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Zoning Out

The state of gaming in Russia post-shutdown

Zoning Out

One of the biggest stories of 2009 has been the end of gaming in Russia. Gaming in Russia grew significantly after operations commenced in the 1990s.  The proliferation of slot halls and “street machines,” in particular, caused some alarm as revenues grew significantly. As a result, the public and government officials questioned the industry.

In 2006, a bill was signed into law by President Vladimir Putin establishing four zones around the country where casino gaming would be legal-in Primorye in the far east, Altai in Siberia, on the border between the Krasnodar and Rostov regions near the Azov Sea, and in the western enclave of Kaliningrad, nestled between Lithuania and Poland.

The new legislation set capital requirements and stipulated a minimum number of tables, slot machines and revenues a casino must have in order to operate. The slot hold percentage was set at 10 percent and 18 years was set as the employment age in casinos and other gaming facilities.  

Ominously, the legislation also set a timeline under which existing operations would need to relocate to the new gaming zones or close their operations.  That deadline passed on July 1, 2009, and the government made extraordinary efforts to ensure that all gaming operations ceased.

No Growth Zones
Despite the rigid enforcement of the shutdown, no domestic or foreign operators started or even contemplated operations in the new gaming zones, as all four were in remote locations with little infrastructure or local population. The Russian casino gaming industry-which Boris Belotserkovsky, the president and CEO of machine manufacturer and distributor Unicum, estimates generated revenue between US$7 billion and US$8 billion-was shuttered in an evening.

The perception of many industry experts of the four “opportunities” is so poor that they can only deduce that policy-makers wanted to ensure that the industry was dissolved.

Currently, all legal casino gaming has ceased in the country, and gamblers are now forced to seek out alternatives.  They include illegal gaming, video lottery terminals, sports wagering, lottery tickets and foreign casinos.  Several former casino managers agree that illegal casinos have sprung up, but the extent of the proliferation is uncertain.  While these casinos could possibly offer slot machines, it is more likely that table games are the core offering.

Video lottery terminals are emerging as an alternative.  These machines exist under the existing legislation, which permits paper or other types of lottery tickets.  Belotserkovsky reports that the permissibility of these machines is debatable, and that lottery machines are not currently being sold. Unicum, however, does have an agreement with Novomatic to enter the market if favorable clarification surfaces.  Ruslotto, the public agency, does appear to be selling lottery terminals to Russian operators.

Reportedly, many of the establishments offering the lottery terminals are small operations located on the outskirts of major cities such as Moscow and St. Petersburg.  There are approximately 50 to 60 of these operations, and machines also are offered in other locations such as internet cafes.  While unconfirmed, it is likely that some slot machines are also present, competing side-by-side with lottery terminals.

Where To Now?
So what alternatives exist for casino operators? A Japanese group has considered the development of the Primorye gaming zone, located approximately 35 kilometers from the airport in the eastern outpost of Vladivostok. However, near-term development is unlikely, and pending legislation that would enable gaming in Japan could hamper marketing efforts in what would be a key feeder market.  

Others have recently looked at the Azov Sea location, but no announcements have been made, and infrastructure improvements at the location would likely require billions of dollars.  

There are also some rumors that the gaming zones could be redefined, with
the promise of increased tax revenue providing some incentive to a government that is largely dependent on oil prices.  However, with some interest in the existing zones and a reasonably strong fiscal position, little urgency or motivation exists for legislators.

Former Russian operators also started looking abroad before the July 2009 deadline.  Ritzio established operations in Ukraine and had operations in both countries shut down when Ukraine chose a similar path but with little notice.

Clive Tilley managed the Casino de Paris, located at the Korston Hotel in Moscow, and also established operations in Montenegro. While his firm’s Russian operation was widely recognized for catering to an emerging middle market, he notes that attracting Russian gamblers to make gaming the main purpose of a trip is challenging.    

Mass Market, VIP Travel
The challenge lies in the former structure of the Russian market.  A number of slot parlors catered to a mass-market player. Many of these players enjoyed gaming but are unlikely to take trips abroad to game, due both to the cost and their view of gaming as entertainment. Tilley notes that while many players in Russia enjoy casino games, they are not the dedicated, avid gamblers that a destination such as Macau enjoys.

The second segment, the middle market, was a growing part of the
Casino de Paris and other casinos’ clientele. While this segment could potentially travel abroad, gaming is unlikely to be the purpose of a trip (although these players may engage  on a more casual basis if they visit a destination that features gaming).  

The final segment-the former VIP gambler-has the means to play abroad if they wish.  This market was estimated by Belotserkovsky to be worth between $100 million and $300 million.  

Geoff Butler, the former manager of Corona Casino on Novy Arbat in Moscow, says these players currently seek out alternatives in London and Minsk.  While Minsk is a logical alternative given its proximity to the Russian population and cultural similarities, it should be noted that Storm International has opened a casino there under its Shangri La brand, and has successfully attracted former Russian clients to this new location. The firm formerly operated the Shangri La located in Pushkin Square in Moscow, one of the most successful casinos in Russia and a popular property for VIP gamers.

Another alternative for Russian operators would be to become junket operators and bring Russian gamblers to other casinos. While this alternative was explored in Macau and possibly other markets, the challenge lies with the nature of the Russian VIP gambler.  These players have the means to play in other jurisdictions and likely have the ability to get foreign currency needs met. The value proposition for the junket is therefore limited.

Russian operators may be challenged in terms of their expected returns. The gaming industry grew quickly in Russia and provided fantastic returns. While it turns out that these returns were commensurate with the risks, most prospective investment opportunities are not forecasted to generate similar returns.

While Tilley was able to bring some employees to the operations in Montenegro, foreign work permits are difficult to obtain and the vast majority of former employees have likely suffered. In addition to this unnecessary unemployment, one cannot help but feel that an opportunity has been missed.  

Whereas more thorough regulations developed under the context of a partnership between the Russian government and the gaming industry could have preserved the industry and even driven foreign direct investment, the alternative has resulted in lower tax revenue and higher unemployment during a challenging economic environment.

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