Russian Gaming Zone, Azov-City :: Interview with Lenar Kashapov

from Gaming & Leisure Magazine

www.gamingandleisuremagazine.com

Spring 2013

In the Fall 2012 G&L issue, we reviewed the general state of affairs for the overall casino gaming industry in the Russian Federation.   With this issue, we’re taking a closer look at one of the four special gambling zones created by Russian Federal Law № 244.  Mr. Lenar Kashapov, Director of Azov-City Gambling & Resort joins us for this discussion.

Gaming & Leisure Magazine
Spring 2013

[G&L]  The non-profit “Association of the Gambling Zone of Azov-City” was created in 2009.  What are the objectives of the Association?

[Lenar Kashapov] According to Russian legislation gambling organizers are required to create a noncommercial organization representing their interests.  Federal Law № 244 contains this provision and further stipulates such organizations could also have part of managing functions at the gambling zones. There is an annual investment forum in Sochi (Krasnodar region) where the cooperation agreement between Azov-City Gambling & Resort and the Administration of Krasnodar region (regional governmental body) was signed in 2009.

The main functions of our Association are:

·         Lobbyism

·         Industry standardization

·         Attracting investments

To meet the first target we negotiated with the government about infrastructure expansion: constructing roads, power lines and treatment facilities.  To meet the target for industry standardization we developed building norms and standards for casino buildings.  At the time we didn't have such norms for gambling facilities, so we discussed legislative and regulatory acts with the parliamentarians and requested changes in legislation. On behalf of the members of the Association we negotiated with the largest consulting firms and also potential partners about investments and operating casino resorts in future.

Russia is a unique country and the experience, contacts and knowledge we have are an invaluable treasure for the development of Russian gambling industry.  Moreover, in the future we are planning to work for development and promotion of all four gambling zones in Russia, so we permanently collect the information and negotiate with the authorities of the regions that have gambling zones – Kaliningrad territory, Altay and Primorski regions. I think there are no people in Russia who have more information and contacts in gambling zones beyond our group.

[G&L]  Located in Krasnodar Territory in Russia’s Southern Federal District, how is Azov-City positioned for in-bound tourism?

[Lenar Kashapov] To have strong position for in-bound tourism we have to continue to expand our facilities.  We have only two casinos at gambling zone Azov-City at present. They are not very attractive for international tourists.  People from Vladivostok, Tyumen, Ulan-Ude, Stavropol,  

Lenar Kashapov
Director of Azov-City Gambling & Resort

Novocherkassk, Moscow, St.-Petersburg visit our casinos.  In whole – about 80 cities in Russia and abroad visit our casinos.  The largest group of visitors come from neighboring Rostov-on-Don and Krasnodar.

We recognize that the Azov-City gambling zone is situated in a distinctive region of Russia, so we have no doubt it will be interesting for foreign tourists.  You could not see such nature and bright expressions of Russian culture in other Russian gambling zones. Kuban (another name of Krasnodar region) is the native land of the famous Cossacks.  

Situated on the Black Sea, the coastal city of Sochi will host the Winter Olympic Games in 2014.  It boasts an  innumerable quantity of ancient historical destinations interspersed with fields of sunflowers and wheat. All these features will be used to breathe the spirit of Russia and the region into the non-gaming facilities in Azov-City.  We already have visitors from China, Turkey, USA, Ukraine, Europe and are sure that soon we will see tourists from Israel and Arabian countries.

When the authorities of Krasnodar region represented the Azov-City gambling zone investment project in 2009 they declared that the airport, seaport, and a high-speed highway would be constructed.  They also planned to construct resort facilities for elite leisure: hotel complexes, yacht-clubs, aqua-parks, marines, golf clubs, horse-racing and other lifestyle facilities for the up-scale leisure and entertainment market. The regional administration estimated a stream of visitors up to 6 million persons per year from the countries located within a two hour flight.

[G&L]  As with Las Vegas, Azov-City has been created in a lightly populated area far from cities of any significant size.  Are there parallels between the two gaming regions?

[Lenar Kashapov] Of course, everybody is trying to find these parallels. But what are they? I cannot answer. There were many other factors which had helped to develop Las Vegas.

I think Russian casinos will have their own identity because Russian gamblers have their own distinct mentality and behavior.  Gambling in Russia has its own history, but it is not very long. For example, if Americans visit Las Vegas for rest, entertainment and fun, for Russians – a trip to casino is a chance to win.  The Russian gaming market was aimed mainly at local guests even when it was at its peak, only a few people here understand it as a tourist activity.

From the point of view of expected profit, Azov-City is a fascinating project.  Azov-City is the first gambling zone in Russia and it seems that it will evolve into the first Russian casino-resort destination with a critical volume of tourists and gamblers.  From the point of view of business organization –independent foreign investors with western technologies and mentality will not be able to develop projects here on a stand-alone basis, it will be necessary to have a local partner.  Authorities wish to avoid the risk that foreign investment would overwhelm the domestic Russian investment.

Gambling industry in Las Vegas was initiated by gangsters, but according to Russian gambling legislation people with criminal records cannot be engaged in business.  Las Vegas was built up chaotically, but Azov-City has committed to a regional development plan through legislation – Land Use and Development Rules. The highway in Las Vegas was built without much ado, but authorities in Krasnodar region are trying to manage with local roads. And at last the gambling industry gives us a head start – there are a lot of professional investment companies and gaming operators all over the world – so we continue to look to them for their experience.

As to location – I cannot say definitely – we are similar to Las Vegas or not. The first part of gambling zone Azov-City is situated at the coast of Azov Sea where the surrounding territory is quite large, and there are many people who wish to live and work here.

[G&L]  Oracul Casino was the first to open in Azov-City.  Is there planned expansion of the Oracul Casino?

[Lenar Kashapov]  Royal Time Group is the owner of Oracul, the first Russian casino.   Oracul was created with the declared intent of significantly boosting this new resort-city in the south of Russia, where gambling is planned to be only a smart part of the region's

Oracul Casino

entertainment offerings.

The first 1500 square-meter gambling facility was opened in 2010, and has since expanded to 4000 square-meters.  The Casino Oracul is presently building a hotel complex which will be the biggest part of resort.  I think the construction will take about 15 more months.  Investors and partners trust Royal Time Group, so I suggest financing would not be a problem.

The most difficult thing in Russia is maintaining a dialogue with authorities.  Gambling is a new industry in our country and we recognize it is very important to have a correct economic calculation. To plan its strategy, Royal Time constantly consults with authorities. 

[G&L]   A mixed-use tourism project “Golden Sands” is being billed as the Leisure Capital of Russia.  What is the status of development, and what offerings are intended within this project?

[Lenar Kashapov] The coordination of such initiative in Russia is very long process.  It is necessary for authorities to make changes to various standard and legal acts.  Moreover it is necessary to find infrastructural capacities, develop and co-ordinate the general plan of land using at the new location. And at last it is necessary to find a lot of money which the regional authorities do not presently have. This project is developing slowly and it has to be changed due to bureaucratic procedures.  Construction processes at the new site could bring more difficulties.

Oracul Casino

We support regional authorities in this initiative; moreover we have ordered and developed the land use concept of the Golden Sands.  We are watching the developments and as soon as a clear light is shed upon the situation, we will immediately publicize the progress along with government authorities.

[G&L]  Some people have considered illegal gambling facilities in the cities as the main competitors of the gambling zones.  How well are the authorities controlling these illegal gambling facilities?

[Lenar Kashapov] That is a shadow business and I cannot answer objectively “How well are the authorities controlling illegal gambling facilities”.  I’m studying gambling in Russia, but even my knowledge is not enough to estimate volumes of illegal market. 

Struggling against illegal gambling is different in different regions of Russia. In some regions government and law enforcement bodies are focused on other important issues, and therefore the struggling against illegal gambling is not prioritized.  In other regions, the fight against illegal gambling is under personal control of the Governor.

According to official data the Office of the Public Prosecutor closed more than 40,000 illegal gambling facilities and more than 450 illegal casinos all over the Russian Federation. But you should consider that law enforcement bodies often close the same gambling facility many times.  There are also some facilities that are difficult to enter since they are under somebody’s protection.

But on the other hand the gambling zone is visited mainly by VIP gamblers who don’t like to be arrested.  If you visit an illegal casino in Russia such arrest and prosecution is very possible. The elite will go to legal casinos to enjoy better service and entertainment programs, complete with an opportunity to win the prizes guaranteed by the government.  I am absolutely sure while illegal gambling is prospering, the development of Russian gambling zones will be extremely slow.

[G&L]  We would like to thank Mr. Lenar Kashapov for his time in discussing the status and future of Russia’s Azov-City Gambling & Resort.  

State of Affairs in the Russian Gaming Industry 2012 - A Conversation with Lyubov Loginova

published in Gaming & Leisure Magazine

www.gamingandleisuremagazine.com

Fall 2012

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 budget

According to my estimates, the business turnover has not decreased, but rather remained the same. It has just withdrawn into the shadows and the former tax revenues are now accordingly used to bribe the officials.

[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

http://rgweek.com/en/news/2011/sept/state-of-affairs-in-the-russian-gaming-industry-a-conversation-with-lyubov-loginova