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UNCLAS SECTION 01 OF 03 YEREVAN 000004 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EMIN EFIN ETRD AM
SUBJECT: ECONOMIC CRISIS TAKES TOLL ON ARMENIA'S MINING, IT 
INDUSTRIES 
 
REF: 2007 YEREVAN 1311 
 
YEREVAN 00000004  001.2 OF 003 
 
 
SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET DISTRIBUTION 
 
 
SUMMARY 
 ------- 
¶1. (SBU) While the effects of the global economic crisis have 
not yet been felt broadly in Armenia, the mining and 
information technology sectors have suffered more severe 
setbacks.  Falling mineral prices have resulted in suspension 
of mining operations, layoffs and brief worker unrest in 
several mining-dependent towns.  Due to falling sales from 
foreign customers, several IT firms have closed or laid off 
staff, with more expected in the coming weeks.  In both 
sectors, there is little expectation that the situation will 
improve in less than six months. End Summary. 
 
MINING FIRMS SUSPEND ACTIVITY 
----------------------------- 
¶2. (U) The mining crisis is of great concern to the GOAM not 
only because mining constitutes four percent of GDP, but 
because mining activity is substantially concentrated in the 
country's southern regions, where there are few other 
economic activities. The three leading mines in the southern 
Syunik Marz employ 6,000 persons, with 10,000 others working 
in satellite services that will be affected by the mining 
downturn. 
 
¶3. (SBU) The fall in minerals prices has prompted several 
mining companies to suspend their operations as they wait for 
prices to rebound, and is causing concern for banks, 
concerned that low prices increase the risk of repayment 
default.  One local American-owned bank in November declined 
two loan applications from mining companies, due to falling 
prices.  The Armenian State Employment Agency currently 
estimates that more than 1,600 mining jobs will be lost in 
the sector.  Among the expected layoffs are 300 from a mine 
in Alaverdi (northern Armenia) owned by the Armenian Copper 
Program (ACP); 450 at the Agarak (near the Armenian-Iranian 
border) Copper and Molybdenum Combine, and an unknown number 
from Deno Gold, in Kapan (southern Armenia). 
 
¶4. (U) The Alaverdi mine had been only marginally profitable 
even when prices were at their peak, and ACP Executive 
Director Gagik Arzumanian told EconOff that the company does 
not intend to reopen it.  ACP continues to operate its mine 
in Nagorno Karabakh, and has transferred some of its 300 
Alaverdi employees there.  Falling copper prices are also 
prompting skittishness from Russia's Vneshtorgbank, which is 
providing nearly USD 250 million to finance ACP's project to 
clear-cut and mine the Teghut Forest (reftel).  This is a 
30-year project that should be immune to short-term price 
fluctuations.  Arzumanian told us that the bank has been 
showing concern about the direction of copper and molybdenum 
prices, and while it remains committed to the project, has 
not yet disbursed any funds toward its implementation. 
 
WORKERS REVOLT AT DENO GOLD 
--------------------------- 
¶5. (U) On November 10, three GOAM ministers--Energy Minister 
Armen Movsisian, Minister of Economy Nerses Yeritsian and 
Labor Minister Arsen Hambardzumian--traveled to the southern 
town of Kapan in an effort to resolve a five-day strike at 
Deno Gold Mining Company, a copper and zinc mining operation. 
 On November 6, the General Manager of Deno Gold had 
announced plans to lay off 60 percent of its workers and 
impose wage cuts of 40 percent on remaining staff.  This 
followed a mid-October announcement by the company that it 
would lay off 340 of its 1,500 staff due to falling world 
prices for copper and zinc. (Note: According to Aram 
Hakobian, Deno Gold's administrative director--who himself 
will be laid off in mid-January--salaries currently average 
about USD 1,200 per month, relatively high by Armenian 
standards, and certainly in that region. End Note). 
 
¶6. (U) In July, when world copper prices peaked, Deno Gold 
had discussed the possibility of expanding its mining 
operations in Kapan.  However, at current prices for copper, 
molybdenum and zinc, continuing mining activity was not 
economically justified until world prices rebound. The firm, 
a subsidiary of Canada's Dundee Precious Metals, claims to 
have invested over USD 100 million in the Kapan mine since it 
was acquired in 2006, but says it has never earned a profit. 
 
¶7. (SBU) As a result of the mediation and a subsequent 
 
YEREVAN 00000004  002.2 OF 003 
 
 
meeting with Energy Minister Movsisian on November 17, Deno 
Gold agreed to defer all layoffs for three months, after 
which it would reassess the situation.  Armenian media have 
reported that the GOAM also transferred AMD 800 million (USD 
2.6 million) in outstanding Value Added Tax (VAT) refunds to 
Deno Gold. (Comment: This appears to be a quid-pro-quo.  If 
Deno Gold in fact agreed to retain the employees for three 
months in exchange for receiving its outstanding VAT refunds, 
it suggests the company had largely written off any hope of 
recovering the money, despite the GOAM having provided 
approximately USD 70 million for such refunds in both its 
2008 and 2009 budgets.  Other exporting companies have asked 
us whether the GOAM did, in fact, provide VAT refunds, noting 
that it would help them transition through this difficult 
period as well. End Comment). 
 
A CHANCE TO CLEAN HOUSE? 
------------------------ 
¶8. (U) Aram Hakobian, Deno Gold's administrative director, 
told EconOff on November 10 that while Deno's management 
decision to lay off staff was primarily a response to falling 
minerals prices, Deno was also attempting to modernize the 
operation and rationalize staffing. Hakobian said that the 
mining techniques currently employed by Deno dated from the 
Soviet era and were decades behind those of western 
operations.  Consequently, even at peak prices, the company 
had been losing close to USD 300,000 per month.  Unlike ACP's 
Alaverdi plant, Deno fully intends to resume mining 
operations should prices rebound, although at present it is 
operating at a "care and maintenance" level. 
 
¶9. (SBU) The mining crisis has affected primarily companies 
involved in mining of such base metals as copper, molybdenum 
and zinc.  Gold prices remain high and U.S.-owned Global Gold 
reports that its business is still performing well, although 
the financial crisis is making it more difficult for the firm 
to find working capital; a recent bank financing deal worth 
several million dollars collapsed.  The firm employs 300 
people in the warm-weather months, and about 150 during the 
winter, when it processes stockpiled ore. 
 
FALLING DEMAND HITS IT SECTOR 
----------------------------- 
¶10. (U) Since mid-November Armenia's information technology 
industry has seen a sharp falloff in business, and as in the 
mining sector, many expect the downturn to last at least six 
months. Exports account for nearly 80 percent of 
these firms' sales, and much of the decline in this sector is 
the result of falling demand from U.S. customers.  Armenian 
firms are particularly vulnerable to declining demand for 
internet advertising, enterprise and systems integration 
software. Problems for Armenian IT firms are not limited to 
falling sales, however; many of their customers are 
defaulting on their payables, as well.  Troubles may worsen 
yet, as many Armenian IT firms have contracts with their 
customers that expire December 31 and may not be renewed. 
¶11. (U) Two IT firms have already announced plans to close or 
scale back vastly their operations, and several others have 
undertaken significant staff reductions, with more likely to 
occur in the coming weeks. Lycos Europe, which employs 200 
persons at its Armenian subsidiary, on December 15 formally 
announced plans to close by March; workers have already begun 
receiving layoff notices.  The U.S.-based EPIGY Labs has laid 
off most of its research and development staff and retained 
just a few operations staff, and U.S.-owned Virage Logic is 
also laying off staff.  (Note: It is likely that neither 
firm's closure is attributable entirely to the global 
financial crisis.  Lycos has been in trouble for some time 
and management has been trying, under pressure from 
shareholders, to sell the company since early 2008.  EPIGY 
had its own operational difficulties.  The crisis may have 
exacerbated their troubles, however. End Note). 
 
¶12. (U) The situation is not dire throughout the industry, 
however.  Synopsys, a U.S. firm with 500 employees in 
Armenia, reports a strong performance in 2008 in its 
worldwide business and remains optimistic for 2009.  It 
anticipates hiring new staff in Armenia and expansion of its 
college training program.  Credence Systems, another U.S. 
firm with approximately 60 local employees, reports that 
business remains strong and hopes to expand to 100 employees 
by the end of 2009 and ultimately to nearly 200. 
 
¶13. (SBU) Problems in the IT sector have caused considerable 
concern for the GOAM, which is counting on the sector as a 
pillar of the country's economic development.  Currently 
 
YEREVAN 00000004  003.2 OF 003 
 
 
there are 200 IT firms in Armenia, 60 of them foreign. 
Leaders in the IT sector met in Dilijan December 6-7, where 
Minister of Economy Nerses Yeritsian discussed the 
possibility of emergency financing for Armenian IT firms.  In 
a move similar to bailouts in the U.S., the GOAM has already 
made equity investments in a few IT companies in order to 
sustain them over the course of the current downturn.  If the 
GOAM is successful in obtaining funds for SME lending from 
international financial institutions, the IT sector will 
likely be one of the major recipients of that lending. 
 
¶14. (SBU) The GOAM has also expressed a desire to keep the 
Lycos team as intact as possible in order to take advantage 
of their collective expertise, even going so far as to 
suggest keeping them working in the same building, under a 
different employer (still to be determined), once Lycos has 
closed down.  The Lycos staff account for three percent of 
the country's IT workforce of 6,000.  Among the potential 
consequences in Armenia of an IT sector collapse is not only 
the loss of employment for skilled IT workers, but also the 
possibility that some may move abroad in search of 
employment.  Loss of workers in this and other sectors with 
relatively high wages may have an impact on the consumer 
credit markets as well.  Many IT workers, with 
higher-than-average incomes, hold a disproportionate share of 
car loans, mortgages or other significant debts on which they 
may be prone to default if they remain unemployed for long. 
 
COMMENT 
------- 
¶15. (SBU) The problems in both the mining and IT sectors are 
evidence that the Armenian economy is more vulnerable to 
external market conditions than some initially wanted to 
acknowledge.  While it is understandable that the GOAM would 
hope to help sustain the mining and IT sectors, its options 
are limited, given their dependence on exogenous 
factors--world market prices and export demand, respectively. 
 Barring a turnaround in prices in the near-term, Deno Gold 
will almost surely undertake the layoffs once the three-month 
deferral expires.  There is also little that the GOAM can do 
to stimulate demand in the IT sector in order to avoid 
layoffs there.  However, as one IT executive told EconOff, 
this is also an excellent time to start a new IT firm, as it 
is a buyer's market for talent.  End Comment. 
YOVANOVITCH