G A M I N G & L E I S U R E F A L L 2 0 1 2 7 0 2 . 5 4 7 . 4 5 4 560

The state of the Russian gam-ing industry has been radical-ly modified in recent years,shifting legal casinos fromhighly populated cities toremote, lesser traveled areas.Helping shed some light onthe current state of affairs in

Russian Gaming is Lyubov Loginova, a highlyrespected industry professional and CEO ofMoscow-based Alsart.

G&L: On 1st January 2007, Federal Law No 244took effect, creating four specific gambling zoneswithin Russia. Five years have passed since the lawtook effect. Where are the four zones, and are theyprepared to meet the demand for gaming in Russia?

LL: Three years have passed since the actual ban ongambling business in 2009, and what we have today– two casinos in Azov City, several construction sitesin the Altai and Far East zone. These gambling zonesare planning to open their first casinos before the endof this year, whereas the gambling zone inKaliningrad is still not functioning.

According to the Accounts Chamber of theRussian Federation, the special zones that thegovernment has designated for gambling busi-ness development are not worth the cost of theircreation, which is not surprising as creation ofgambling zones was a political decision; the eco-nomic feasibility was not taken into account. Inaddition, the current legislation has many loop-holes for illegal business.

According to the Accounts Chamber, the statehas allocated over 1.4 billion rubles for the organ-ization of gambling zones, yet tax revenues recov-er merely 7% of the cost. This, however, is notsurprising when you consider that out of the fourgambling zones planned for opening; only onehas launched operations – "Azov City", wherethere are just two casinos.

Payoff from public funds in excess of 1.4 billionrubles spent for the establishment of "Azov City"gambling zone is now close to negative values.

In 2009, instead of relocating gambling clubsand casinos, businessmen either preferred to closeup their business or to continue it illegally.Loopholes in the law allowed them to operatealmost legally. It was only in August 2011 thatthe amendments to the Criminal Code, whichallow condemning the illegal businessmen for 4-6 year term in prison were adopted.

However, that hardly discourages the illegalbusiness, as there are many people willing to takerisks for large and quick profits.

It’s worth noting a trend that the major playersstarted leaving after the business became illegal.The number of people who are willing and readyto play is many times lower than what it was fiveyears ago.

Limiting the illegal business opportunities didn’tmake the legal gambling zones any more attractivefor the businessmen because of two main reasons: theaccessibility problem and rules of the game.

Gambling establishments are to be built inAltai, Primorsky and Krasnodar Krai as wellas Kaliningrad oblast. Moreover, the proposedsites are located in unpopulated areas, wherethere is neither infrastructure nor transport. Itis clear that an owner of ten slot machinesinstalled near the train station would not gothere. Even an owner of Moscow based casinocouldn’t afford it.

Gambling zones were intended to attract largeinvestors who would build the city of entertainmentwith children's parks, shopping malls, concert ven-ues, and casinos. Such investors exist, however theyare outside of Russia as the provisions of the FederalLaw No.244 stand in their way.

It is clear that the creation of a large entertain-ment center will require huge investments foryears to come. Yet according to the law, theland is leased for 10 years, and what will hap-pen afterwards is unknown. For example, thesouthern zone located in two regions –Krasnodar Krai and Rostov Oblast. The latterhas already been liquidated, but imagine ifsomebody started to work and build some-thing there.

In addition, the law provides that the land lotin the gambling zone may be acquired by anybusiness, so big investors fear that smaller com-petitors will reap the fruits of their labor.Suppose there comes an investor willing toinvest 10 billion dollars in the gambling zone,build an amusement complex, but then comesa small business and opens a kebab house withfive slot machines and installs a tent with tworoulette tables. Now tell me, will a big playerinvest in such projects?

G&L: Are Russian and foreign investors flowinginto these regions as expected? What may besome of the challenges they face?

LL: The gambling zones are quite active insearch for investors, as far as I know; theyattend almost all gaming expos, investmentand real estate exhibitions across the globe.Recently I attended several such events: thepress conference of the Far Eastern gamblingzone in Macau and the gambling zones presen-tation at the recent Russian Gaming Week inMoscow. I see quite a lot of interest fromRussian and foreign operators toward thezones, yet not every company will take the risksof such an investment. Russian investors areprimarily discouraged by the experience duringthe allocation of land lots in "Azov City", aswell as the fact that local illegal business is stilloperating and growing, thus discouraginggamblers from traveling to the zones. Foreign

Bill Healey

STATE OF AFFAIRS IN THE RUSSIANGAMING INDUSTRY A CONVERSATION

WITH LYUBOV LOGINOVA

INTERNATIONAL GAMING

Fall12_G&L.qxd 9/10/12 8:21 PM Page 60

61V I E W T H E G A M I N G & H O S P I TA L I T Y R E S E A R C H C E N T E R AT W W W. G A M I N G A N D L E I S U R E M A G A Z I N E . C O M

STATE OF AFFAIRS IN THE RUSSIAN GAMING INDUSTRY A CONVERSATION WITH LYUBOV LOGINOVA

investors are primarily looking for guaranteesof safety of their investments, transparency of tax-ation, laws, and activities in the zones. Howeversuch guarantees are not widely available.

Construction of zones and search for investors isadditionally complicated by the fact that theinvestors are essentially offered to pioneer in vir-gin territories at their own expense, to developthe entire infrastructure, to build everythingfrom scratch: roads, power plants, etc.

G&L: Federal Law No 244 set 30 th June 2009 asthe time when gambling outside these four zonesshould end. In Moscow alone it must have had asignificant impact on revenue collection?

LL: Yes, of course. Tax revenues from gamblingbusiness were a substantial supplement for thepublic treasury, and not just in Moscow but inall cities. We have a joke that now they havebecome a substantial addition to the policewages, so they celebrate the day of ban on gam-bling business as a holiday.

It's obvious that the existence of a large-scaleunderground business would not be possiblewithout the help from the authorities, so nowthese former tax revenues are flowing intotheir pockets.

According to estimates before 2009, the figureswere as follows:

• $6 billion – an annual turnover of Russian gambling business

• $5.9 billion - turnover of the Russiangambling business in 2005 estimatedby 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 budgetin January-May 2009

Source: Report of the Federal Treasury, Moscow budget

According to my estimates, the businessturnover has not decreased, but rather remained

the same. It has just withdrawn into the shad-ows and the former tax revenues are nowaccordingly used to bribe the officials.

G&L: How has the Russian casino worker beenimpacted by the significant change? Have therebeen efforts to assist them in finding alternativework or shifting to the new zones?

LL: In 2009, after the ban on gambling busi-ness, according to various estimates, from 350to 500 thousand people were left on the streetwithout means of support and alternativeemployment opportunities. Governmentpromised to create an employment office andhelp them find a job, but in fact it is very dif-ficult to find a job for the former staff of casi-nos or slot machine arcades. In the labor mar-ket, there are vacancies for porters, carpenters,low skill workers and other blue collar work-ers, but the people who are used to earn theirliving by intellectual work will have a hardtime readjusting. After all, what skills does aprofessional croupier have? Communicationskills, ability to calculate quickly, sleight ofhand, knowledge of foreign languages, con-flict management, and practical psychology.

Their personal traits include endurance andstress resistance in any situation. Gamblingstaff are generally night owls. Is such a personsuitable for an office job? Therefore, it turnedout that most people either found a similar jobabroad or continued their career in illegal casi-nos and gambling halls.

G&L: These gambling zones are placed alongthe Russian border. Are they intended to targetinternational gambling tourists?

LL: Yes, of course. The Far East Zone is pri-marily aimed at attracting gamblers fromChina and Japan. With a convenient geo-graphical border close to China, it is just athree-hour plane ride away from Tokyo, so itmay facilitate the influx of players from thesecountries.

Kaliningrad is bordering on EU countries,“Azov City” – on Georgia, Ukraine, ArmeniaIn fact, the whole concept of gambling zoneswould be successful even without attractingforeign tourists and focusing instead on domes-tic players, if the authorities could provide thenecessary infrastructure for tourism and combatthe illegal business in the cities where in factthe target gamblers are playing, though gam-bling is banned there.

G&L: What is the status of state-ownedcasinos in Russia? Would that provide ameans to bring legal casinos closer to theRussian gambler?

LL: There are no state-owned casinos in Russia.Now there are rumors about upcoming nation-alization of all lotteries, but no discussionsabout state-owned casinos.

We wish to thank Lyubov Loginova for herthoughtful insight into the status of Russia’sgaming industry.

Based in Bali, Bill has been consulting, installingand supporting solutions in the global golf andleisure industry since 1982. He has been involvedwith over 1000 systems installations in 40+ coun-tries from North America to Africa to Asia &Australia.

Lyubov Loginova, CEO of Moscow-based Alsart.

Fall12_G&L.qxd 9/10/12 8:21 PM Page 61