Gaming industry highlights in Russia and CIS


Overall situation in the market of former USSR


RUSSIA

Overall situation in the market can be described as "calm". Ban on gambling business with the law "On national payment systems" soon coming into effect is forcing the market participants to look for alternative ways to develop or move into other industries and market segments.

As noted by a market expert, Lyubov Loginova, Chairman of the Board of Alsart Group, "big market players rushed out to the west and to those jurisdictions where gambling is legal. During its existence the market has gained experience and developed tools that may be of interest to and in demand by the foreign partners.

Online products developed by Russian companies are already in great demand in the foreign markets thanks to the original mathematics, excellent graphics, ease of use and flexible affiliate schemes". Among the most notable developments are the amendments to Chapter 29 of the Russian Tax Code introducing new tax rates for bookmakers.

Russian President Dmitry Medvedev signed into law the amendments to Chapter 29 of the Russian Tax Code regulating taxation of gambling business. Bet-making points of the betting offices and totalisators have been classified as objects of taxation. The tax of 5,000 rubles must be paid per each bet-making point of the betting office and totalisator.

Article 369 of the Russian Tax Code now allows the federal subjects of Russia to set tax rates within the following limits:

• per processing center of the betting office - from 25,000 to 125,000;
• per bet-making point of the totalisator - from 5,000 to 7,000 rubles;
• per bet-making point of the betting office - from 5,000 to 7,000 rubles.


According to statistics, the monthly turnover of a bet-making point (the total of bets made) amounted to 1.5 million rubles.

In addition, individual entrepreneurs have been banned from engaging in gambling business. The draftsmen set out the following rationale for the amendments:

Bet-making points are not classified as the objects of taxation. However, their quantity is one of the criteria for assessing the scope of gambling organizer’s operations, as the number of bets made and the organizer’s ability to obtain revenue from the results of each of these bets are in direct proportion to the number of venues where players are offered to make bets.

Moreover, unlike with other types of tax payers, the expansion of the network of bet-making points and the corresponding increase in the gambling organizer’s revenues does not result in respective increase in tax payments. In this case, the gambling organizers in betting offices and totalisators are in a privileged position compared to payers of other types of tax. This is in conflict with the general principles of equity and fairness of taxation.

It should be noted that lately many amendments have been made to the Federal Law "On state regulation of organization and management of gambling..." The minimum authorized capital requirement for gambling organizer at betting office or totalisator was set at 100 million rubles. The authorized capital may only be paid in cash with no leverage. The net asset value may not be less than 1 billion rubles. Other introductions include mandatory audit and disclosure of information about the organizer’s activities, founder restrictions etc.

The Federal Law dated 16.11.2011 N 319-FZ will come into force on 1 January 2012.

Poker

It seems that the legislature of the Russian Federation has decided to follow in the footsteps of the United States, as lately there has been a growing concern that the online poker in Russian will be banned.

As you know, Russian President Dmitry Medvedev signed a number of laws amending some legislative acts. This has resulted in a ban on poker clubs in spite of all objections from the Russian Sport Poker Federation, and poker was qualified as a game of chance and equaled to roulette and slot machines. Also there were new amendments introduced to the Criminal Code and the Code of Administrative Offences, which provided for the legal responsibility for gambling outside the gambling zones. Thus, according to the adopted law effective since July 1, 2009, any gambling activity (except for the betting offices, lotteries and totalisators) may only be performed in the four designated gambling zones located in Kaliningrad oblast ("Yantarnaya"), Altai Krai ("Siberian Coin"), Primorsky Krai ("Primorye"), and Krasnodar Krai ("Azov City").

In addition, the Internet was also included in the above mentioned changes in the scope of liability for the information and telecommunication networks, which automatically put the ban on online poker. Of course, these measures were primarily aimed at combating gambling establishments that hide under names such as "Internet Club 24/7", but if one really wants to fully implement them, the ramifications may be much more serious.

And so recently, there have appeared some first indications of online poker becoming restricted in Russia as well. This news came from Omsk, where the prosecutor's office ordered the local Internet service provider to block access for all of its subscribers to customers and websites providing services such as online poker or casino.

It all started with the standard procedure of checking the compliance of one of the ISPs operating in Omsk oblast with the current Russian legislation on regulation of gambling activities. The audit revealed the fact that the ISP does not block its subscribers’ access to specialized websites, where they can play real money poker on the Internet.

In his comments the district attorney of Octyabrskiy district of the city of Omsk reminded: “... the activity of online gambling resources, where customers can play online poker, casino or any other form of game of chance in the Russian Federation is forbidden”. The audit revealed that the local ISP did not ban its customers from participating in various kinds of gambling, namely, roulette, poker, casino and slot machines. The only thing that it took to get access to gambling was registration on one of the online casino websites and funding the account using credit cards and payment systems such as WebMoney.

In connection with the situation the district attorney of Octyabrskiy district of the city of Omsk filed the appeal with Kuibyshev Court to oblige the ISP to limit its subscribers’ access to the websites providing online gambling services in general and, in particular, online poker.

Kuibyshev Court ruled to fully satisfy the district attorney’s appeal to block access to the websites and subscribers providing illegal gambling services.

This ruling was the first fruits of online poker banning campaign in the Russian Federation outside the gaming zones. Who could be the next and whether Russia will face wave of protests of online poker players, and whether all foreign online poker rooms will start denying access to their resources for players from Russia – time will tell, though some of the answers to these questions are already apparent.

According to recent news, Entraction Poker network, a pretty big online poker game site, notified the players about the policy changes in the near future that the applications from poker players located in Turkey, Canada, Israel, Norway and Russia will no longer be accepted, as required by law in those countries. Entraction Poker announced that the implementation will start in the fall of 2011.

Background note: the network operates 112 online poker rooms and is positioned as an aggressive young network occupying high positions in global rankings.

Gaming Zones
"Siberian Coin"

The other day another tender for lease of 4 land properties in "Siberian Coin" was announced. The initial cost of lease of the properties ranged from 127 thousand to 213 thousand rubles per annum. The minimum amount of investment in construction of hotels and casinos indicated in the tender announcement ranged from 155.9 million to 613.7 million rubles. The projects should be implemented before December 2015.

Now let’s read carefully the "Agreement on the investment project execution" to be signed by the authorized agency and a potential resident of "Siberian Coin". The document provides for total control of one party and full compliance of the other. The agency is authorized to perform inspections at any stage of the project, to have unhindered access to the investment zone, and to request any documentation. Whereas the investor must submit various reports to the authorized body with varying frequency. In case of termination of the agreement due to the resident’s incompliance, a fine of 5% of the declared investment amount will be charged. In addition the authorized agency may recover the loss from the resident. However, the resident is entitled to apply the same measure. All disputes are suggested to be referred to court.

Well, let’s look at the court practice, all the more so because it is very interesting. In October, the Supreme Arbitration Court of Russia dismissed the claim of a Tatarstan company "PAK-Express" against the government. The lawsuit was related to the liquidation of the only operating gambling zone "Azov-City". "PAK-Express" invested 150 million rubles in it by opening a casino, while the total volume of private investments in this zone amounted to 500 million rubles. However, the authorities decided to liquidate Rostov part of "Azov-City". The court published the following summary: the state may, at its discretion, create or liquidate gambling zones – in the mean time it turned out that the provision about the ban on closing such facilities during the term of 10 years after their establishment was eliminated from the law on gambling zones. What’s more, there is no mechanism to recover the investors’ money from the state.

"Azov-City"

Investors suing the Ministry of Economic Development to recover 154 million rubles

End of the form

Investors of "Azov-City" filed six counterclaims to recover the money spent on construction in the former gambling zone from the Ministry of Economic Development to the Arbitration Court of the Rostov region considering the case of termination of lease agreements and return of land properties.

Background note: in June 2011 the Ministry of Economic Development of Rostov region filed a court claim for termination of leases and return of the land property ownership to the region.

In August the regional Arbitration Court suspended proceedings because of the claim from LLC "PAK-Express" of Tatarstan to render invalid the decision on liquidation of the gaming zone. The Supreme Arbitration Court dismissed the claim of "PAK-Express", and the Arbitration Court resumed proceedings.

As reported in the Arbitration Court of Rostov region, to date, six claims have been filed by three investors. A claim for over 2 million rubles was filed by sole proprietor Odintsov. Other four claims were filed by "PAK-Express" for a total of over 152 million rubles (the amount invested in the construction of Parus Casino). Another claim for 258 thousand rubles was filed by JSC "Nord West". The proceedings will take place in late November - early December.

UKRAINE

Ukraine’s gaming industry lives in hope of Euro 2012 during which allegedly they may allow casino operations. It is periodically suggested that it would be appropriate to designate special gaming zones in the country for the gambling establishments.

Thus, the new Prime Minister of the Autonomous Republic of Crimea Anatoliy Mogilev believes that gambling should be allowed in Crimea.

Not anywhere, of course, but in special zones. The peninsula is a place where people come to relax and have fun. This kind of gaming zones are, for example, in neighboring Belarus. And despite high taxes it will generate additional revenue for the Crimean budget", - said Mr. Mogilev.

Legalizing gambling will generate over UAH 3 billion for the state budget - expert
Prior to the ban on gambling there were about 13 thousand gaming establishments in Ukraine. Their annual profit amounted to around UAH 16 billion. According to preliminary estimates, in case of resuming casino operations, the state would receive over UAH 3 billion in yearly revenues.

However, the experts and casino owners don’t believe that there is any chance to legalize casinos for Euro 2012 (Ukraine).

Proposed bill envisaged restoration of legal status of gambling, though only in large luxury casinos and online casinos. A substantial increase in revenues was planned due to the license cost that would be set at UAH 40 million for 7 years and raising cost of patents and certificates, as well as higher taxes. However the initial version of the bill caused much controversy and a few months later the Ministry of Finance presented its vision of the future law.

The Ministry of Finance suggested to ban betting offices and slot machines and to locate casinos only in the resort cities of Ukraine on the premises of the premium hotels. However this concept displeased the experts and the casino owners. According to them, there’s no point in opening casinos under such conditions since they would be unprofitable.

For example, even in the most luxurious casinos 90% of revenues are generated by slot machine arcades. And the resort towns with poor infrastructure and low tourist flow are not interesting for potential casino players. Besides, the most popular Ukrainian resort area, the Crimean peninsula, has a major drawback due to seasonality. Therefore, throughout most of the year the casinos will stand idle.

Experts believe that in the event of approval of such a law only a few casinos may be open, however there's a big question mark over their profitability.

BELARUS

The Belarusian authorities canceled the results of the tender held in 2010 to select an investor for the establishment of a gambling monitoring center, where the American company GTECH was declared the winner.

As reported in November last year by the Deputy Minister of Sports and Tourism of Belarus Czeslaw Shulga, an American company GTECH (a major developer and provider of gaming technology) won the tender for the creation of the monitoring center for the gambling business in Belarus that was intended to function for at least 10 years and provide real-time complete and reliable information on all gambling establishments in the country to the relevant state authorities round-the-clock. It was assumed that the enterprise "BT Telecommunications" owned by businessman V. Peftiev who is a co-owner of the ISP “Dyelovaya Set’” and the sports-betting company (“5 of 36 Sports Lottery” and KENO) will act as the data transfer and collection operator for the monitoring center.

In February this year the government of Belarus by resolution #192 exempted GTECH and "BT Telecommunications" from paying customs duties and VAT on imported equipment and spare parts by approving the signing of investment agreements with these companies.

Nonetheless, according to the resolution #1477 dated November 3, 2011, the authorities announced a new tender to select an investor for the establishment of a gambling monitoring center. However, neither Ministry of Sport of Belarus, nor the government spokesmen gave any reasons for such a change, despite the fact that the authorities planned to capitalize on the stricter gambling regulation in Russia and quickly launch a kind of "Las Vegas" in Belarus under the framework of the Customs Union.

It is not excluded that this happened due to political reasons. As you know the European Union imposed sanctions against "BT Telecommunications", which made impossible any cooperation of GTECH (participating in the Belarusian project through its Cyprus affiliate) with the disgraced Peftiev’s company, thus undermining the project execution.

However, cancellation of the results of the first tender and announcement of a new one may be due to trivial errors of Belarusian bureaucrats that set too liberal conditions for the first tender. Despite the fact that the matter was about collection of the information essential for the Belarusian budget revenues, the authorities did not initially intend to participate in the establishment of the monitoring center.

Now the error has been fixed. The aforementioned resolution #1477 introduced a new provision in the tender rules providing for granting the state the blocking minority ownership (share) in the managing company of the established monitoring center.

"...gratuitous transfer of share in the authorized capital of the established monitoring center to the Republic of Belarus in an amount of at least 25 percent plus one share for the joint-stock company and at least 25 percent for other type of business entity" – the document says.

KYRGYZSTAN

Kyrgyz parliament passed a law banning gambling in the state. It should be noted that gambling was a major component of the economy since the gaming establishments, especially those located in recreation zones, attracted visitors not only from Kyrgyzstan, but also from Russia, Kazakhstan where gambling is officially banned.

Thus, according to the Central Asian Free Market Institute (CAFMI) that conducted a research on the impact of gambling on the socio-economic situation in Kyrgyzstan and the welfare of the population, 0.24% of Kyrgyzstan's annual GDP is attributed to the country’s gambling institutions. If to take into account tax payments and performance of the affiliates, the share in GDP is estimated at 0.7%.

According to CAFMI experts, the law banning gambling in Kyrgyzstan will have adverse effect in terms of loss of tax revenues for the state budget, job cuts, increased share of the shadow economy and other negative consequences.

It is estimated that 12.6 thousand people who will soon lose their jobs are directly and indirectly involved in the activities of the gambling establishments. In addition, there is an inflow of slightly less than 1.2 billion soms (about 25.4 million dollars) from gambling business entities into related branches of the economy.

MOLDOVA

Minister of Finance of Moldova Vyacheslav Netrutsa said that the authorities are to take control over gambling business. The country will set up a state-owned company "National Lottery of Moldova."
This state-owned company will control all lotteries, casinos and slot machines in the country. Existing facilities will operate until their licenses expire. According to the authorities, the state monopoly will make the industry more transparent and protect children from gambling. Besides it will provide additional revenue for the state treasury. About half of revenue from gambling will be used to support cultural and sports projects in the country.

Background note: Moldova has already had experience with the banning of casinos in the Gagauz autonomy in 2009. However less than a year later, the country's Supreme Court overturned it.

Executive director of the Institute for Strategic Studies and Reforms Galina Shelar argues that the measures concerning gambling business are being taken not only by the authorities in Moldova but in other CIS countries as well. According to her, the mayors of Moscow and St. Petersburg asked the president to remove all the loopholes in the law on lotteries in Russia because the gambling tycoons are using lotteries as a cover in order to operate outside the four designated zones existing for two years now.

A similar situation is observed in neighboring Kazakhstan: you can play only in designated zones. At the same time the desire for easy money hasn't become any less. According to some estimates, just in Almaty alone, the monthly turnover from illegal gambling business amounts to 70 million dollars. Whereas in Belarus roulette is still one of the main sources of the state budget revenues, where gambling tycoons have paid nearly two billion dollars in taxes for the last three months.

Changes are also pending soon in Armenia’s casino industry, where gambling business is legal. Thus, starting from January 2, 2013 it will be possible to open gambling establishments only in the cities of Tsakhkadzor, Jermuk and Sevan.
 
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