliable power, data communications, and telecommunications connections. Business incubators are also available to facilitate a quick start-up  essential in the fast-moving technology sector. Viasphere International, which has subsidiaries and partners  in Japan, Italy, USA, India, and a number of European countries, intends to provide venture capital to promote the creation of new businesses.

Moroyan, a major investor in IT worldwide, believes Armenian authorities should do more to strengthen legislation concerning protection of copyright. But he noted a key element of Armenia's attractiveness for investors.  He said: When we place orders in India, we receive accurately and on time the things we have ordered. When we place orders in Armenia, we receive accurately and on time the things we have ordered plus ten more suggestions for the development of new products.

Prospects for future growth look good, provided Armenia can ensure that its telecommunications infrastructure keeps pace with the demands of the industry and its education system continues to produce intelligent, well-motivated people. There may be concerns about both questions but both are within Armenia's capability to fix.

The economic incentive to do so is powerful. According to the 2001 Index of Economic Freedom, published by The Heritage Foundation and the Wall Street Journal, Armenia has been making positive strides economically. In 1999, Armenia was rated only the 106th most attractive place in the world for investment out of 161 countries in the index. Since then it has risen steadily, moving from 84th place last year to 68th in 2001. By comparison, Georgia was ranked 114th, Azerbaijan 139th, and Iran 151st in 2001.

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The European Unions e-Caucasus Initiative and Conference

Armenia is well placed to establish itself as the powerhouse of the region for IT and e-commerce, attracting further outside investment and integrating the country fully into the global economy. The European Union (EU), recognizing this potential, is sponsoring the Caucasus Information Technologies Initiative in Yerevan, a regional conference bringing together high-level government officials, IT professionals, educators, businessmen, and representatives of international and regional bodies. Originally set for this month, the conference has been put back to April following the terror attacks on the US on September 11.

Participants are expected from the three Caucasus republics, Iran, Turkey, and Russia as well as EU member states, and countries with advanced IT capabilities such as Japan, South Korea and India. The conference is part of a nine-month e-Caucasus initiative by the EU aimed at increasing cooperation across the region in information technology.  National and regional level working groups are expected to be established after the conference,  to develop an action plan for implementing ideas and programs emerging from the discussions. The knowledge economy also offers Armenia the opportunity to escape its geography to some degree, making powerful use of its greatest resource the brains of its people.

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Obstacles to the Success of the Armenian IT sector

Nevertheless there are obstacles impeding the development of the IT sector. Experts point to a lack of financial resources, the monopolized telecommunication infrastructure, an unclear legislative environment, and management and marketing weaknesses within local companies, as well as an outdated curriculum in some local universities. Directors of local companies complain that they do not enjoy the same privileges as foreign companies under the Law on Foreign Investments.

Businesses are looking to the government to solve some of these problems. It declared the IT industry a priority sector for economic development in December 2000 and adopted a plan to support its growth in April of this year. Armen Grigorian, Deputy Minister of Industry and Trade, said the development of a successful IT sector will benefit other areas of the economy and create an infrastructure for attracting further inward investment. The development of an IT industry in Armenia is an essential tool in the transition from a manufacturing to a digital economy, he said.

Chookaszian believes Armenia should make the transition to a digital society a national priority. Hratch Bayadian, president of ITF, believes a nationwide strategy should be drawn up to ensure the spread of IT not only throughout the economy but also in society generally. There are still just 120 schools out of 1,400 in Armenia with computers, despite the existence of several programs, including ones sponsored by the US Government, aimed at equipping educational institutions with modern technology and Internet access.

It is the same as if one blackboard had to be shared by 100 teachers with one pen for every 1,000 pupils, said Lusine Janoyan, board member of the American Chamber of Commerce.

The Armenia Connectivity 2000 program backed by the US State Department provides schools with computers and network links to enable them to access the Internet and form an online educational community. Ejmiatsin School #2, one of the largest in the Armavir region, and Ashtarak Secondary School #1 were two of the latest institutions to be hooked up to the scheme.

Grigorian is confident that many of the obstacles in the way of IT development in Armenia can be overcome.  He said: There is the will, the people and the resources to achieve a technological breakthrough and to succeed.

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ICT Assessment Report, USAID

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Comparative salaries for software development teams (Arcas Survey)

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Making Connections
UNDP Spreads Internet Links into the Regions

BY HRAIR SARKIS SARKISSIAN | Los Angeles

The establishment of the first regional center in Armenia for public Internet access and training brings the World Wide Web to the towns and villages beyond the capital.

The Vanadzor Internet Center in the Lori region, which opened on October 19, offers 12 workstations, 24-hour Internet access, and group training facilities for up to 100 people per day. It brings the Armenian Freenet an access and training project established by the United Nations Development Programme (UNDP) (www.undp.org) to the regions of Armenia for the first time, offering many more people the opportunity to become involved with information technology.

Outreach to the regions outside Yerevan was complicated by the inadequate infrastructure and excessive connectivity prices, said Christine Karapetian, the UNDP's information Officer in Yerevan. The Vanadzor center, the product of a partnership between UNDP and international organizations such as IREX and Project Harmony, is also intended to act as a channel for a pioneering e-governance initiative.

Regional and local authorities would start, after appropriate capacity building consultations, to pilot using information and communication technologies, particularly the Internet, for providing various services to society, said Karapetian. An online e-Forum (www.forum.am) has been established, which hosts groups on human rights, the environment, gender issues, human development, and political parties.

"The creation of online communities aims to help interest groups composed of NGO and government representatives and independent experts dealing with respective issues, to discuss and consolidate views and voice them vis-à-vis the decision makers and the society at large," Karapetian said. Armenian Freenet has also developed the first bilingual Armenian-English Web mailer that anyone around the world can take advantage of. The inauguration of the Vanadzor center took place as part of events marking the International Day for Eradication of Poverty on October 17. The UNDP chooses a theme each year and for 2001 it chose to highlight the role of information and communication technologies in achieving poverty reduction.

The UNDP first arrived in Armenia in 1992, when the country was in dire need of emergency and humanitarian aid. As the immediate crisis passed, it shifted its focus to long-term projects. In 1997, the organizations Project on Support of Information Society and Democratic Governance (www.ict.am) established the Internet public access and training facility Armenian Freenet (www.freenet.am).

The project was able to offer Internet access, connectivity, Web hosting, and Information and Communication Technologies (ICT) training services to over 15,000 organizations and individuals, mostly in Yerevan, says Karapetian. We expect that the connectivity, access, and service standards established by the project and the Armenian Freenet will continue setting the tone of ICT development across Armenia.

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Debit Becomes a Credit For Banking System

By Haygaz Baghian and Narine Khachatrian | Yerevan

The introduction of the Armenia Card marks another step on the road to the republic's development of an e-commerce infrastructure. The ArCa is the first debit card issued in any country of the Caucasus.

The system was established by Armenia's Central Bank and 11 commercial banks on October 25 with the aim of reducing the circulation of cash in the economy. Central Bank chairman Tigran Sargsian described the introduction of ArCa as a revolutionary step.   More than 1,000 cards have been issued already and three automatic teller machines have been installed in addition to 20 other offices where card owners can get cash. Armenia Card is also accepted in 22 shops and restaurants.

The network of shops and restaurants where people can use the card is expected to grow to 200 soon, and at least seven other automatic teller machines are planned. Bank customers can buy an Armenia Card for 2,000 Drams (about $3.50) plus an annual service charge, also 2,000 Drams.

The unified payment system will operate only in Yerevan to start with, but it is expected to expand into other Armenian regions and also Nagorno Karabakh in the future. A $1.5 million grant from USAID helped with the implementation of the ArCa card.

Smbat Nasibian, governor of Yerevan's Converse Bank, said the introduction of ArCa meant that greater transparency and financial accountability was required for every shop or restaurant involved in the unified payment system. The Central Bank has a 44 percent stake in ArCa with the rest divided equally among the 11 commercial banks. They are: Ardshin, HSBC-Armenia, Armeconom, Artsakh, Anelik, Credit-Yerevan, Agricultural Cooperative, Armimpex, Development, Credit-Service, and Converse. The Armenian Card is expected to be certified by Europay next year, allowing customers to access money from their accounts through teller machines across Europe.