Money-Growing: Casinos on the Move

Restrictions imposed locally result in large-scale territorial redistribution of businesses. In St. Petersburg, the process is in full swing. In the meantime, the sector braces for the new federal law, which is expected to introduce even tougher standards.

Historically, a basement next to the editorial office of the weekly “Real Estate and Construction in St. Petersburg” at the corner of Obvodnoi Kanal and Izmailovsky Prospekt, housed a shooting gallery. It can hardly be said that the establishment was extremely popular. Then the gallery closed down for renovation to re-open shortly afterwards as a slot-machine arcade.

In the years 2003 to 2004, after the federal government took over the gaming licensing that process became quite noticeable. All across the city shops and small cafes situated in bustling areas were closed down to be replaced with gaming arcades.

But soon afterwards things changed. Slot machines moved elsewhere; the gallery next to the editorial office has been transformed into a sex toys shop. The attendance rate there today is scarcely higher than in the shooting gallery.

Crackdown Timeline

In 2004, the city government launched a crackdown on the gaming industry ordering checks into as many as 2,500 “taxable entities”. It turned out that approximately 40% of gaming establishments had been operating “with violation of targeted use of land and municipally-owned properties”, 32% had no license, 6% were not duly registered with tax authorities and over 50% operated in violation of sanitary and fire safety regulations.

In September 2005, the city committee for property management (KUGI)’s decree No. 284-r banned gambling establishments in city-owned properties. In early 2006, following a series of probes and raids the government closed down 227 arcades and 1,660 freestanding slot-machines (188 halls had been operating on municipally owned territories, 29 on privately owned properties). As a result of the first attack St. Petersburg was left with only 700 gaming arcades and 25 casinos.

In December 2005, Governor Valentina Matviyenko signed the law “On the placement of gambling enterprises on the territory of St. Petersburg…”, imposing considerable restrictions on the industry and tough requirements. Henceforth, casinos and gaming halls could operate only on the spots where gambling was sanctioned by law. The law banned gambling establishments on the territory of markets and retail areas, at public transport stations, in underground passages, hospitals, theaters and schools and within 50m distance around those spots.

Remarkably, apartment houses were not included in the list. Furthermore, the lawmakers had preserved a popular form of placement of gaming halls, whereby operators acquired first-floor apartments and had them reclassified as non-residential properties. The law also introduced new requirements gaming establishments were to meet. A gambling arcade must measure no less than 80sqm and house at least 20 slot-machines; a casino must measure no less than 500sqm and comprise at least 7 tables and no less than 45 machines. Operators were given a respite before the law took effect on July 1, 2006. The list of addresses where gambling was sanctioned was compiled by Sept. 1. The government played it safe, which is understandable.

The St. Petersburg committee for economic development, industrial policy and trade (KERPPiT) expects direct tax revenues alone from the gaming industry to reach 2.6 billion rubles or 1.5% of the total budget revenues this year. The total income from the sector is expected at 10 billion rubles. That is not an oil well, of course, but such sources are worth something. The imputed income tax on gambling operators is quite easy to collect; the rate is set at 7,500 rubles per slot-machine per month, 125,000 rubles per each casino table and just as much per bookmaker’s office.

Operators, on their part, partially welcomed those measures as being aimed at elimination of smaller rivals who paid no taxes and were largely responsible for the negative image of the industry; besides, the new law banned outsiders from the market (according to market operators, some 20% of the sector is controlled by Moscow companies). Chairman of the Gaming Business Association, Konti Group’s general director, Dmitry Nevelsky, admits that government control is necessary: “Operators suffered grave losses but those losses are justified… We hope that we have taken a correct path.” Although the direct damage has proved to be quite considerable.

An ad hoc inter-governmental commission has already examined over 600 applications. As a result 432 spots for placement of gambling enterprises were included in the address list, including 410 gaming arcades, 21 casinos and 1 bookmaker’s office. Applications on 203 spots were rejected. The ones to suffer were predominantly the companies who had operated their establishments near bus stops and in retail areas. Owners of the Vulkan (Volcano) chain were forced to closed down approximately 40% of gaming halls; the company Profit (that runs Maxbet gaming halls) closed 27% of its establishments. Market operators refuse to comment on their losses.

At Highest Rates

Newly introduced restrictions and requirements impel gambling operators to give up some of their properties and look for new rooms. Gambling establishments have already moved out of practically all city-owned properties. Vacated built-ins are redesigned as small shops and offices. In changing conditions the owners of gaming arcades prefer to come to terms with landlords.

Igor Gorsky, development director at Becar Realty, says that when letting their properties to gambling companies, building owners usually set high rental rates of $100 per 1sqm per month and over, whereas retail enterprises are charged $50 to $80 for same properties. “The owner does not need a headache, local residents’ protests and increased attention on the part of officials. The gaming industry is fraught with problems. Every problem means extra expense,” Gorsky explains. On the other hand, property owners proceed from a wide spread belief that gaming companies make huge profits. No trustworthy data on the gaming industry’s earnings are available, however.

One of the market operators has reported that slot machines are pre-programmed for payout of at least 92%. “Programming may be made in stages: 98% to 96% to 92% to 86%… 70% is the minimum set by the federal law. But if the percentage of wins is low players stop coming,” he says. People conversant in the trade report that one of the chains suffers a loss of approximately 1.5 million rubles per one slot machine per month. But the operators do not get rid of it, for the rumor of sure wins spreads in town and high attendance makes up even for those losses.

Head of analysis at Avers Group, Dmitry Svitelman, confirms: “The gaming industry determines the upper limit of rents for non-residential properties in locations where their placement is sanctioned. Gaming operators agree to pay more than retailers.”

In Moscow, the situation is the same. In mid-2005 the city hall had to suspend sale of basement properties on Bakhrushin and Mosfilmovskaya streets after the bidders – namely gaming operators – had pushed up the rates to $3,500 and $4,500 per 1sqm respectively. Restrictions on gaming industry inevitably bring about a certain imbalance on the non-residential real estate market as average rates charged for built-in properties in “sanctioned” locations prove to be higher than in the areas where operation of gambling outlets is prohibited.

St. Petersburg’s government had planned to redesign facilities freed from slot-machines as retail outlets under the governor’s program to develop convenience stores across the city (the so-called one-step away shops). Under the plan, some 200 to 300 properties measuring 50 to 150sqm ca. will be allocated for the purpose and 9-year leases to those properties will be awarded on a tender basis. Market operators assume that the idea may prove feasible only provided the shops are offered considerable privileges; otherwise, given the recently imposed ban on alcohol sales during late night hours, the retailers will suffer losses.

Nationwide Prospects

The lawfulness of the government’s move to ban gambling in certain location is quite disputable. One of the small companies which has lost three gambling outlets out of nine has challenged the municipal law on placement of gambling facilities in court. The properties which housed the outlets were not municipally owned. In fact, the plaintiff challenges the local government’s right to restrict the rights of property owners. In September, the Oktyabrsky district court pronounced several provisions of the law on the list of addresses of gambling establishments and adjacent territories unlawful and invalidated those. The governor’s office appealed the ruling in the Supreme Court.

Analogous developments are taking place in Leningrad Region. Local lawmakers are examining amendments to the regional law “On placement of gaming facilities…” Earlier several local entrepreneurs filed a claim in court requesting a revision of the law. The local legislature said that the Supreme Court had invalidated several provisions, in particular, those setting the size of gambling outlets, number of slot machines and the list of locations. However, market operators do not expect the courts to side with them and the situation to change in their favor. On the contrary, they brace for even tougher restrictions. Their pessimism is rooted largely in the presidential draft bill, announced by Vladimir Putin in a recent live broadcast.

The draft calls for even harsher restrictions. The federal government is set to restrict gambling outlets to four special “gambling zones” and “gambling zones of settlements”. The decision to establish special gambling zones is to be made by the federal government on the basis of consultations with regional governments. Operators are required to possess at least 600 million rubles in net assets. Gambling outlets must measure at least 800sqm and have 10 tables for casinos, 100sqm and 50 machines for slot-machine parlors. The text of the draft says that the law is to take effect on January 1, 2007. Considering how fast the State Duma approves the presidential bills, this is quite likely to happen. Companies who fail to meet requirements set by the new law will be closed down by the end of 2008. For most gaming operators that spells closure or large-scale restructuring of their businesses. Local governments, on their part, will have to look for alternative sources of income.

The official KERPPiT website has published a gloomy announcement: “In connection with recent proposals by President of Russia Vladimir Putin and the announcement by Chairman of the State Duma Boris Gryzlov of the [pro-Kremlin] United Russia faction’s plans… to move gambling outlets to specially designated zones, somewhat farther from large cities, the press-service of KERPPiT seeks to draw attention to the fact that for the time being no legal acts to the effect are available. The issue is yet to be examined by the State Duma. In this connection, the discussion of the issue by the committee is premature…” The prospects of moving gambling outlets to reservations are highly doubtful as organization of such zones is fraught with colossal expense and due to national specifics. An analogy with the U.S. is rather far-fetched, given the difference in quality of road network, cars, population mobility, etc. Hence, for most operators the new law spells full closure.

Viktor Sidorov, general director at the Gloria Game company, notes that a total ban is no solution. The industry is based on the real demand, on basic human requirements. Most gaming operators are convinced that the crackdown on civilized businesses will push them into the shadow sector. The government will lose tax revenues and the chance to keep gamblers in check. Meanwhile, St. Petersburg entrepreneurs are in talks to join efforts. Perhaps, several large or medium-size companies will merge their enterprises into a larger firm that would meet all the requirements.

Some of the businessmen see a conspiracy behind the government’s initiative, suggesting on condition of anonymity that the move to establish four gambling zones and ban gambling outlets in big cities could be of benefit to major Western companies who can afford investment in a Russian Las-Vegas (including construction of roads and public amenities, advertising, etc.)

Executive officer at the Gaming Business Association, Alexei Sluchayev, tries to be as cautious as possible in his estimates: “The administration and the city legislature have passed a local law. We observe the requirements set thereby. Should further restrictions be adopted on the federal level, we will comply with the requirements of the federal law as well.”

Vladimir Putin, President of the Russian Federation:

“I just recently sent a draft bill to the State Duma that, in accordance with my proposal, confines all gaming activities and business into four special zones allocated for this type of activity and business. I believe that this is a civilized solution. We are going to give a certain period of time to allow all those who participate in this business to react in due time, make the corresponding decisions, and then direct their efforts and the considerable capital they already have to developing these four special zones. Incidentally, in any region where they happen to be they will act as an essential help in supplementing regional budgets.”

St. Petersburg Governor Valentina Matviyenko:

“The city has closed down all free-standing slot machines… and all machines installed in vestibules of metro stations. Two laws penned by the government have been adopted by the city legislature, on placement of gambling outlets and on administrative liability. It is inconceivable why the State Duma still has not move to eliminate the legal vacuum in that field on the federal level. But we decided not to wait for the federal laws to be adopted and passed our laws, which we are set to observe.” (The Dialogue with the City TV program, 17 July 2006).

Members of St. Petersburg Gaming Business Association:

JSC Konti Group (Konti casinos, Astoria, Olimiya, Neva-Da!, etc.

JSC Nevsky Kolorit (Captain Morgan, Lux, Karat)

JSC Stek Show (Planeta, 10 gambling clubs, 28 slot-machine parlors)

JSC Yakor

OOO Vulkan

OOO Gloria Game (Papanin club, gambling halls)

JSC Set Game (Premier, Gudwin, Slava, Palkin restraurant, Safari gambling halls)

Firma Profit (the largest chain in the city with nearly 140 Jack Pot halls)

OOO Sanik (Crazy Fruit arcades)

OOO Neskuchny Sad

The members of the association control 75% of the market. Outsiders are a casino at Talion Club (owned by Alexander Yebralidze), a casino at Zolotoi Sad boutique hotel (owned by Alexander Rozenbaum) a chain of gambling halls Progressiv and several other companies.