Gaming Business 2005
Gaming business in Russia today is a fourteen year old troubled child. The first casino in USSR was opened 15 years ago. In 1998, after the federal legislation “On the taxation of gaming business” was passed, gaming industry stepped out of the shadow.
The gaming in Russia includes casinos, gaming houses, gaming halls, sports book, bingo halls. The latest tendency is opening entertainment complexes where not only slot machines but also pool, bowling, arcade machines will be operated, as well as bars, restaurants, and clubs.
Today the gaming business revenue is over 2 billions dollars. The most of that money is generated by slot machines. There are approximately 170K slot machines in Russia, although these figures are just estimates. There are around 5000 gaming halls. The number of casinos with table games and sports books is growing much slower and the market does not show much interest to bingo or totes. Today there is just one bingo club in Moscow and less than 10 totes. The number of slot machine is rapid; in January 2003 there were only 117K slot machines operated.
There are two major segments to the market:
The first one is Moscow and St. Petersburg, and the second one is other regions of Russia.
Moscow’s and St. Petersburg’s slot machine market seem to be reaching its saturation. The increase in number of machines will lead to the lower return per machine. Operators will not like it. If the taxes are not going to be paid by those operators, the tax revenue services are not going to be happy about it.
The profits from operating slot machines are dropping because of the tough competition between gaming operators. Spoiled players of big casinos in Moscow and St. Petersburg want to see new machines and games. Where the older slots should go? The companies-operators become chains and open branches in the distant regions of Russia where they utilize the outdated equipment. We should mention of course that the situation started to change and the newer games are introduced to the rest of Russia as well. That put the pressure of competition on the old style chain operators. Local authorities favor local operators too as the chain operators make taxable revenue go somewhere else, slip away from the local tax revenue services.
The biggest chain operators are “Jackpot” and “Vulkan”. They cover around 11-12% of the slot market. Moscow and St. Petersburg accommodate around 50% of all slots and 30% of table casino games.
The number of casinos in these two cities is fluctuating whereas in the other cities of Russia their number is rather stable – if one casino opens another one closes. The difference between the situation with casinos in Moscow and the rest of the country can be explained by the difference between the level of players and the amount of money they can afford to gamble. The further increase in the number of table games can be expected only in Moscow because of the hike in the licensing fees (3500 – 5000$ per table) that some operators will not going to be able to afford. Casinos will have to minimize the number of tables and slots.
There was an attempt to limit the number of casinos in Moscow to 56. The legislators were referring to the world practices. There is some validity to what they are saying, however different countries have different approach to the limitations and gaming regulations. Some countries limit the number of casinos for its entire territory, other countries set limitations for every particular city, in some places the limit is calculated per capita, US or France limit gambling to some territories, there are also countries where there is no limitations at all.
Let’s take Cambodia, where gaming brings significant revenue for the budget, for example. Recently there were built 7 casinos in the small town of Poipet, bordering with Taiwan. Those casinos were crowded with Thai players as gambling is prohibited in Taiwan. Because of the political crisis the borders between Cambodia and Taiwan were closed and the town of Poipet was seriously hurting until the borders were re-opened. Of course we do not say that the Cambodian scenario is going to be repeated in Russia, but some notes should be taken.
The different regions of Russia should receive different regulation approach as Evenkia is different from Moscow, Moscow is different from Amur region, where there are lots of Chinese players (gambling is prohibited in China). The same approach for all territory of Russia will not work.
Number of casinos in Moscow seems to be rather excessive. Of course, such great casinos as National, Metropol, Crystall, Europe, Golden Palace are unique and have their niche. However, there a lots of lower level casinos that come and go. The introduction of limitations to the number of casinos does not seem rational as the market regulates itself. We would rather see regulations of casino operations introduced to improve the quality of services.
Just a couple of words on the slot machines market in Russia: everywhere in the world there is a division of all gaming machines into certain categories according to some features. Machines are categorized as C – for operation in casinos, B – for operation in slot halls, A – for operation in bars, etc. Than, the machines a categorized according to denomination, max and min bets and wins. There are no such regulations and categorizations in Russia.
It is easy to entrance the market in Russia. The license fee is about 50$, which seem to be a ridiculously low figure. Even though it is rather easy to enter the market, it is hard to stay on the market. Government controls all industries by taxation. The regulating function of government seem to work pretty well, the taxation of gaming grows geometrically.
There are talks about banning of gaming in Russia all together, like it was done in Turkey, Mexico, and Azerbaijan. The question is how the government is going to benefit from it. It would be naïve to believe that all table gaming, slots are going to magically disappear – they will be operated illegally. What is going to happen to the tax revenues? In 2003 gaming had brought around 120 million dollars to the budget. The expected revenue in 2004 is 250 million dollars to the local budgets just in the direct gaming fees. Besides from that direct gaming taxes gaming facilities are also paying property taxes, advertisement taxes, transportation taxes, unified social taxes, etc. What will happen to the 400000 people currently employed in gaming if this industry will be banned? Not only dealers but also security guards, accountants, administrative workers will have to look for another job. I should also mention the new born companies actually producing gaming equipment – tables, slots, etc. They will have to discontinue the production as well. Who is going to feed such an army of unemployed people? By the way, in all the above mentioned countries except Tajikistan the gaming was legalized after a while. Governments realized that they could use some tax revenues generated by gaming business. Even such conservative countries as Japan and Thailand are planning to reconsider their regulations of gaming. In Japan the pro-gaming speakers usually use employment factor as an argument.
Flourishing gaming business in Baden-Baden, Germany, allowed building Grand Opera over there. Same situation happens in France where tax revenues generated by gaming were partly spent on the construction of theaters. These are the positive sides of gaming, gambled money return to the players in some social incentives.
Gaming and betting are the part of the whole industry, entertainment industry. It is impossible to close down this huge industry without hurting anyone. It definitely needs to be better regulated and organized, but there is no need in banning it.
Speaking of banning of gambling, we should mention Singapore. Gaming in Singapore was prohibited in 50s, when prime-minister’s son committed a suicide after he lost everything gambling. Similar thing happened in Azerbaijan in 1998 – after its President Aliev had lost a lot gambling in casinos in Turkey (which were closed as well a little after). Murat Niyazov (son of the President of Turkmenia) has lost 12 million dollars in one night in Madrid casino and his father decided to close all the casinos in Turkmenia. Emomali Rakhmonov has closed 4 casinos in Tajikistan because there was no legislation regulating casino operations. The government of Tajikistan was given the assignment to create a draft of such a legislation within a month and when the government failed to come up with the draft the casinos were closed. Islam Karimov banned the casinos in Uzbekistan. There are no casinos in Israel but the lotteries and TV quizzing games are very popular. There a numerous of illegal gaming going on but the government cannot benefit from it. In some Islamic countries like Libya, Pakistan, Kuwait, Iran, Indonesia, Oman, gambling is prohibited because of the religious reasons.
In Russia the threat to ban gaming is not really serious and it comes from a couple of deputies.
There is much talk about gambling addiction in mass media. Not much attention is paid to another illnesses and addictions such as alcoholism and drug addictions. How serious is gambling addiction in the country? There is no any statistical research on that matter. Some people estimate the number if addicts as 300 000, others estimations are 10 000. If this is serious addiction than there should be serious methods of treating it developed. There are no exact numbers people suffering from this illness but gaming does not look like a national tragedy so far.
Who are those people suffering from gambling addiction? They are people who love to risk; they are superstitious believers in Lady Luck, people who make bets that they can not afford. They are good people outside the casinos, good family people and good employees, but when playing, they loose control, bet everything they have in a futile attempt to beat the chances and win. Casinos are cannot be blamed for this. Shops selling wines are not blamed for alcohol addiction, car dealerships are not blamed for the huge number of car accidents. However, I believe that in Russia all gaming halls and casinos should have the same practice as US or Spanish casinos – they should offer booklets about the gambling problem with the help telephone number listed.
Pushkin, Dostoevskiy, Nekrasov, Leo Tolstoy, Green, Turgenev – Russian famous writers were big fans of gambling. Balzac, Hoffman, Zweig wrote about gambling. Zweig even wrote his novel “24 hours of woman’s life” about Dostoyevskiy’s gambling addiction, how once he bet his wife.
Another problem that seem to pop up every time we talk about gaming – criminalization. Does this problem really exist and what does it mean? Stealing and robberies do really occur in gaming facilities that do not have good enough security. Not every casino has surveillance now even though it is an important part of security used as protection from fraud as well. Unfortunately, crime happens in many spheres, not only in gaming. Casinos that do bother to spend money on good security are not getting robbed. Attempt to save money on security fails when the facility is getting robbed.
On average, criminalization in gaming business is at the same level as in other businesses. A bigger problem is a rather mediocre quality of management is many casinos and gaming halls. It is also worth mentioning that gaming business in Russia is very dispersed. This problem can be solved with the help of the World of Games Association, established on 04/14/2004. This is a very timely and welcome undertaking.
It is hard to make predictions, but there is a number of things that are long overdue. First, there must be legislation “On gaming and betting” which would specifically regulate gaming and betting and not how casinos are run.
Such legislation would define common terminology and rules of all legal games and betting, requirements on the locations where such activities can undergo as well as licensing requirements. While not the focus of this legislation, licensing is a very important domain which must be defined and regulated.
It should also specify the rights and responsibilities of casinos and their customers. Certain functions can be handed over to self-regulating organizations.
Without such legislation, the future of the industry is quite obscure. Especially with the constantly changing tax climate and the flawed clause 29 of the Tax Code, “Taxing of Gaming Business”. These problems will be solved over time, but this process could be boosted by collaboration within the industry and between industry and government.
Speaking of government, taxing is not the only thing that could be improved in respect to gaming. I wish the government took a wider look at the gaming industry in the coming year.
Gaming in Russia is booming, there is no question about it. It is all the rage right now. The market gradually expanded, large, big-budget chains appeared, customer base is growing. Gaming is percepted as being easier than manufacturing; so many entrepreneurs consider it an attractive niche. Russia has always been consumed by various booms, be it in clothes or lotteries or slot machines (followed by tax troubles). Gaming business is no different than any other business in that it should mature over time.
Evgeny Kovtun