Russia Reshuffles Cards On Gaming Zones
Lorien Pilling, Head of Research, Global Betting and Gaming Consultants
It has been six years since legislation was passed in Russia which banned gambling – casinos and slot halls – across the majority of the country. On 1 July 2009 the legislation was implemented and all gaming facilities had to be closed. Since then, the Russian gaming market has not developed in a way that either operators or politicians might have expected.

Under the new regulations, gambling is now only allowed in four designated areas. The four initial areas were: Kaliningrad Oblast, Azov-City in Rostov Oblast, Altai Krai and Primorsky Krai. But since 2009 there have been petitions to move the location of some of these zones and some of these petitions have been successful.
One initially designated gambling region was the Azov City gambling zone in Rostov Oblast. The region borders the Ukraine and is situated along the Sea of Azov which borders with the Black Sea. Azov City was actually the first gambling zone to open a casino under the new regulation. 

The Oracle Casino opened in late January 2010 with 200 slot machines and 10 tables and was run by Royal Time. The local government funded utility infrastructure, while Royal Time built the casino at a cost of around US$10m. But despite the first casino already being open, the government considered moving the borders of this gambling zone to a new area in Anapa City on the Black Sea because of its better infrastructure and connectivity to the rest of the country. 
The local Krasnodor government argued that the more modern infrastructure in Anapa City would attract more visitors and more investors. The current zone of Krasnodor/Rostov Oblast is located far from densely populated areas and could never hope to attract as many visitors as Anapa City.
In December 2010 Russian President Dmitri Medvedev approved the move of the designated zone. The new area hopes to feature a shopping centre, restaurants, several hotels and a Las Vegas-style casino. The area is situated only five minutes from the airport and has a good connection with the railway network too. No definite deadlines have been set for the commencement of construction, but the project seems to be in the early phases of development.
Azov City gambling zone was finally closed down in April 2011 by Prime Minister Vladimir Putin. 
At the same time, he also annulled the 10-year period rule that prevented the government from abolishing gambling zones. Not surprisingly the closure sparked legal cases brought by firms who had been persuaded to invest in the original gambling zone. In January 2012 local media reported that various Azov City investors had filed six claims in the Arbitration Court of the Rostov region demanding full compensation for their failed gambling investment. Among them were: a claim for more than RUB 2 million by Odintsov, four claims for more than RUB 152 million by PAK-Express and one claim for RUB 258,000 by JSC Nord West. 
The proceedings will take place in late November 2012.
The moving of a gambling zone to an area with better infrastructure and links to the rest of Russia is an interesting move because one of the intentions of “banishing” gambling to remote zones was precisely to try and make it less accessible to Russian citizens. The initial idea was to allow gambling in deliberately remote areas to minimize the negative effects of gambling.
In light of these zonal and regulatory changes, the authorities in the Kaliningrad gambling zone also proposed that their zone should be moved closer to the city of Svetlogorsk where a well-established resort is located. 
The government of the Buryatia region has also proposed establishing a new gaming zone in its ‘Baykal shore’ tourist zone. The officials chiefly tout the proximity of the Chinese market as its main advantage. Russia’s eastern borders with China and proximity to Japan and South Korea make gambling zones in that region of particular interest.
The Primorsky Krai gambling zone, close to China and Japan, is still working developing its gambling plans. The vision is for four casinos with 1,000 slot machines, 45 gambling tables, 20 poker tables and 10 VIP tables in each casino, as well as 3 hotels with 600 rooms in each, shopping malls and other entertainment. 
In October 2011, the casino permit for the Primorsky Krai zone was granted to The First Eastern Gaming Company. The casino will be located 50 km from Vladivostok and will also include 12 villas, an exhibition gallery, as well as a yacht club on the nearby lake.
In the same region, Vladivostok has recently been labelled by Russia as a potential gambling hub and has formally commenced plans to attract foreign investors. The Integrated Entertainment Zone has the potential for around five large casino resorts with total of 12 casinos between the resorts.
The first phase of a three-phase development is expected to be completed by 2016 with the value of the total investment estimated at US$ 2 billion. 
In July 2012 the state-owned developer Nash Dom Primorye published the document with which it invited companies to bid on the project. Interestingly, the government offers effectively zero per cent taxes on GGY and favourable lease terms in the zone. The developers will be liable for creating jobs and developing the area’s tourism industry. The document outlines East Asia (South Korea, Japan, and China) as the principal target markets for the casino zone. Vladivostok is just two hours by plane from Seoul and Tokyo.
In August 2012, the government announced that seven companies will take part in the casino development in Primorye. One of these is First Eastern Gambling who will invest US$ 30 million in a casino & entertainment facility, while a Cypriot company Houmuoks Primorye, owned by the Noutelico Trading Limited will develop a US$ 200 million five-star hotel and casino complex. 
The Russian Direct Investment Fund led by Vnesheconombank has also agreed to fund the development of an integrated resort in Muraviinaya Bay.
These developments might make a success of the eastern gambling zone in the coming decade but, so far, the Russian gambling regulation has not been a success. A report by Russia’s Audit Chamber at the end of 2011 claimed that the designated gambling zones had failed to succeed. The study said that public funds have been squandered on the creation of the gambling zones. So far, the government has received only around RUB 100 million in tax revenues from the zones, just 7% of its development cost.
The new gambling zones have also failed to combat the problem of illegal gambling in Russia. 
Even before the new legislation, illegal gambling in Russia was a problem as many of the venues and machines in major cities were not licensed. The ban just made things worse as a portion of the operators continued working in illegal conditions. According to some unofficial data, around 30% of gambling operators in Moscow continued running their businesses, but of course less openly than before.
The Russian police anticipated the move by the operators and continue to battle illegal gambling. In December 2010 Moscow’s city government re-committed to enforcing the gambling ban by being more active in shutting down illegal operators. Authorities agreed on creating a new task force to act against underground casino operators. 
President Dmitry Medvedev is in favour of the task force and further believes all operators of gambling facilities should face prison time. The President wants the act of organising illegal casinos to be treated as a crime rather than as an administrative offence. He also wants the task of closing illegal operators to be a priority. In July 2011, the Russian State Duma approved President Medvedev’s proposed legislation which toughens punishments for illegal gambling, including gambling conducted over the Internet or mobile networks. The fines start at the equivalent of US$ 100 –US$ 170 for “common individuals”, US$1,000 -US$ 1,700 for officials and reach up to US$ 36,000 for “legal entities”. 
Criminal penalties which complement the fines range from three to six years in prison, with manual labour, but apply only in cases of large (over US$ 500,000) or very large (over US$ 2 million) profits from the illicit gambling activities. Also, confiscation of gambling equipment ensues in all cases.
In April 2012, the Russian Prosecutor General’s office reported that 28,000 gambling houses and 414 illegal casinos have been closed since the federal law banning gambling in Russia came into force. The prosecutor’s office also confiscated US$ 1.8 million of illegal gambling proceeds and 450,000 gambling machines and collected over US$ 4.5 million in fines. But corruption remains a big problem in battling illegal gambling in Russia. 
According to a BBC report, an anonymous source told the broadcaster that for US$ 400,000 a month a casino would be allowed to operate.
It is clear that the initial Russian gambling zones have not fulfilled their brief. This is not a surprise to the operators who were involved in the Russian market prior to 2009, who predicted the loss of legal jobs and the rise of underground gambling venues in major cities. Investors will be hoping that the second phase of the zones, including their relocation to areas of more appeal, will bring greater success and stability to the sector. 

This article first appeared in December 2012 edition of Casino Life magazine. GBGC regularly contributes to this sector-leading magazine. In the next edition look out for GBGC’s article on the casino development in the Philippines.