A tale of two gambling zones: How Crimea stacks up to Sochi

Published in: Latest Intelligence

President Vladimir Putin signed a law creating two new gambling zones in the Olympic City of Sochi and the newly annexed Crimea last month with the hope of boosting tourism revenue. But experts hold mixed views on the ultimate chance of success in either location.

At a specially organized conference in Yalta on August 22, Russian gaming experts convened to discuss the potential of Crimea. The consensus was that in the longer-term Crimea may be the more successful of the two new zones, though both face significant challenges.

Russia banned gambling in 2009 except for in designated areas across the country: in Kaliningrad near the Baltic Sea, in the Primorye and Altai Regions and Krasnodar territory. Out of four of them, only the Azov-City gambling complex on the border of the Krasnodar and Rostov regions has been completed.

In Sochi, casinos will be located near the Olympic Village. However, the law specifies that casinos can only be set up in Olympic facilities paid for by private investors.

It will work in favor of companies controlled by Russian billionaires Oleg Deripaska and Viktor Vekselberg, Russia’s Gazprom and the country’s largest lender Sberbank, who built many of the Olympic facilities.

The move to create the gambling zone in Sochi came from a push from Sberbank head German Gref. Initially, Putin opposed the initiative, saying it will discourage families from visiting, but the situation changed after the annexation of Crimea.

Sochi is also scheduled to host the 2018 World Cup and gambling will add to the offerings available to the expected wave of tourists arriving for the games.

Russia’s Deputy Prime Minister Dmitriy Kozak recently said the gambling zone in Sochi already has many of the necessary facilities and may be operational as early as next May/June, in time for the next holiday season.

He also said that “the projected gaming zone in the [neighboring] city of Anaya will certainly be closed” and that the same fate may befall the only functioning gaming zone Azov-City, but a final decision has not been taken.

According to the head of Sochi, Anatoliy Pakhomov, 49 new hotels (primarily four- and five-star) were built for the Olympics, some of which are controlled by foreign hotel operators, such as Fine Hotels & Resorts, Accor Hotels and Marriott International.

However, one of the problems developers may face is that these hotels were not specifically designed for gamblers, the president of the Multitur company Aleksey Visokanov told Russian privately-owned news agency Interfax.

Despite the shortcomings, in the shorter term Sochi is likely to prove more popular, at least to overseas visitors, due to political unrest in Crimea.

“Why to invest in Crimea, when there will be no regular influx of tourists to the peninsula until the bridge (over the Kerch Strait – the only first direct road connection between Russia and Crimea) is built? A big number of foreign players will certainly not come to Crimea, but may come to Sochi,” Visokanov added.

Oleg Zhuravskiy, President of the First Self-Regulating Bookmakers Organization, also predicts fast development of the Sochi gaming zone, within three to five years, because the infrastructure is already in place.

In 2013, about 4 million tourists visited Sochi, with that number expected to have risen 30 percent in 2014 due to visitors coming to the Olympics. It’s forecast to drop off again next year.

However, in the longer-term, Marina Smirnova, head of hotel industry and tourism at Cushman & Wakefield, sees greater potential for developing the Crimean zone. The region currently lacks good quality hotels and new facilities can be specifically tailored to create a purpose-built gambling zone.

Under the new law, the Crimean authorities were empowered to freely choose locations for the gambling zone on the peninsula.

Crimean leaders have recently announced that they do not plan to spread gambling facilities across the peninsula, but rather establish a zone in the resort area of Big Yalta, which stretches 70 km along the Black Sea shore.

On 30 July, acting head of Crimea Sergey Aksyonov told the Crimean TV and radio broadcaster Krim that experts from Macau, Las Vegas and Monaco had come to the peninsula to assess the opportunities in the region and had identified Big Yalta as the best location.

Vitaliy Nakhlupin, the chairman of the permanent commission on budgetary and financial policy of the Crimean State Council, has also supported Big Yalta as most key gaming facilities were situated there before Ukraine banned gambling in 2009.

At that time, there were 283 gaming houses in the area.

Meanwhile, some local hoteliers said it may be more viable to locate casinos within the hotels than to set up a special gambling zone, as the current tensions may make it difficult to attract the required investment.

Development Director of the Yalta-Intourist hotel Stanislav Mazhayki said at the recent Gaming Congress that the best way to go would be to legalize casinos in five-star hotels.

Head of JSC Shambala and co-owner of the namesake casino in Azov-City, Maksim Smolentsev believes that the gambling zone in Crimea won’t be open to visitors for at least three years at the earliest if it’s built from scratch.

There will need to be a city development plan and a concept, the tender for investors and, finally, actual construction.

Smolentsev advised the local authorities not to expect an influx of wealthy tourists, because most of the gamblers in the Russian gaming zones are residents of the neighboring towns with modest income.

But despite pessimistic advice, Moscow is still hoping to boost the local economies with this legislation, as well as to attract more tourists to the resorts and create new jobs.

Experts told Russian privately-owned news agency ITAR TASS that the appearance of casinos in Crimea could inflate the regional budget by up to $750 million annually.

Earlier the aide to the acting head of Crimea, Rustam Temirgaliyev, said that several investors, including some from China, have already expressed an interest in becoming involved, though he gave no names.

Vitaliy Nakhlupin agreed, telling the Crimean Gaming Congress that authorities will attract a world-class investor, with relevant experience. There will be a “transparent tender” and in return for an exclusive license, the winner will take on sole responsibility for the financing.

Maskim Bayev, director of bookmaker "OneBett" said that the economies are growing faster than the Russian average in the designated zones. But he said the regions are much more likely to attract investment from locals and surrounding regions than foreigners given the political crisis.  

Crimea's tourist revenue is expected to fall sharply this summer as a result of the unrest, with the majority of tourists to the region traditionally coming from the rest of Ukraine.

Out of Crimea’s 5.9 million tourists last year, Ukrainians accounted for 3 million of them. This summer this figure sank to 300,000 tourists following the annexation of the peninsula.

So far in 2014, about 2 million tourists have visited the region, though those statistics don’t include the last few weeks of August, according to tourism officials. Around 80 percent of those visitors have been Russian.