 Rising Stakes By John Marone |
As Ukraine's economy began to pick up a few years back, the country witnessed an increase in consumer spending on clothes, cars, real estate and entertainment. A decade earlier, seedy strip bars, overpriced restaurants and intimidating casinos were the entertainment of choice for the new elite, providing critics of the free market with plenty of ammunition to taunt the have-nots of post socialist society. Now in major urban areas, nightclubs are filled with ordinary young people rather than gangsters, while restaurants can be found to suit just about any taste and pocket book. And the casinos?
Like bowling alleys and multi-screen cinemas, casinos multiplied along with profits from the nation's prosperous export business. Wealthy businessmen of all shades presumably sought a place to invest their earnings, while a rising middle class was starting to gain an awareness of the term 'disposable income'. Following the entertainment sector's overall trend, gambling facilities are now even more likely to share floor space with other venues that attract people looking to spend their money on fun. If you can't afford high-stakes poker - no worries - slot machine halls are now as ubiquitous as newspaper stands.
The opportunity to gamble is made possible by the opportunity to set up gambling operations. "There is no problem in opening a casino in Kyiv today," said Nikolay Povoroznik, deputy head of the city's directorate for licensing and issues of registration. "The only thing needed is your good intentions." But according to him, investors in casinos were too optimistic in their initial estimates, many assuming that profits were guaranteed. "Today the market is full, and growth has already halted. Smaller ones are closing, while larger groups are moving in."
Joss Casino is part of one of Ukraine's larger and more experienced gaming companies - the Split Group. According to Maksim Sobkovich, the chief manager at Joss, "growth in the number of casinos hasn't corresponded to the size of the consumer market ... At issue is a very limited segment of consumers."
But the increase in competition isn't the primary concern of Sobkovich or other gambling-industry people in Ukraine.
Although it only costs around $60.00 to obtain a five-year gambling license in Kyiv, the owners of casinos, slot machines and bookmaking offices also have to pay a permit fee on every table, one-armed bandit and betting bureau that they operate. The fee is collected by the State Tax Administration, while it is city governments that charge for the licenses. The problem, according to people in the business, is that the fees keep going up.
Moreover, according to Sergey Tretyakov, president of the Ukrainian Association of Operators of the Gambling Business, rising fees has led to a drop in the issuance of permits and an increase in illegal operations. "This obviously pushes everyone into the shadows," he said, "according to our estimates, 50% of the gambling business is in the shadows."
In response, individual gambling operations have invented a wide array of 'tricks' to help alleviate their tax burden. Many of these involve a liberal interpretation of legislation, which currently only scratches the surface of the sector's needs. "There isn't even a definition of what a gambling table is," said Sobkovich. So some casinos will block together five different tables (roulette, poker, etc.) to pay only one permit fee. "This just leads to corruption," said Tretyakov, as the legal confusion provides fertile ground for venal tax inspectors, who could be given a wide berth in interpreting gaming regulations.
Another problem for gaming houses is that they have again been made responsible for paying taxes on customers' wins. The headaches and room for cheating that this regulation causes require no further discussion; however, the law that introduced the new regulation does.
Scheduled to take effect in January, it was introduced by the now former Tymoshenko government as part of a whole package of amendments to this year's budget, which were passed in March. As with producers of tobacco and alcoholic beverages, the gambling industry is fair game for unfair taxes.
In fact, the legislative amendments not only change the rules but raise the stakes. As of January, a casino owner, for example, will need the $60-license plus an additional 30,000-euro license to use it. "I think that there is only one goal of this law - to bring in more serious (state) revenues," Sobkovich said. Worst of all, he adds, it only creates more confusion. For example, why is payment of the second license denominated in euros? What state body will be responsible for collecting the fee? "The law doesn't hurt us but it doesn't solve any problems."
Tretyakov agrees. "Thirty thousand euros doesn't scare anyone," he said. The problem is providing the industry with clear rules and thus protection from corrupt officials. Like Sobkovich, he points to flaws in the new amendments "What documents are needed ... When does the new fee have to be paid - at the beginning or end of the year?"
Povoroznik acknowledges that much still needs to be done to better define the rules of the gambling industry. "Unfortunately there is still no special legislation in this area," he said. What does exist on the books was written several years ago and primarily applies to business regulation in general. It's very basic and straightforward, he argues, but to make it more specific is going to take time.
People like Tretyakov, aren't impressed by the authorities' most recent efforts. The amendments have introduced new terms like "gambling" (instead of just "gaming"), in addition to the second permit and euro fee. The upshot of this is that slot-machine operators, whose interests Tretyakov's association defends, are now subject to the same licensing rules as casinos.
Povoroznik said slot machines used to be considered gambling until Tretyakov and others got the law changed a few years back. Now things have come around full circle. In the interim, one-armed bandits have spread across the city of Kyiv like fast food restaurants. "They put themselves in the same category as a donut shop, setting up slot machines right across from schools," said the municipal official, whose office is only one of 800 that operate across the country. To date there is no single body that regulates the industry. Instead people like Povoroznik, as well as the tax police, confront gambling enterprises on the local level.
This hardly seems appropriate for such a lucrative business. Tretyakov couldn't quote the industry's national turnover, but he said gambling provides employment for around 40,000 Ukrainians and "one percent of state budget revenues." Half of this one percent comes from slot machines.
Citing figures obtained from the State Tax Administration, the Ukrainian newspaper Biznes reported that there were 2,743 gambling enterprises registered across the country in 2004: 195 casinos, 402 bookmakers offices, 68 lotteries, 2000 slot machine operators and 78 others like bingo, etc.
Now, gambling companies don't just want to expand but "to create a separate economic sector," said Tretyakov. And to do so they require stable licensing fees and transparency. To those inclined to see gambling as a pernicious vice, these words probably seem like crocodile tears. Isn't it casinos that launder all the dirty money made by organized crime?
Tretyakov is dismissive. "It's a lot easier to open an (illegal currency) conversion center ... Casinos get pointed out because they are always in clear view." In short, his argument goes, one can launder money through lots of establishments, including restaurants, construction companies and offshore banks. Moreover,
it's the gambling industry that is demanding transparency.
On the other hand, "it's very difficult to say how much a casino makes because they often operate alongside bars and restaurants," said Povoroznik. One thing is for sure - the start-up costs are high. The premises themselves are usually luxurious, equipment has to be imported, staff trained and lots of cash on hand.
But in a country where much of the economy at large is openly acknowledged to be in the shadows, why pick on casinos and bookmakers? In the middle of last month, Ukrainian media reported that the city of Kyiv had prohibited the placement of slot machines in the subway.
Sobkovich said he supports some regulation of the industry. "Anyone looking to gamble will find a place, but it shouldn't be right near his home." "There are various gradations of slot machine operators," he explains, and not all of them try to seduce kids.
As for casinos, the market continues to get more sophisticated, and people expect more freebees like complementary food and drinks, raffles and stage shows. The core client, of course, remains the regular gambler. We give people a dose of adrenaline in comfortable surroundings," said Sobkovich. In this sense, Ukrainian gambling is no different than anywhere else.
But it wasn't always that way, Sobkovich adds. The market has evolved along with the players themselves. "If you look at the business 10 years ago, they were pretty incompetent, with lots of money. They played on luck." Now gamblers may not be so wealthy but are usually experienced and highly knowledgeable of their game. A lot has changed since Soviet times, when card games were organized in people's flats or at summer resorts. Now you can place your bet on almost any street corner, which is probably why the government and the gambling establishments are facing off over who gets the bigger cut.
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More in the section:
A Rich, Cursed Land
Read also previous issue' articles:
Are Ukraine's Political Habits Unique?
Is Ukraine's Economic Growth Speculation-led?
Ukraine is Drifting to the West - Slowly but Surely
The Unfinished Orange Revolution?
Vacuums, Reforms and the Need to Regain the Initiative
Pirates of the 21st century
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