Odds Are Good for Foreign Casinos

When the state takes control of the gambling industry, foreigners will have an advantage over Russians thanks to Kremlin legislation that will make investments, well, a big gamble.

The legislation, expected to cruise through the State Duma next month, will empower the state to handpick companies to operate inside four zones where gambling will remain legal after 2009.

Russian companies, however, said Thursday that the legislation lacked clarity, meaning big risks that they could not afford to take.

Storm International, which operates the Super Slots chain and several casinos, including Moscow’s Shangri La and Jazz Town, has called off plans for an initial public offering. „On Tuesday, I had to say stop, because now we’ll have South Africans, Australians and Americans buying into mega complexes inside these zones,“ Storm CEO Michael Boettcher said.

Foreign gambling giants, many of which are listed, „can afford to throw money around,“ he said.

About USD 1 billion will come from South Africa-based Sun International, a gaming giant with a market capitalization of USD 3 billion that plans to help build the Parkland casino and entertainment complex in the Moscow region.

Sun International acknowledged that its investment plans were linked to the new legislation. „Our interest in Russia follows the decision by federal and regional authorities to introduce a new legislative and regulatory dispensation for the gambling industry,“ company CEO David Coutts-Trotter said in an e-mailed statement.

Construction on the $ 6 billion Parkland would begin after the legislation is passed. The project is a joint venture with the Belaya Dacha investment group.

Australia’s PBL is also eyeing Russia. PBL could not be immediately reached for comment Thursday.

The legislation aims to give the government full control of Russia’s rampant gambling industry, estimated to top USD 5.5 billion per year. While critics say it will encourage underground gambling dens, proponents insist it will stop the rampant spread of gambling.

The exact locations of the four zones — two in European Russia, and one in Siberia and the Far East — have not been announced.

Boris Belotserkovsky, shareholder of Ritzio, the country’s largest gambling operator, said the Las Vegas-style zones were a government pipe dream, as they will require billions of dollars to develop but the average gambler spends under 1,000 rubles (USD 37).

The zones are unlikely to become profitable in less than a decade, when higher incomes would ensure higher stakes, but the zones require the multibillion-dollar investments today, he said.

He said Ritzio also scrapped plans to go public because of the legislation, but declined to elaborate.

The Duma’s economic policy committee has yet to make its recommendations, which are needed before a vote can be scheduled. But legislators and gambling operators have little doubt that the current version of the bill will be signed into law this year.

Igor Dines, a Duma deputy with United Russia, said he expected it to be approved in November and the first provisions to come into effect in July. Among the provisions is a requirement for casinos to be no smaller than 800 square meters. Dines said only 10 percent of gambling companies — big and small — would remain in business.

Given the prevalence of gambling halls, a drop in establishments would be a welcome change, said Alexander Lebedev, the Duma deputy with United Russia. „I don’t consider [gambling] a business. It’s a way of extorting money from citizens, from the least socially protected groups,“ he said.

Lebedev submitted a bill earlier this year to ban gambling in residential areas. His proposal was dropped in favor of a less restrictive bill submitted by United Russia deputies Vladimir Medinsky and Valery Draganov and passed in the first of three readings in March.

On Wednesday, the Duma scrapped the bill and the more than 400 amendments proposed after its first reading.

United Russia is throwing its weight behind the Kremlin-backed bill.

But critics say it will lead to a repeat of what happened in Dagestan after gambling was outlawed there in April. A total of 140 underground gambling halls have sprung up in the region’s capital, Makhachkala, in place of the 125 gambling facilities that operated legally before the ban, said Yaroslav Tarasov, publisher of Mir Igr, a trade magazine. Tarasov was citing Dagestani police figures. Russia has no federal law on gambling, which is currently regulated by regional law.

„Let them go underground. That’s why we have the Interior Ministry,“ Lebedev said, adding that much of the business was already operating illegally.

Boettcher, of Storm International, defended the industry. „One bad Georgian doesn’t mean that all Georgians are bad, and one bad casino doesn’t mean that all casinos are bad,“ he said.

Police raided several Moscow and St. Petersburg casinos that they said had ties to Georgian organized crime earlier this month. The raids came amid heightened tensions between Moscow and Tbilisi.

The gaming industry contributes some 22 billion rubles (nearly USD 1 billion) per year in taxes to regional coffers, Dines said. Moscow and St. Petersburg now get the lion’s share of tax revenues from gambling businesses.

Moscow is a fierce critic of the bill. Valery Ivanov, deputy chief of the city’s commission on gambling, said the bill’s „every article, every line needs clarification.“ Criteria for allocating government land for gambling and holding tenders for businesses to open in the zones is unclear, he said.

Samoil Binder, who manages three casinos in Moscow, including Molodaya Gvardiya casino in the Molodyozhnaya hotel, agreed. „If I spend USD 100 million, I don’t have any certainty that I could recoup this money, even in part,“ he said.

Businesses would only get five-year licenses to operate inside the zones, not leaving them enough time to recoup their investments if their licenses were not renewed, said Binder, a deputy head of the Association for the Development of the Gaming Business.

One thing is a firm bet, he said. „A battle will start among governors“ for a chance to bring one of the four zones and its tax revenues into their regions, he said.