Money-Growing: Big Game

At a conference entitled “The Entertainment and Gambling Industry: Playing With and Without Rules” held in early June under the aegis of the Moscow International Business Association (MIBA), government officials and entrepreneurs discussed the prospects of development in the sector and its legislative regulation.

Statistics show that gambling establishments, as well as shopping malls, children’s sports centers and health clubs are developing rapidly across Russia, especially in financially-prosperous Moscow. “Consumers have already been granted full, virtually unrestricted opportunities to have their desires for various goods satisfied, and now their interests are shifting towards the entertainment sector,” Natalia Sazonova, an analyst with Colliers International, describes the trend.

However, according to the evaluation by Aleksandr Borisov, MIBA’s director general, many segments of the entertainment industry in Russia “have not yet reached the peak of their development, or niches that are still unoccupied are being cultivated.” In his opinion, networks of multi-screen movie theatres are likely to expand considerably; health and wellness clubs are eying annual growth of 20-30 per cent, while golf clubs have only just embarked on the road of development.

City officials themselves are taken aback at the growth rate of the entertainment establishments. According to Ordzhonikidze, in terms of the sheer scale of the entertainment industry’s infrastructure Moscow has already outstripped a number of major cities throughout the world. The growth rate and most importantly the lack of “provincialism” are truly astonishing, believes the deputy mayor. According to Ordzhonikidze, the number of investment offers in the sector considerably exceeds the number of project ideas.

The official sees a strong link between the rapid development of the entertainment industry and that of the tourist industry in Moscow. “If earlier the proceeds from tourism accounted for some 1 percent of the city’s budget revenues, then today that share has reached 7 per cent,” says Ordzhonikidze. For comparison, the official said, the banking sector accounts for some 9 per cent of budget revenues, while industrial enterprises bring in 17 percent.

Investment in the entertainment industry is growing even more rapidly than in the sphere of commerce, which led in terms of growth until recently. Meanwhile, in 2003 investment in the commercial sector, where the pay-back period is the shortest, accounted for some 60 percent of the total volume of foreign investment injected into the Moscow economy, which Ordzhonikidze put at $14 billion. However, when compared with 2001 the number of investors interested in the entertainment industry has increased 15-fold. At the same time, many major projects by Russian and foreign investors are still “on hold”. No decision has yet been made on the project to build a Formula One racing track in Moscow; plans to build an amusement park in the Nagatino District of the capital have been revised more than once over the past few years, and the prospects of developing the children’s Park of Miracles remain vague.

To sell and entertain

Construction of retail-entertainment complexes, more commonly known in the West as shopping malls, where investors willingly open bowling alleys, children’s centers, Internet cafes and even casinos, is one of the most highly developed segments of the entertainment sector. 2002-2003 saw 12 such malls open across the city, and the construction of at least 10 more is in the offing.

Aleksei Ovsyannikov, a leading consultant with Vesco Realty, believes that the complex approach will shape the future development of the entertainment industry in Moscow. “An entertainment center should become more diversified, where a bowling hall, instead of merely offering beer and peanuts to its clients, includes a cafe equipped with television screens, a pool hall and slot-machines,” Ovsyannikov explains. According to him, the Chempion (Champion) entertainment complex near the Voikovskya metro station in northern Moscow is a good example of a well-thought-out universality.

“Combining shopping facilities and entertainment is the most sensible option,” maintains Natalia Sazonova. Such symbiosis makes malls more attractive to buyers, and hence, ensures constantly high proceeds in the form of rent paid by shop owners. Even when it comes to large spaces being let out cheaply, which may seem unprofitable, it is no secret that rental charges for entertainment operators are 5 to 10 times lower than for shop owners.

At the same time experts warn against locating certain entertainment enterprises in shopping malls, particularly casinos and gambling arcades, however economically efficient they may seem. Mall owners are interested in attracting such tenants because their turnover is high enough to pay their rents. But casinos and slot-machines in shopping malls run counter to the concept of the mall as a centre for family-oriented shopping and entertainment. “Slot-machine halls and casinos do not contribute to the synergy – their clients are not there to shop, while the normal business hours of such halls and casinos do not coincide with those of the mall,” Sazonova says. “Slot machines yield high proceeds and are profitable, but with them in place considerable damage is likely to be done to another profitable business – the shopping centre proper.” Movie theatres, children’s amusement parks, attractions and bowling alleys are the most appropriate for shopping malls, believe the analysts from Collier International.

Meanwhile, the boom in the entertainment industry has spread from Moscow and St. Petersburg to the regions. Major retail-entertainment complexes, occupying 30,000 to 60,000 square meters, are operating in Krasnoyarsk, Volgograd and Novosibirsk, notes Aleksandr Borisov, director general of MIBA. The Kopeika shopping centre, owned by the Financial Corporation NIKoil, is set to build 15 malls across central Russia. The St. Petersburg firm Mir plans to construct 10 shopping malls with a total entertainment and retail space of 450,000sqm. Yet, not all entertainment centers fit into the format of the shopping mall. Distinct venues like amusement parks, golf courses, casinos and sports centers require special facilities.

Cola & popcorn

The movie theatre industry, flourishing both in the capital and throughout the country, is unanimously recognized by investors as highly promising. Movie theatre operators have long been vying for locations to develop modern multiplex theatres and for the right to reconstruct and re-equip old venues.

2,000 movie theaters are operational in Russia today, with 393 (20 percent) of them having been renovated and re-equipped. According to estimates by market participants, for film production to start yielding profits in Russia the number of theatres must grow considerably. Meanwhile, Russia has 0.43 modern movie theatres per 100,000 residents, whereas Great Britain has 5.8; France around 9; the US 12. The movie theatre market is expanding rapidly, with proceeds from ticket sales reaching $50 million in 2001; $110 million in 2002, and $200 million in 2003. The forecast for this year is $270 million. Moscow accounts for 40 percent of this market. Approximately 15 movie theatre chains and nearly 50 multiplex theatres operate in the capital. The year-on-year rate of return for privately-owned movie theatres is estimated at 25 percent. The payback period is 3-4 years provided that 30 percent of the seats are filled. The best movie theatres sell up to 70-80 percent of their tickets.

Golf & skis

Inspired by the example of its presidents and leaders the country has taken up tennis and alpine skiing. The demand for new types of healthy entertainment is increasing considerably. Tennis enthusiasts are luckier, of course, with tennis courts available at many sports centers and stadiums. Mountain skiing facilities are nowhere near as developed in Russia.

Initial investments began to flow into projects for the construction of ski resorts ranging from $5 million to $1.5 billion back in 2001. The Krasnaya Polyana ski resort is the most famous and costly project, requiring up to $1.5 billion. According to the Russian Tourist Industry Union, investing in the development of ski resorts is more profitable than constructing seaside hotels. The number of visitors to ski resorts increases 25 percent each year, hence, their payback period is shorter than those in Europe. Such resorts are also being built near Moscow, despite the city’s remoteness from mountain ranges and the sea. Volen Park has cost investors $12 million, while $34 million was invested in the Sorochany ski resort.

Golf is yet another pastime attracting an ever-increasing number of fans. At the same time Russia suffers from an acute shortage of golf courses, experts say. According to estimates by the Russian Golf Association, one golf course can offer facilities to 25,000 players, meaning Russia needs at least 5,000 courses that meet world standards. So far Russia has embarked on a ‘modest’ program envisaging the construction of 500 courses over the next 15 years. According to reports from the Russian Golf Association, five golf clubs operate in Russia today, two of which are located in Moscow. The best one, Le Meridian Moscow Country Club in Nakhabino, is included in the list of the world’s best golf clubs. For comparison: across the globe people spend $2.5 billion on golf balls alone.

Games & business

One of the brightest and most optimistic outlooks predicted by the market specialists is reserved for casinos and gambling establishments. According to Boris Belotserkovsky, a board member with the Russian Association for Gaming Business Development (RAGBD) and president of Unikum Group, “the statistics speak for the colossal development of the gambling business.” According to RAGBD reports, in 2001 2,800 arcades were operating in Russia; by late 2003 their number had reached 5,000. Over the same period the number of casinos grew from 600 to 1,000. The number of bookmakers, excluding those operating on the Web, nearly doubled, with the minimum investment required for opening such an office being estimated at $20,000-$30,000. The volume of taxes collected from gambling establishments grew from $2.4 billion to $3.5 billion in just one year from 2002-2003.

However, judging by reports from the owners of gambling centers, the system of taxation the gambling industry is subject to leaves much to be desired. Taxes on gambling businesses, now included in the budget revenues of local authorities, are being collected at rates that “defy all logic”. According to Samuil Binder, director general of the RAGDB financial committee, the tax authorities are not impartial in their evaluation of the specifics of the gambling sector. In particular, he says, the latest decree by the Ministry for Taxes and Levies orders the imposition of a monthly tax of 3,500 rubles on children’s arcade games, when the average proceeds from such machines does not exceed 2,000 rubles.

Yet, despite all those obstacles, the gambling business does attract investors. According to Belotserkovsky’s forecasts, 2004 will witness the saturation of the Moscow market and see investments flowing into the regions where the rapid development of the gaming industry will begin.

According to Anatoly Melnichenko, head of the Tax Ministry’s directorate for taxation of small businesses, 980 gambling tables and some 47,000 slot-machines are operating in Moscow today. However, the city government’s control over gambling establishments, the number of which has nearly reached its maximum, remains very weak, says Andrei Kozhemyakin, deputy chairman of the Moscow city licensing committee. According to Kozhemyakin, eight attacks on arcade halls have been registered in the capital over the past few months alone. Some people were injured and the material damage is estimated at 1.5 million rubles.

“Today confusion reigns in the gambling business in Moscow,” holds Ordzhonikidze. “One can receive a license in Kamchatka and then open gambling establishments in Moscow.” This has already caused a lack of control over such facilities, with crime rates soaring, the deputy mayor claims. One of these days the government will shut down those establishments and 150,000 people employed in the entertainment industry will be out of a job, Ordzhonikidze warned.

Granting licensing rights to the regions

To make the gaming business, represented largely by low-quality networks of gambling centers, more civilized, unified standards need to be introduced. Gambling establishments should comprise restaurants, discos, high-quality equipment, maintains Ordzhonikidze. “Building such a club costs not less than $3 million,” he says. However, today the Moscow city authorities have no legal means of restricting access to the market for unprofessional firms and no way of introducing any operational standards for casinos and gambling centers.

The Lord casino that was closed down in Moscow recently is a striking example of the authorities’ lack of control over the industry. The authorities were forced to resort to extreme measures after the security service of the casino would not let the Interior Ministry’s commission enter the premises. The casino confirmed the report to Vedomosti. “We had all the required papers, but the establishment had to be closed. The city authorities got their way, saying that a casino could not be located in a residential building,” a Lord employee told Vedomosti on condition of anonymity.

Beginning in 2002 the federal State Sports Committee, or Goskomsport, has had the rights to issue licenses for gambling businesses. Under the current rules licenses are issued upon application, which, city government officials complain, does not ensure the observance of safety and quality standards in such establishments. To establish control over the operation of gambling establishments, Moscow’s authorities have urged the State Duma to pass a draft bill delegating the right to issue licenses to the regional authorities. The draft bill on gambling in Russia has already been approved in the second reading. However, says Ordzhonikidze, “a group of lobbyists is already attempting to send it back to the initial reading stage to kill it off completely.”