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Ukraine 2.0

The painfully slow return of regulated gaming to Ukraine

Ukraine 2.0

It has been over two years since the government of Ukraine shut down all legalized gambling in the country. What was supposed to have been a temporary ban awaiting new regulations became an indefinite hold on virtually all forms of gaming.

In 2010, various bills designed to reintroduce the once-flourishing industry—but this time with consistent behavior on the part of the authorities—never made it through parliament. Even now, with one of the country’s most powerful anti-gaming political leaders under arrest for unrelated past matters, there is no clear path forward. And with less than a year to go before Ukraine co-hosts with Poland the 2012 European soccer championships, there is no reason to assume that the legislative logjam will be addressed in the autumn parliamentary session. But it could be.

Ukraine before the ban was something of a Wild West territory when it came to gaming. Although regulations were in place that included licensing fees and taxes, the reality was that a much more informal situation held sway outside of the major cities. Literally thousands of gaming venues were in operation around the country of 40-odd million, in every neighborhood. Of an estimated quarter-million slot machines, only half were thought to be licensed. The government was missing out on over $1 billion worth of revenue annually, and the player was pretty much dependent on the virtue of the operator and local authorities.

The end of the era came suddenly in May 2009. In the city of Dnipropetrovsk, a fire broke out at a slot arcade operated by Metro Jackpot Company and resulted in the deaths of nine people and injuries to 11 others. The tragedy was quickly seized upon by anti-gaming factions within parliament, who pushed for and won an emergency ban on all casinos and gaming machine businesses in the country. The ban made no distinction between legitimate operators abiding by the rules—such as the local subsidiary of publicly listed Olympic Entertainment Group of Estonia—and those who chose to work outside the law. The move was supported by 340 of the 442 ministers of parliament.

Leading the charge at the time was then-Prime Minister Yulia Tymoshenko. The attractive and charismatic gas-speculator-turned-politician had no sympathy for those protesting the loss of some 200,000 jobs in the gaming sector.

“There are those who say that this is a business and people have lost their income and jobs. But drug trafficking is also a business that provides income and jobs,” said Tymoshenko, quoted on her own website. “For me, drugs and gambling are the same. We need to put the issue of gambling to a close. And I believe this will be to the benefit of the people of Ukraine.”

For Tymoshenko and her supporters, the solution was to follow the Russian example: banish gambling to remote regions where its harmful effects would be minimized.

“The gambling industry should be located outside of cities,” Tymoshenko said, following a May 2009 meeting of the government commission investigating the arcade fire. “This practice exists in other countries, and we need to put a stop to such poisoning of the morality of our youth. I know that this measure was recently approved in Kazakhstan and Russia, and for a long time now most states in the U.S. do not allow gambling facilities in cities.”

It was a seemingly odd choice for someone who together with Viktor Yushenko had led the anti-Moscow “Orange Revolution” in 2004. The Russian closure of gaming venues outside of the infamous four empty gambling zones was scheduled to take place in two months. But since 2004, the paths of Tymoshenko and Yushchenko had diverged, to the point where President Yushchenko at first vetoed the bill that arrived on his desk. But he quickly bowed to growing public sentiment, although not without registering his protest.

“I’m dissatisfied with this decision,” said Yushchenko. “I don’t find in it any answer to resolving this problem in the country.”

The law included instructions for the cabinet to draw up new legislation to regulate the gaming industry and to designate the special zones where gambling would be permitted. The task was supposed to be completed in three months, but nothing happened. The casinos and slot halls remained closed—officially—at year’s end.

A New Regime

In February 2010, Viktor Yanukovych was elected president, defeating Tymoshenko by some three percentage points in the second round of voting. Yanukovych lost the 2004 election to Yushchenko after allegations of fraud had forced a repeat vote.

Since taking power, Yushchenko’s Party of Regions and other supporters have introduced several bills intended to restart the gaming industry. Generally, to no avail.

One of the first efforts was a proposal by Mykhailo Brodsky, chairman of the state committee for regulatory policy and entrepreneurship, to allow casinos at hotels in the resort area of Crimea and at five-star hotels in major cities around the country. The motivation for allowing casinos to again operate was to raise funds for the general budget and for projects involved with the 2012 European soccer championships, which Ukraine is co-hosting along with Poland. Additional variations on this theme have since surfaced, but none have become law.

Of course, the problem with having no regulated gaming is that unregulated gaming thrives in its absence. Internet cafés and sports bars—whose publicly accessible computer screens can offer any game virtually—filled the gap left by the departure of the physical slot machines and table games. The operators were able to take advantage of a loophole in the law that did not recognize this format of gaming.

In January 2011 came the first attempt to rein in the internet cafés. VostokReport, a young consulting group specializing in gaming in the Baltics, Ukraine and Russia, reported the introduction of an amendment to the original law banning gambling. Bill 8024 added gambling online or by computer simulation to the list of prosecutable offenses. In April the parliament voted to adopt the bill—introduced by Tymoshenko’s party—in first reading by a vote of 289 to 161.

In May, the parameters of what is gambling were expanded even further. Tymoshenko’s party managed to get parliament to accept a more detailed definition of gambling. The second reading of Bill 8024, adopted by a vote of 251 to 199, defined gambling activity as any activity aimed at providing access to gambling, whether that be in a casino, or via a computer terminal or slot machine simulator. A gambling game now is defined as any game in which participation requires payment by the player, including by electronic means, and which enables the participant to win a prize based on randomness. The bill was signed into law by Yanukovych in early June.

In mid-June, the Party of Regions introduced draft legislation to create a state monopoly on lotteries. Bill 8652 would go so far as to prohibit the very use of the word “lottery” by all gaming operators other than the national monopoly. The reason for limiting the use of the word is that in many countries in the region, calling a game a lottery is a semantic fix to get around the letter of the law.

The intent of 8652 is to channel the money currently being spent on privately operated lotteries into the national coffers, ostensibly for use on “good cause” projects. VostokReport says that the treasury’s share of lottery income is forecast to exceed UAH2.65 billion—about $328 million—for the period 2011-2015.

A single lottery operator would be sought and awarded a license valid for 12 years. The bill requires the operator to maintain an official lottery office in designated areas with populations of 500,000 or more and have representatives in areas with population of 5,000. Share capital requirements for the operator are to be the same as in effect for banks, with the operator holding equity of UAH100 million. The licensee would be restricted to involvement in only those activities necessary to operate the lottery.

The move to a national lottery monopoly is the exact opposite of what is happening in most European countries. However, even the E.U. continues to recognize that as long as the intent is to protect the populace from compulsive gambling, there can be justification for a monopoly.

Poker Is Not Gambling

Aside from lotteries, of which there are currently three licensed operators, the only other legal form of gaming at the moment is the poker tournament. Poker in tournament form is officially recognized as a sport by Ukraine, as it was in neighboring Russia prior to that country’s gaming shutdown in 2009. Ukraine capital Kiev has become the destination of choice for Russian poker players seeking locations other than their own local underground clubs.

Online operator PokerStars is currently in the midst of a second season of its Russian Poker Series, which for obvious reasons is steering clear of its namesake. Four of the six events are scheduled to be held in Kiev, where the series kicked off in April with 265 players paying or qualifying for seats at $3,000 each. September will see two events back-to-back, together creating a guaranteed $1 million in prize payouts. The series will culminate with a televised $3,000 buy-in in tournament in Kiev in December.

In contrast, poker cash games are illegal. But as with some “lotteries,” operators have been employing a semantic workaround.

Pauls Lusins, the editor who covers online gaming and live poker events at VostokReport, explains that a player obtains chips by leaving a “deposit” at the cage. This deposit is then claimable by the person who returns the chips to the cage.

The practice seemed to be working fine throughout 2011. Then, in early August, police raided a poker club in Kiev for using this method. Also, the dealers were said to be raking the games, just like in poker rooms anywhere else. The question at that point was whether this was a one-off raid or whether it signaled a new focus on poker by the government.

Barring an emergency call to parliament to discuss the Tymoshenko arrest, the next legislative session is scheduled to begin September 6 and run through January 13, 2012. Armed with new legislation that better defines what is and isn’t gambling, it may be easier now for legislators looking to establish a regulated gaming industry. But it will still be a matter of local authorities willing to enforce whatever laws are put into place, in order to create a sustainable environment for legitimate operators.

Russia Update

The gaming ban in Russia has pretty much played out as expected. Since the mandated closing of accessible casinos in July 2009, the four designated gambling zones have been pretty much ignored, and underground casinos in cities have flourished—along with corruption among officials and police.

As an added attraction, rival government agencies are now using charges of illegal gambling involvement to tar their opponents.

Although police have reportedly closed down hundreds of illegal operations, new ones continually arise to take their place. Lyubov Loginova, who chairs the board of operator and supplier Alsart, explained the futility of the game to GamblingCompliance in June. The trick is to continually find loopholes in the law, exploit them for as long as feasible and then get out.

“In Russia, you will get your return on investment in one or two months’ time,” says Loginova. “So even if it is for six months, you will cover costs and you will make a profit.”

A good example is the proliferation of internet cafés whose only reason for existing is to offer online gambling. It was only in late July that President Dmitry Medvedev signed into law a bill that introduced criminal and civil penalties for operating this kind of business. Now, fines as high as RUB1 million and prison terms of six years can be imposed.

Still, the ban has not been bad for all business. VostokReport notes that one beneficiary of the underground gambling industry is cash terminal operator Qiwi, which has 100,000 terminals turning cash into an SMS with Visa card details. The method allows users to purchase goods and services online, fairly anonymously. The card is valid for three months and can take a maximum balance of RUB15,000—about $500. Qiwi takes a commission of 2.5 percent with a minimum of RUB25.

Of the top 20 destinations for Qiwi card payments, PokerStars is fourth—after PayPal, iTunes and Google—and Full Tilt Poker sixth. Also figuring in the top 20 are and Titan Poker.

And in the gambling zones, the peaceful sound of crickets…

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