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Tech Through The Policy Lens

Inspired by the rise of India as an IT giant in the early 2000s, and the stratospheric rise of global technology companies as the dominant economic actors, governments across the globe saw the IT industry promise of creating high-quality jobs and incomes for developing nations. The governments in Central Asia and South Caucasus were among those seeking to benefit from their educated populations, and over the last decade introduced various support programs to the national IT sector and local startups.

The progress to date, however, has been uneven. For instance, in the recent Innotechnics report Venture Eurasia the region scored an unprecedented sixfold rise in venture investment - to USD 139M in the first half of 2023. However, a single country - Armenia - accounted for almost 90% of all venture funds in the vast region followed by Kazakhstan (6%) and Uzbekistan (3%). A deeper look into the government tech policies of these three countries may help explain this difference.

Becoming the #1 destination of venture capital is a remarkable achievement for Armenia, the smallest of all nations in the region, and the Armenian government’s smart policies certainly contributed to this result. Resource-poor Armenia was among the first countries to grasp the potential of IT to boost its export revenues. According to EVN Report, since 2014 Armenia established a special tax regime for certified IT companies, including 0% on income tax and VAT, 5% on dividend tax, and their employees enjoy reduced personal income tax. Moreover, newly established companies enjoy full tax exemption for the first five years.

While similar tax-exempt regimes are now available to the residents of the state-funded Astana Hub in Kazakhstan and IT Park in Uzbekistan, the taxes alone would not suffice to explain Armenia’s dominance in venture investments. An important factor is the unique role of the Armenian diaspora worldwide, which bridges Armenian companies to the US and global markets. The cases in point are HIVE Ventures, a venture fund established in 2014 to focus on investments in Armenian companies and founders, boasting a solid portfolio of successful SaaS companies, and BANA Angels, an international investor community and startup incubator in Armenia.

Whenever such a developed startup ecosystem is absent, government-driven initiatives are stepping in. For instance, Astana Hub offers its residents - startups from Kazakhstan and Central Asia - support from international agents, tasked with exploring market access and investment opportunities abroad, and a wide range of education, acceleration, and funding programs. In Uzbekistan, the minister of digital development went on a tour in the United States to promote the country as a software development and BPO hub (including a TV appearance and a promo video of Uzbekistan IT Park played at the iconic Times Square). The local VC firms in both countries are also catching up, focusing predominantly on startups at the seed stage.

VC investments, for all their importance in the tech industry, are increasingly volatile and may not be the only indicator of a country’s progress in building an advanced IT industry. In terms of the overall IT exports, Kazakh and Uzbek IT companies did well, with export volumes reaching USD 243M and USD 145M respectively in the same six months of 2023 with solid y.o.y. gains. Uzbekistan in particular, recorded over 300% growth in export revenue for the IT Park residents in Q1 alone.

Another approach would be to look at the success of the home-grown tech companies. On the one hand, Armenia’s own unicorn, a popular design app Picsart, is currently valued at 1.5 billion dollars and boasts the global VC firms, such as SoftBank and Sequoia Capital among its investors. On the other, the valuation of Kaspi.Kz, a digital ecosystem covering 65% of the larger and relatively more affluent population of Kazakhstan, stands at a whopping USD 14.2 billion on LSE. Uzum, a rising digital ecosystem in Uzbekistan, less than a year after its launch in 2022 announced plans to attract USD 300M from international investment funds, taking its valuation into the unicorn territory.

Nonetheless, whether the company scales by accessing the global markets or expanding within its home country, there is another fundamental challenge where government support plays a critical, if sometimes indirect, role - the human capital. The shortage of tech talent has long been a major drawback to the emerging technologies adoption. The differences in the government’s approach to the issue is illustrative of their broader view of tech industry development.

In Armenia in particular, where 2.5% of all employed workforce work in IT companies, the rapid growth of tech talent is constrained by the country’s population. However, the relative ease of establishing businesses and access to talent and global markets made Armenia one of the prime destinations for tech businesses moving from Russia, Belarus, Ukraine, and other countries. In the first half of 2022 alone the country registered an unprecedented 50% surge of IT professionals and the establishment of over 2500 new tech companies, including the chip-making giant Nvidia.

Kazakhstan’s Astana Hub lured Russian and Central Asian IT companies and talent with tax incentives, relocation support, and investment opportunities. Among the companies that moved their operations and hiring to the country in the past two years are the global ride-hailing company InDrive, gaming giant Playrix, and Codify, an edtech startup from Kyrgyzstan. Also, the industry demands drove the decision to allocate 70% of all government-funded scholarships in technical and vocational education to IT and Tech students and the population's digital literacy is among the major KPIs of the “Digital Kazakhstan” initiative.

Uzbekistan, with its growing young population, focused on developing the local tech talent pool through an ambitious “One Million Uzbek Coders” initiative launched in cooperation with the UAE in November 2019. In less than two years more than 2.5 million young people registered on the platform “uzbekcoders.uz”, an online IT education portal, and over a million received a certificate of completion. The Uzbek private sector, including Uzum and Humans followed suit, creating their own education initiatives to address talent shortages in specific disciplines.

Overall, the developments of the last decade put the region that has been under the radar of the global tech industry into the spotlight, and one has to acknowledge that governments play a major role in this digital transformation. While the policy approaches to tech vary as much as the countries themselves, there is a shared understanding that digital technology will continue to be a game-changer in national economic growth and social development. The government-driven initiatives to create attractive tax regimes, develop human capital, and boost the local tech and venture ecosystems, along with access to the global capital markets will remain the key drivers of tech and IT industry developments in the Caucasus and Central Asia.