published in Gaming & Leisure Magazine
Fall 2012
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| Gaming & Leisure Magazine, Fall 2012 |
The state of the Russian gaming industry has been radically modified in recent years, shifting legal casinos from highly populated cities to remote, lesser traveled areas.
Helping shed some light on the current state of affairs in Russian Gaming is Lyubov Loginova, a highly respected industry professional and CEO of Moscow-based Alsart.
[G&L] On 1st January 2007, Federal Law № 244 took effect, creating four specific gambling zones within Russia. Five years have passed since the law took effect. Where are the four zones, and are they prepared to meet the demand for gaming in Russia?
[LL] Three years have passed since the actual ban on gambling business in 2009, and what we have today – two casinos in Azov City, several construction sites in the Altai and Far East zone. These gambling zones are planning to open their first casinos before the end of this year, whereas the gambling zone in Kaliningrad is still not functioning.
According to the Accounts Chamber of the Russian Federation, the special zones that the government has designated for gambling business development are not worth the cost of their creation, which is not surprising as creation of gambling zones was a political decision, the economic feasibility was not taken into account. In addition, the current legislation has many loopholes for illegal business.
According to the Accounts Chamber, the state has allocated over 1.4 billion rubles for the organization of gambling zones, yet tax revenues recover merely 7% of the cost. This, however, is not surprising when you consider that out of the four gambling zones planned for opening, only one has launched operations – "Azov City", where there are just two casinos.
Payoff from public funds in excess of 1.4 billion rubles spent for the establishment of "Azov City" gambling zone is now close to negative values.
In 2009, instead of relocating gambling clubs and casinos, businessmen either preferred to close up their business or to continue it illegally. Loopholes in the law allowed them to operate almost legally. It was only in August 2011 that the amendments to the Criminal Code, which allow condemning the illegal businessmen for 4-6 year term in prison were adopted.
However, that hardly discourages the illegal business, as there are many people willing to take risks for large and quick profits.
It’s worth noting a trend that the major players started leaving after the business became illegal. The number of people who are willing and ready to play is many times lower than what it was five years ago.
Limiting the illegal business opportunities didn’t make the legal gambling zones any more attractive for the businessmen because of two main reasons: the accessibility problem and rules of the game.
Gambling establishments are to be built in Altai, Primorsky and Krasnodar Krai as well as Kaliningrad oblast. Moreover, the proposed sites are located in unpopulated areas, where there is neither infrastructure nor transport. It is clear that an owner of ten slot machines installed near the train station would not go there. Even an owner of Moscow based casino couldn’t afford it.
Gambling zones were intended to attract large investors who would build the city of entertainment with children's parks, shopping malls, concert venues and casinos. Such investors exist, however they are outside of Russia as the provisions of the Federal Law No.244 stand in their way.
It is clear that the creation of a large entertainment center will require huge investments for years to come. Yet according to the law, the land is leased for 10 years, and what will happen afterwards is unknown. For example, the southern zone located in two regions – Krasnodar Krai and Rostov Oblast. The latter has already been liquidated, but imagine if somebody started to work and build something there.
In addition, the law provides that the land lot in the gambling zone may be acquired by any business, so big investors fear that smaller competitors will reap the fruits of their labor. Suppose there comes an investor willing to invest 10 billion dollars in the gambling zone, build an amusement complex, but then comes a small business and opens a kebab house with five slot machines and installs a tent with two roulette tables. Now tell me, will a big player invest in such projects?
[G&L] Are Russian and foreign investors flowing into these regions as expected? What may be some of the challenges they face?
[LL] The gambling zones are quite active in search for investors, as far as I know, they attend almost all gaming expos, investment and real estate exhibitions across the globe. Recently I attended several such events: the press conference of the Far Eastern gambling zone in Macau and the gambling zones presentation at the recent Russian Gaming Week in Moscow. I see quite a lot of interest from Russian and foreign operators toward the zones, yet not every company will take the risks of such an investment. Russian investors are primarily discouraged by the experience during the allocation of land lots in "Azov City", as well as the fact that local illegal business is still operating and growing, thus discouraging gamblers from traveling to the zones. Foreign investors are primarily looking for guarantees of safety of their investments, transparency of taxation, laws and activities in the zones. However such guarantees are not widely available.
Construction of zones and search for investors is additionally complicated by the fact that the investors are essentially offered to pioneer in virgin territories at their own expense, to develop the entire infrastructure, to build everything from scratch: roads, power plants, etc.
[G&L] Federal Law № 244 set 30 th June 2009 as the time when gambling outside these four zones should end. In Moscow alone it must have had a significant impact on revenue collection?
[LL] Yes, of course. Tax revenues from gambling business were a substantial supplement for the public treasury, and not just in Moscow but in all cities. We have a joke that now they have become a substantial addition to the police wages, so they celebrate the day of ban on gambling business as a holiday.
It's obvious that the existence of a large-scale underground business would not be possible without the help from the authorities, so now these former tax revenues are flowing into their pockets.
According to estimates before 2009, the figures were as follows:
- $6 billion – an annual turnover of Russian gambling business
- $5.9 billion - turnover of the Russian gambling business in 2005 estimated by PricewaterhouseCoopers;
- 26.4 billion rubles – revenues from tax on gambling business for consolidated budget of Russia in 2008, according to the Federal Treasury
- 6 billion rubles – expected drop in revenues from tax on gambling business for Moscow budget in 2008
- 3.5 billion rubles - revenues from tax on gambling business for St. Petersburg budget in 2008
- 7.2 billion rubles - revenues from tax on gambling business for the Russian budget in January-May 2009
Source:
Report of the Federal Treasury, Moscow
[G&L] How has the Russian casino worker been impacted by the significant change? Have there been efforts to assist them in finding alternative work or shifting to the new zones?
[LL] In 2009, after the ban on gambling business, according to various estimates, from 350 to 500 thousand people were left on the street without means of support and alternative employment opportunities. Government promised to create an employment office and help them find a job, but in fact it is very difficult to find a job for the former staff of casinos or slot machine arcades. In the labor market, there are vacancies for porters, carpenters, low skill workers and other blue collar workers, but the people who are used to earn their living by intellectual work will have a hard time readjusting. After all, what skills does a professional croupier have? Communication skills, ability to calculate quickly, sleight of hand, knowledge of foreign languages, conflict management and practical psychology.
Their personal traits include endurance and stress resistance in any situation. Gambling staff are generally night owls. Is such a person suitable for an office job? Therefore, it turned out that most people either found a similar job abroad or continued their career in illegal casinos and gambling halls.
[G&L] These gambling zones are placed along the Russian border. Are they intended to target international gambling tourists?
[LL] Yes, of course. The Far East Zone is primarily aimed at attracting gamblers from China and Japan. With a convenient geographical border close to China, it is just a three-hour plane ride away from Tokyo, so it may facilitate the influx of players from these countries.
Kaliningrad is bordering on EU countries, “Azov City” – on Georgia, Ukraine, Armenia. In fact, the whole concept of gambling zones would be successful even without attracting foreign tourists and focusing instead on domestic players, if the authorities could provide the necessary infrastructure for tourism and combat the illegal business in the cities where in fact the target gamblers are playing, though gambling is banned there.
[G&L] What is the status of state-owned casinos in Russia? Would that provide a means to bring legal casinos closer to the Russian gambler?
[LL] There are no state-owned casinos in Russia. Now there are rumors about upcoming nationalization of all lotteries, but no discussions about state-owned casinos.
We wish to thank Lyubov Loginova for her thoughtful insight into the status of Russia’s gaming industry.
Reposted by Russian Gaming Week
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