Inside Armenia’s growing investment wave

0:00 Welcome to Civilnet. I'm your host, Paul Vartanian Soukiasian. Last week, US Vice President J.D. Vance made a historic and unprecedented visit to Armenia, unveiling a number of groundbreaking investment announcements. We're joined by Dr. Hovsep Patvakanian, head of the Investment Council of Armenia, to discuss what this means for the country and direction of its economy. Thanks for taking the time to be here. Thank you for the invite. So, Vice President Vance is one of the highest US officials to visit the South Caucasus in decades. What's your take on what this visit signals to Armenia and the world? Um yes, the the visit of Vance was as you said, it was the highest ranking official from the US who visited Armenia for the past 20 years. But more

0:45 importantly, we need to dig deeper to understand what type of announcements were made during this visit. So, three main pillars were announced. One is the investments into the AI infrastructure of Armenia and the Nvidia Firebird cooperation. The other one was the investment into the security of Armenia through the sales of Vbat surveillance drones, which which is a rare occasion for our type of countries to receive this type of technologies. And uh third is the trip trip agreement. So, when you compare the announcements that were in place in Armenia and in Azerbaijan, for example, you can see very much concrete

1:31 steps and concrete projects for Armenia, while for the Azerbaijan it was mostly kind of a strategic framework and more of a general uh scheme uh laid out there. Um it also sends a signal to the wider region that uh the US has um economic and political interests uh in the region, in Armenia and Azerbaijan. And um we'll we'll see many more things unfolding based on this um of this visit. Well, you're right that the announcements here definitely felt more fully formed. Uh they said the same types of things like AI in Azerbaijan, but I didn't hear any actual plans yet. I'm sure they're doing something. There's also Azerbaijan is talking to Israel about AI. But let's talk about AI

2:17 in Armenia. Uh so, during Vance's visit, they announced this Firebird project, which is very exciting, and we were excited when they announced phase one, $500 million. That alone was one of the biggest investments that we've had in in perhaps all of Armenia's uh period as independent. Um but Vance announced that phase two is going to be $4 billion. So, what does this mean in practice opportunity-wise, and will this serve as a magnet to a you know, attract foreign investors and tech giants to Armenia? Well, absolutely. It puts Armenia on the AI AI map of the world. But to understand in more details what this means, the partnership between the Nvidia and Firebird means that Nvidia will now be exporting and be authorized

3:04 to export uh the GPUs uh that it produces to Firebird for it to be used in the to be built AI center in Armenia. This creates a whole new AI infrastructure for Armenia that can be utilized by different IT companies, by different AI large-scale companies. Um in in our estimation, this infrastructure that is to be created uh in Hrazdan, which is uh a a layer of ECOS uh free economic zone in Armenia. This will allow the big players, including OpenAI, xAI, to enter Armenia and to utilize this infrastructure. Um once we have this uh $5 million invested

3:50 and then up to $4 billion invested, this simply means that um Armenia becomes one of the top 10 countries in the world when it comes to neo cloud cloud services, which basically is the cloud services for the AI. Um on one hand, when you look at it through the perspective of macroeconomic indicators, this will lead to a double-digit growth in the first and second year of investments. And these are the foreign direct investment, basically. In more practical and theoretical terms, this is the investment into the stock capital. So, they've been uh there's been a lot of speculation whether this this will result in the increase of the debt sovereign debt of Armenia or that this is um merely export, but in classic terms, this is considered to be um

4:38 investment into the stock capital. But on the second tier, we'll see a lot of um developments when it comes to the electricity generation. Uh in our estimation, this will be an annual of 600 to 800 million of kilowatts um production of electricity, which will mean that Armenia need to cope up with this uh electricity capacity for for the future investments to flow in. Um which will mean increasing the solar capacity, increasing the nuclear energy capacity, etc. Um and this also sends a signal to a broader audience in the IT community that uh out of all the possible countries in the world, um where you have

5:23 I think around 10 to 12 countries only that has this type of authorization to use the Nvidia chips. Um this basically puts us in the in a big league of countries. And these countries include UK Israel um Belgium, Korea. So, these are not the countries you usually see Armenia in the list with. And this also sends a signal to a broader audience that Armenia is a country where innovation is possible, where the infrastructure is there to support your innovation, where the legislation and especially tax legislation is very favorable for the AI uh startups and AI big companies to enter Armenia. And I believe I don't want to say um any names, but uh let's

6:11 hope and see by the end of this year we'll have some very big names entering Armenia. Uh you're the head of the Investment Council of Armenia, which is working to upgrade Armenia's legislative frameworks just for reasons like this. And it's also developing alternative investment tools in the country. So, can you tell us a little bit more about the the inside working of that? Yes. Um so, based on the decree um of the Prime Minister, uh there was the body private public dialogue platform that was created that is led by the Deputy Prime Minister, where this type of legislative issues are discussed that comes from the private sector to this type of platforms, and then our team of experts are working towards developing the legislative packages and working closely with the government to make sure these

6:57 legislative packages are transformed into the viable reforms. Um so, we've been working annually at on around 15 to 20 reforms. Um and some of them are quite relevant for the IT industry as well. Several things that we covered this year, for example, refers to the convertible debt regulations. Before the companies that were not able to do the debt investment and then convert it into the equity. The other reform that we worked on was the simplified agreement for future equity that is very well known in the US, uh which allows the company to invest in the in the IT startup and then let it grow, and at some point receive the equity at the discounted uh rate

7:43 rather than to have the equity right away. Another area that we covered is the crowdfunding investments. Be it infrastructure, be it IT, be it a large-scale project in more of a traditional sector. Before Armenia didn't have the regulations to um for the companies to go for the crowdfunding investments. We had the crowdfunding charity, but the crowdfunding investments that's something that we talk about a lot when the diaspora Armenians can invest $50, $100, and then convert it into the share in a company. This is something that we didn't have in the legislation. Now we do. And we see kind of the first results of all this type of alternative investment tools being embedded into our legislation. First, it is very much um modeled after the Delaware. So, it's easy for the IT

8:29 companies to uh to be based in Armenia and then to move to Delaware and vice versa. Second, when it comes to the figures, only within 5 to 6 months with the convertible debt investment tool, we've seen around 80 million of investments done. With the SAFE tool, 1.5 million of investments done within the past four five um five months. And with the with the crowdfunding investments, we already see platforms emerging based on this type of regulations that are able to to raise uh different type of investments. And we keep on working in this type of uh work. We work also very broadly with exporters of Armenia on the challenges that may face, be it transportation um costs increase, be it legislation, be it

9:16 certification needs. Something that we just recently did refers to the um certification costs um reimbursement for the companies who want to to achieve the standards of the European Union to enter those markets that were more intricate for them. Um and when they need to do the certification for those type of uh markets, uh these certification costs are pretty much uh subsidized and covered uh through through the scheme that we worked on with the Ministry of Economy. I saw a recent article in Benzinga that quoted you, and you said in your capacity as well uh with Invest in Armenia, you've been seeing since the Washington Accords that Armenia signed at the White House back in August, you've been seeing a great degree of

10:02 added interest coming from companies. Are these American companies or who are I mean you can't give names per se, but you know, to what degree is this interest really increased lately and you know, who who are they? What are their reasons for looking at Armenia now? All these questions I mean I have so. Um. Uh interest is through three factors mainly. Um we have quite a lot of logistic companies that are now interested in Armenia. Uh who would like to come in our to Armenia to open their logistic centers right at the kind of borderline areas where the the main routes including trip and hopefully also Gyumri cars and further will be located. Um we see

10:50 interest in the in the IT as I mentioned earlier. On the on the AI infrastructure developments, we see interest in the energy. Again, when you when it comes to the another announcement that was made on the nuclear energy modular reactor to be installed in Armenia through the US technologies and through the US investment of another several billion of dollars. Um this will also require a lot of maintenance related matters and maintenance related uh technical companies to be placed in Armenia. So we see pretty much on all the spectrums the interest in this regard. We we see it even in the areas that first

11:36 will not kind of kick in as the low hanging fruit. Okay, for example, tourism. Uh we see that from the Gulf countries specially uh there is big interest to open up a luxury resorts now and to target target kind of a group tour that will cover not only Armenia but also Georgia but now also Turkey. And these things are usually considered whenever there is a development in this regard. For example, there is as of now there is a negotiation that one company is implementing. I will not name give names. But they want to open a quite a big resort in Syunik and

12:22 Vayots Dzor. So the like the two branches. Uh in both of the regions. Before that before the kind of the peace talks or before the consideration of opening borders between Armenia and Turkey uh these talks were simply not in place. They might have been in place but mainly by the diaspora Armenians not by the international chains or transnational you know, companies that have interest here. Um and we see that there is a growing interest in this regard as well. So Armenia has kind of transformed its position uh in the eyes of the world to be a place that is much much safer to come to. Is a place where the infrastructure

13:08 allows for the bigger scale investments be it in IT, be it in tourism, be it in any other sector. Um and I believe in the upcoming one to years we'll we'll see kind of the first wave of those things unfolding. And once some of the big names are in Armenia, this will make things even faster because it's always based on precedent for the countries like ours. Once one big, two big, three big names enter the country, then it's it's pretty much a game changer. I think talks like these these are important to the diaspora as well because I feel like for so many years they were used to seeing Armenia as either charity or the only people that would invest in Armenia are Armenians

13:54 diasporans and and really I in the in the discussions I see now there is still a lot of pessimism this like oh why would anyone care about us? We're just kind of used to thinking that way but the truth is things are changing and so it's really important that to get ahead of that and realize Armenia is a place where you can come and make money and invest and and be a part of it not just out of this nationalism hi sir sort of thing. Yeah. So you've been referring to the Turkish border and this has been something I've been following for 20 years. We we had the football diplomacy back in 2008 in hopes of that happening. Didn't happen. Now unfortunately you know, post Artsakh and what's happened that's kind of changed things and yet Turkey is still not opening. Um we keep hearing rumors though things

14:40 happening on the border. Now there's a checkpoint on the Turkish side that's gone to gotten up and going just a few days ago. They also have dropped the ban on direct exports to Armenia. You they they used to have to go to Georgia, drop it off there, get a middleman and then have them bring it into Armenia. Now you're going to be able to go directly. So what is your feel on the border because as much as we we hear it might be opening, Azerbaijan always comes back in saying not until Armenia does this and this and this and then Erdogan in Turkey seems to back that up. So a lot of people don't have much hope of the border opening but then there are these rumors and and also you know, if it does open, what will the impact be? That's been a long debated thing as well. So kind of a really maybe complicated question but what are your

15:26 thoughts on it? Uh in my assessment it's not a matter of whether it will be opened or not. It's a matter of whether it will be opened in the upcoming several months or by the end of the year. Hm. Uh I believe a partial opening will be in place soon. Uh for the third country citizens. And um I don't see any reason why this will not be in place for the third country citizens. And from the public statements I can say that from my understanding is that once the final peace agreement is signed the the border will be fully opened and operational for both Armenian citizens and Turkish citizens. What this means for the Armenian producers

16:13 can be twofold. On one hand when you look at the transportation costs, the fact that Armenia has to export to Europe and to the west right now through Georgia and then through Georgia to Turkey and from to Turkey to Europe um bypassing and not having a direct kind of link from Armenia to Turkey makes the route 28 hours longer. Hm. So when we go to let's say to Kars through Georgia, it takes us 28 hours. Whereas if there is a direct link, it will be just one hour. And when you do the estimation, this will cut down the transportation cost by around 25 to 28% which will be a huge

16:59 kind of advantage competitive advantage for the Armenian producers to enter those markets. Um on the other hand we see that there is kind of the need in terms of the export in those provinces adjacent to the Armenian border for electricity. So this can be another area that we can explore with them to export electricity to Turkey. Um on the other hand there is a bit of fear specially for the agricultural sector uh that the fresh produce coming from Turkey will be even cheaper now and this can be kind of this can harm the agricultural sector in Armenia very much. But in my assessment as of now it's already kind of the difference is quite

17:45 big um in favor of the Turkish agricultural produce. But still Armenian products they don't get out of the market. And we still need to do a bit of an assessment there to see to what extent this will make the Turkish fresh produce much much cheaper than the Armenian fresh produce and how this can impact the the Armenian producers here. Um but in general again, this is a topic that I believe will have kind of the final answers by the end of this year. Hm wow. A lot is potentially changing. So maybe the crux of all this change is trip. You mentioned before the Trump

18:31 road for international peace and prosperity. It's become a huge issue and it's going to elections we're going to have in June. It's going to be coming up a lot because critics are saying Armenia is giving up sovereignty and Turkey and Azerbaijan will end up purchasing this trip and will then control Armenia or the border with Iran will be cut. There's a lot of kind of doom saying around it. Armenia denies all those claims. Uh uh we'll have to see how it turns out. But from your perspective, what does trip mean for Armenia? What's the significance and how can it impact business? When it comes to trip, I believe most of this concerns is of a more of a genre for the press rather than on the

19:17 ground. Because there is an agreement that is publicly available where all of the statements can be um taken down basically because it shows that Armenia keeps the sovereignty in most of the matters that are relevant sovereignty wise. Armenia has a say in the matters. Um so I wouldn't go there and to comment those type of those type of statements. What trip will give in terms of the trade flow firstly, it's it's an alternative route uh for the goods coming from Central Asia and Asia overall to Europe. It will now not go through middle corridor, which is um Central Asia,

20:03 Azerbaijan, Georgia, Turkey, and then um and then Europe. Uh but will now go from uh through TRIP through the souther uh part of the route. Um different researches show that uh this route will cut down the transportation cost by around 25 to 30% for the for this transportation from Asia to Europe. So, it it only makes sense that people will start to utilize this route. Um when it comes to transit cost, so this is kind of the first income uh flow that Armenia will receive the transit cost for per ton, if it is around 10 to 15 dollars. Uh and we calculate it with 1 million or up to two

20:50 three million tons per per year. This will mean an extra uh extra flow of capital of around uh 10 to 15 million. Which, when you compare with the investments that the uh US uh is doing, which is around 450 to 500 million, will mean that if we only concentrate on TRIP as the the 42 kilometer uh route, that this will take a lot a lot of time to to have the payback. >> It makes no financial sense in that alone on its own. >> then But then, when you look at it through the wider perspective, if Armenia manages to to get an agreement for the restoration of the several parts

21:35 of the rail that will help then the TRIP to continue from the south to then Nakhchivan and then to Gyumri and then Kars. Which, in our estimation, is like there are two parts in the rail. One is 1.2 kilometer and the other one is around 5 kilometer. So, the restoration is not a big big problem uh in that sense. Uh if they manage to do that and if the the management of the railroad uh will be efficient, irrespective of which country this will uh be done under, um then it will unfold much bigger um macroeconomic uh effect. And I think this is This is a crucial

22:21 area that um will be discussed this year. And this is a milestone for the TRIP to succeed or not. Because the default is that we have another 15 to 18 million dollars through transit because of TRIP. Um but then, since there is kind of a competing project now in the pipeline, um what Azerbaijan and Turkey is kind of um offering and are thinking of doing uh as the joint new new project is for the TRIP to go to Nakhchivan and then from Nakhchivan right away to to Turkey, to Iğdır. Mhm. And then from Iğdır to continue. Boxing out Armenia completely except for that little This is kind of a

23:08 worst-case scenario. >> So, exactly. But um money-wise, this will mean investment of around 5 billion dollars to to make this a reality. Whereas, to to make the reality the alternative that I mentioned, the Gyumri-Kars and then, you know, going to uh from Turkey to to European countries, um this will require up to 200 million dollars of investment. So, the the the investment is very much different there. So, I believe what this upcoming months will be about is about trying to lobbying this as much as possible for the first um alternative that I mentioned for the Gyumri-Kars to be the

23:55 primary route for this type of things. And I believe the Americans, given their um buying in TRIP and entering the region, I don't see practically any other reason to be involved in TRIP if they don't consider the continuation to Gyumri-Kars and, you know, because otherwise it will be just a small part that will Yes, that will spit out some income um from the transit of goods, but that's it. Um so, it will be basically a an alternative reality for the south uh to to have kind of a transit route, but then all the other possible routes

24:41 that can connect Armenia to the world uh will stay blocked if they don't agree on this this part. Um and I think the restoration of the rest of the railroad, the small parts, and the full operation of the uh railroads um through the bigger framework, um this is very much political as well, given who we have the concession agreement with, Russia. For the viewers at home, Russia is currently the one who can make those uh repairs. >> Yes. Um and there were some comments or statements how they can move forward, um but I mean, these upcoming four to five months, I think this will be the most important thing on the agenda for

25:26 Armenia. This is something that will be very much discussed on the high level to see how it can be unfolded in a way that the whole framework railroad framework uh can be connected within several vectors through Armenia. Well, this is all very interesting things to watch and good luck uh behind the scenes with your bringing more interest and investment to Armenia. And thank you so much for joining us and telling us all about this. Thank you. Thank you very much. And thank you for joining CivilNet.