In the 1979 Russian film Stalker, three men make a long and hazardous journey to reach a depopulated wilderness called “The Zone” in search of an epiphany—a spiritual jackpot, if you will. Thirty years later, Russians who seek jackpots of a more tangible nature will have to place any future bets in a quartet of “zones.” Trouble is, right now you won’t find any casinos there, just what one reporter described as “a couple of bricks and a cow.”
Thanks to the Russian Gambling Bill, which took effect at 11 p.m. on June 30, most forms of wagering are now illegal in 38 Russian provinces. The law, a pet project of Kremlin strongman Vladimir Putin, passed in late 2006, and the formal order to close all casinos and slot parlors was signed by President Dmitri Medvedev last May 14. Even then, some casino owners continued to assume they would be reprieved, while others began winding down operations. The pessimists were proven right. The plug was pulled—under heavy police scrutiny—right on schedule, “shutting down every last legal casino and slot parlor across the land,” as the New York Times put it.
That ended a seven-year boom in the Russian casino industry, a period in which a gaming license could be had for less than the equivalent of $50. “By 2006, Moscow had 70 casinos with table games, while nearly 2,000 slot locations were on street corners, at all subway stops and in residential complexes. St. Petersburg had 21 casinos and 570 slot machine locations. There were estimates that 250,000 slot machines operated nationwide,” writes University of Nevada-Las Vegas Professor of Public Administration William Thompson.
Crushed Hopes
As the end drew nigh, it was thought that at least a few casinos could survive as poker clubs, eking out a profit from the “rake.” After all, poker had been registered as a sport back in June 2007. Those hopes came crashing down on July 17, when poker’s exemption was revoked.
That was the last nail in the coffin for operators like Storm International, which had already spent $32 million shuttering most of its five Moscow casinos and 23 slot houses but had planned to keep its Casino Shangri La and Jazz Town open as poker rooms while attempting to sell or lease its other properties.
Some thought sports betting might take up the slack, but legislation currently before the Duma would require bookies to have $18.5 million in operating capital—a sixfold increase. Video lottery play has also been suggested as a panacea, but two consultants are skeptical. “I don’t know that a game structured like a Class II game is currently legal,” opines Innovation Group Vice President of Strategic Consulting Matt Landry.
Fine Point Group Managing Director Randall Fine adds, “VLTs are just slot machines. If that were done, that’s just a re-legalization of gambling.” Landry doesn’t think slot players will gravitate to the betting windows, either.
Russia’s gambling barons (many of whom are expatriate Britons) are now mandated to pull up stakes and relocate to one or more of the following fringes of the vast country:
• Azov City, on the Rostov/Krasnodar border.
• The predominantly agricultural Altai Krai, just north of Kazakhstan.
• Sparsely populated Russky Island, near Vladivostok.
• Kaliningrad, northeast of Gdansk, Poland.
Russky Island, a nine-hour flight from Moscow, owns particular notoriety in Russia after members of its military garrison starved to death there in 1992, having been abandoned by Moscow. In 2007, the Guardian queried a “recent visitor [who] reported finding scrawny cows munching rubbish, squat tower blocks of blistered cement, an erratic ferry service and wheel-less Ladas rusting in the salty air.”
To get all four zones up and running requires an infrastructure investment estimated at $23 billion, something not likely to reach fruition anytime soon. “It’s only realistic to speak about [a timeline of] four to five years,” the Federal Agency for the Management of Special Economic Zones’ Andrei Alpatov told RIA Novosti.
Game Over
Landry has examined both the Krasnodar and Vladivostok areas, and he concludes that “everybody’s taking their marbles and going home.” Indeed, Storm has already opened a new X.O. Casino in Kyrgyzstan and has announced a casino project in Byelorussia. (In a particularly strange development, on August 5, RIA Novosti quoted Kyrgyzstan’s ambassador to Russia as saying Moscow’s government would help build a gambling-zone airport … in Kyrgyzstan.)
Storm is spending several million dollars to convert the Cleopatra casino in Yerevan, Armenia, into a Shangri La-branded property and is looking for additional opportunities in Bulgaria, Romania, Tajikstan, Kurdestan and even Afghanistan. Rival operator Korston Group quickly set up shop in Montenegro. “The operators that did consider investments [in the zones] were also concerned about infrastructure,” as well as the lack of population density, Landry says.
Having decided the economics of the new regime wouldn’t work, “no one tried,” says Fine, whose company spent much of 2005–06 attempting to help Storm “develop Western-style casino marketing capabilities.” The onus is on the government, he says, because “casinos don’t build airports and they don’t build roads.” Of Russian casino operators’ passivity, he explains, “The general belief was that the law would never come to pass … so they would just make every dollar they could and then close.”
Harrah’s in a Tent?
One prominent Western operator, however, ventured where old Russian hands feared to tread. Harrah’s Entertainment held “meetings and conversations with the Krasnodar government” about opening a casino in Azov City, according to company spokesman Gary Thompson; however, he added, “although we believe the region has long-term possibilities, we have no plans to proceed with any projects at this time.”
Bloomberg News reported in June that Harrah’s was contemplating a $50 million–$100 casino/hotel/conference complex in collaboration with Asati, a manufacturer of sprung structures. “According to the director, [Alex] Kogan, the inflatable structure can be a casino and a water park and the congress hall,” added InvestRussia.org. (Kogan was unavailable for comment.)
Thompson explains that Harrah’s overtures were part of a strategy of exploring any new gambling jurisdiction that opens, but a meltdown in the global credit market—and its effect on consumer spending—sent the project into limbo. “We still think that area has a lot of potential at the appropriate time and the appropriate deal structure,” he said.
Ramping up such a resort would be “highly dependent on who the operator is,” Landry offers.
“If it had the players and you’re operating in Moscow,” he explains, one or two charter flights to Krasnodar would be viable, particularly for weekend trips. However, he notes that the area has limited gasoline, electrical power and water, and no rail access. “It’s just a lot of farmland,” he explains, with the nearest airport 45 minutes away. Fine doesn’t even think Harrah’s was serious, citing the “extraordinary” licensing difficulties it would face.
Distance aside, Vladivostok would be even more problematic, according to Landry: “They have a very small base of leisure tourists as it stands.” He describes the airport as in disrepair and controlled by a single airline. One potential casino site could only be reached by a (nonexistent) bridge. “In terms of utilities, all that has to be brought in.”
Even Russian Gambling Bill co-author Vladimir Medinsky admits he’s unsure that the chosen zones are the right ones. “Who will come [to Altai]? Maybe from Mongolia,” he joked, appearing on Russia Today.
“There’s the distinct possibility that some of those zones don’t end up with any casinos,” agrees Fine. “You can build a casino anywhere in Nevada. That doesn’t mean there’s a casino in every square mile of the state.” Noting Altai’s proximity to China, he says that success would also hinge on easing Russia’s onerous visa application process (lots and lots of waiting in lines) to make it “easy or at least appealing” to foreign players.
Low Expectations
Both Fine and Landry are skeptical of reports that placed Russia’s annual casino take between $6 billion and $7 billion. (Macao’s is $13.8 billion annually, and the Las Vegas Strip alone pulled in $6.7 billion in fiscal year 2007.) Even should the new system come to pass, Landry estimates it would achieve only a fraction of $7 billion, or as Fine puts it, “I don’t think you can assume that disperses to these places that are very far away.”
That points to the overarching problem: Turning a convenience-driven customer base into a destination-market one, amenable to vacationing in the furthest reaches of Russia. Not many Muscovites will schlep off to Siberia, Fine argues, as opposed to their former habit of stopping by a VIP room for a bit of a flutter on the way home from work. The casino culture “was much more of a salon style,” with selective admission, Landry recalls, 90–95 percent dependent on high-end players.
One “whale” could make up for long dead stretches, while operations that catered to the $50–$500 player, like Korston’s Casino de Paris, were anomalies. “In America, casinos have lots of people worth relatively little,” Fine elaborates. In Russia, “the average worth of your customer is much higher.” In various TV interviews, Storm CEO Michael Boettcher estimated his regular customer base in Moscow at no more than 200,000 players.
Landry likens the myriad slot parlors to tribal casinos in Oklahoma: “a gas station or convenience store type of facility.” Even the large casinos were tiny by U.S. standards, “like one of those little casinos in Black Hawk, Colo.” as Fine puts it, costing no more than $15 million apiece.
The most hope anyone dares hold out is that the four-zone scheme will be rethought. Medinsky proposes bunching casinos on Moscow’s Golden Island, which is near the Kremlin and currently open for development. Weighing the cost to ramp up all four zones, Landry thinks it would best to settle upon just one. Either way, the answer to the question, “Will the Russian casino come back?” translates as, “Not anytime soon, comrade.”
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