Cold Shoulder
Despite talk of a “Russian Las Vegas” somewhere near the Black Sea or possibly in central Asia or the Far East, the casino industry in Russia is showing no enthusiasm for investing in the special zones in remote regions of the country where the government has decided it must relocate.
Neither state organizations nor private investors have made any progress in developing these zones so far. Yet, in contrast with the private sector, which is waiting to see the outcome of the govenment’s questionable initiative, local authorities are moving fast to abolish gambling in those areas where it exists.
The new law creating the zones was signed by President Vladimir Putin in January this year. It will come into force in several steps and will change the industry dramatically.
A ban on locating slot machines in residential buildings, educational and medical institutions, transport hubs, sports facilities and state and municipal buildings took effect July 1. By July 1, 2009, all gambling enterprises, including casinos, must move to the Kaliningrad Oblast in European Russia, or to Rostov Oblast near the Sea of Azov, to Primorsky Krai in the Far East or to Altaisky Krai beyond the Urals in a sparsely populated region in the south-central part of the country.
In the meantime, 20 regions have abolished casinos and slot halls completely. Twelve others have abolished slot operations but are allowing casinos to continue to operate. In Moscow, which had the greatest concentration of slot halls, hundreds have been forced to close. In June, St. Petersburg Gov. Valentina Matvienko signed a decree that bans gaming halls in the city after Jan. 1, 2008, although casinos will be allowed to operate until July 1, 2009.
Yevgeny Kovtun, vice president of the Association of Gambling Business Entrepreneurs, an industry trade group, estimates that the total number of gaming operations in Russia has decreased by 50 percent compared with 2006 and it will shrink by 80 percent ultimately. According to the association, the turnover of the gambling industry in Russia last year was about US$6 billion. This year, Kovtun expects turnover of about $1 billion.
Creative survival
Prior to the St. Petersburg decree, authorities there counted 21 casinos and 571 gaming halls in the city, with about 75 percent of them located in residential buildings. Matvienko has proposed substituting them with retail, banking and other service companies.
One real estate expert suggests that with additional investment, casino owners could start profitable hotel businesses or launch business centers — a more reasonable alternative than moving to the Far East, he said.
“The market value of each particular building depends on its total area, location and the proposed use,” explained Dmitry Zolin, managing partner of London Consulting and Management Company. “In St. Petersburg all the places where large casinos are located are in high demand. In these areas quite attractive office centers or hotels could be created.”
Retail is an ideal option for gaming halls located along central streets, he said. In the outlying districts retail is also possible for gaming halls located close to metro stations or transport hubs.
In any case, survival is going to cost operators considerable sums of money, especially if reconstruction and redesigning of their buildings are necessary, Zolin said.
Other requirements in the law setting minimum requirements on casino size and asset values also are having a major impact.
However, entrepreneurs have been quick to invent various ways to comply.
“During the last half-year the gambling industry in Russia seriously restructured. Many small companies merged in an attempt to meet the new requirements for assets,” said Kovtun.
In St. Petersburg, the number of “casinos” has actually doubled because, as Kovtun explained, “A number of gaming halls renamed [themselves] as casinos to survive.”
Since Jan. 1, only casino operators with net assets of more than 600 million rubles ($24 million) and bookmakers with net assets of more than 100 million rubles ($4 million) can be licensed in Russia, according to the new law. Last year, just five gambling companies reported assets of such volume, Kovtun said.
Like many others companies, Premier, a distributor that sells and leases slot machines and operates a network of gaming halls across Russia kindly offers its assistance to gambling enterprises that lack the necessary assets. One of the options is to become a Premier “co-founder”.
“You transfer your slot machines to the authorized capital stock of our company and become a co-founder with a share proportional to the value of your equipment,” Premier states on its Web site. “We provide you with the right to operate under our brand and with our license.”
Another option is to register Premier slot machines in the halls of other companies, which will cost you 2,500 rubles ($100) a month per machine.
“Hurry up to open a subsidiary of our limited liability company as soon as possible, because the time is extremely limited by law!” warns Premier’s site.
Many gambling chains are running similar schemes.
No ‘city of dreams’
But consolidation is only one of the Russian industry’s many new trials. Kovtun explains the harsh new law as a product of two factors — politics and a favorable economic situation.
“The underlying political reason is obvious,” he said. “We are approaching the State Duma election campaign. Gambling became the most popular subject of speculation in Russia. In Moscow we even see social advertisements against gambling. Many political organizations gained a reputation by criticizing the gambling business.”
The various gambling sectors generate taxes equal to about 27 billion rubles ($1.08 billion) annually. However, Kovtun says, Russia’s strong economy has made politicians spendthrifts. “For the last several years we have seen a stable budget surplus, and the loss of the taxes paid by gambling enterprises does not seem a disaster.”
According to a recent poll by the Russian Center for Public Opinion, 65 percent of the population approves abolishing gambling enterprises in cities and towns — 39 percent of respondents favored a complete ban and 34 percent supported the idea of special zones removed from residential areas.
Looking ahead, Kovtun is not optimistic. According to his estimation, a minimum of three years will be required to build the infrastructure to support casinos in the four zones. “The work has not even started,” he said. “There is no funding. Politicians do not want to spend budget funds on infrastructure for the gambling business. Private investors also are not rushing to spend because the funding required is huge.”
The volume of investment varies depending on the conditions of the particular zone. Kaliningrad Oblast is the only area more or less developed. The other zones are just “green fields,” Kovtun says. In Altaisky Krai it is estimated that 20 billion rubles worth of infrastructure is required, not to mention the billions it will cost to build casinos, hotels and other premises.
“No one company, neither foreign nor Russian, expressed any intention to move there and build a ‘city of dreams,’” Kovtun said.
“We do not plan to move our business to any gaming zones,” said Alexander Yebralidze, general director of Taleon, which operates a luxury casino in Nevsky Prospekt in the heart of St. Petersburg. “We have our own opinion on how the gambling business should develop, but nobody cares about our opinion.”
The uncertainty engendered by the new law is perhaps the biggest problem. Though the legislation stipulates that the zones will operate for at least 10 years so that investors can get a return on their money, the political situation is unstable, and the legislation could change at any moment. In Kaliningrad, for example, an organization called “People Against the Gaming Zone” is already lobbying to prevent “criminalization of the region.” Activists are calling for a referendum to abolish the gaming zone.
Businesses, meanwhile, are trying to figure out how to evade the law, at least for a while.
Recently, a Russian Federation of Sport Poker was established. Organizers claim their mission is to support “sport poker clubs” across Russia. The federation already has proudly reported its first lobbying success. In March, the federal ministry for athletics and sports officially decreed that poker is a “sport” and not a form of gambling.
Most observers, however, see this as only a temporary respite. The politicians behind the new law are determined to eliminate every single gaming hall outside the four zones.
“We need strict control to prevent the opening of sport clubs on the premises of former gaming halls and casinos,” Sergei Mironov, speaker of the Council of the Federation, the upper chamber of the Russian parliament, said at a recent meeting concerning the industry.
“Gambling is similar to drug addiction,” he said. “People are ready to sell their last belongings and leave their families without any means for living, only to be able to gamble.”
Ekaterina Dranitsyna is a staff reporter for The St. Petersburg Times.