Clare Nuttall in Yerevan -

The Armenian government is offering incentives to companies to become more involved with the capital markets, but the shadow economy looms large here and many managers prefer not to open up their affairs to the kind of scrutiny this would entail. The head of Armenia's stock exchange believes that situation should change for the better over the next five years.

Nasdaq OMX Armenia - OMX acquired 100% of the Armenian Stock Exchange in January 2008, before merging with Nasdaq the following month - finds itself in a similar situation to that of stock exchanges in many of the small post-Soviet republics. It saw a brief spurt of interest in the mid-2000s when investors turned to frontier markets like Armenia, but things have been quiet since 2009.

At the stock exchange building, the trading floor lies empty - more a reflection that trading has gone online - and officials still ring the ceremonial bell when on the rare occasion an IPO takes place, but the room is now used mainly for conferences and other events.

2011 saw trading on the stock market increase by 57% on year to a still modest AMD200.3m ($511m), with market capitalisation reaching AMD53.8bn by the end of the year. Trading in corporate bonds amounted to AMD708.98m in 2011, and government bonds AMD5.37bn. The exchange has also launched a range of other trading instruments including money market transactions, which has ensured that activity has remained reasonably healthy even through the lean years.

Unsurprisingly, given the impact of the crisis on the Armenian economy and trends in emerging market investments in general, there have been no new IPOs in Armenia in the last three years. The CEO of Nasdaq OMX Armenia, Konstantin Saroyan, notes that recently Armenian companies have started talking about potential future IPOs and bond issues, but given the current uncertainty in global financial markets, these are unlikely to take place this year. "IPOs are not happening at the moment, and there have been no significant new bond issues since 2009. We have seen some discussions about new IPOs and bond issues, but companies are waiting for the good times," says Saroyan.

This is not for want of support from the government or the central bank, both of which, Saroyan says, have been "very supportive". The government currently offers a range of incentives for companies hoping to list on the exchange including a 50% discount on profit tax. Nasdaq OMX Armenia is also working with the government and the central bank on ways to encourage international investment into listed companies. However, Saroyan also wants the international financial institutions active in Armenia, which are supporting the banking sector, to consider supporting Armenian companies via the stock exchange, but has so far has not been able to bring this about.

But perhaps the biggest stumbling block in persuading more companies to turn to the exchange is the need for transparency. Even though Saroyan says the requirements for listing in Yerevan are not very tough, with the shadow economy accounting for 50-60% of Armenian GDP, it is clear that many companies are deeply entrenched in the grey economy. "First the shadow economy should be reduced, as this will create opportunities for companies which are open and transparent. When the shadow economy is reduced, competition between different sources of finance will be more level," says Saroyan.

"Some companies still prefer to continue operating in the shadows. We have tried to explain to companies that they may be doing well now with this policy, but Armenia is steadily reducing the shadow economy. Companies that issue bonds or list on the exchange today, and take advantages of the current financial incentives, will be in a better situation in three to five years time."