Ukrainian Gambling on the Tight Rope (Outlook before the law was passed)

Everyone knows at least a bit about the rollercoaster drama that the Ukrainian gambling scene has been for the past 3 decades. Before the 2009 gaming ban, the country was a typical eastern European state as far as the gambling industry was concerned. Riddled with mafia presence and sometimes even violence. I very much remember receiving news of an old colleague of mine shot in the cash desk of a casino in Kiev. The government simply could not control it, so just like in Russia they decided to shut the whole industry down. A fire killing 9 people in the casino of the provincial Dnepropetrovsk city was used as an excuse for the move. Since then there has been a complete ban on all kinds of gambling in the country except to state licensed lotteries.

On paper that is. All over the country under the guise of selling lottery tickets as a subsidiary for the state lottery agency thousands of points of sales were offering slot games, online sports betting and other gambling activities while the government turned a blind eye. For ten years it was perfectly all right to gamble in the Ukraine despite a law in effect banning all gambling. This obviously can only be done with the open cooperation of government agencies that are supposed to uphold the law in effect. This is what you call state corruption.

When last year president Zelenskyi keeping his election promise on liberalizing the economy reinvigorated the idea of bringing back a regulated gambling industry into existence in his country, lots of heads were turned. There have been attempts at regulating the industry during the period of the ban, but all these died a very fast death as the status quo of running huge gambling operations without practically paying any taxes would have hurt some strong interests.

These very interests were still at force when parliament was unable to pass the gambling bill in December. As of now there are 6 different versions of the bill and this number is expected to increase in the near future as different lobby groups push for versions that favor their own interests. Have to give kudos to the president for taking a decisive move and shutting down the already illegal operations all over the country aiming at speeding up the law-making process.

Despite this move showing a strong handed leader adamant on reforming his country, the fact that banned gambling activities were openly tolerated for a decade doesn’t shine too good a light on the country’s legal system, business environment and give too much confidence to foreign investors to enter the market. One of the aims of the new legislation is openly creating a market with several different players including major international casino companies among them.

As we stand now, the several different versions of the bill agree in a few areas:

• Licensing encompassing most important gambling activities (land based and online casinos, slot halls, poker and lottery)
• Short licensing periods of not longer than five years
• High yearly license fees coupled with hefty per product fees and or a percentage of the GGR as gaming taxation
• Limited number of licenses in each category
• Casinos allowed in 5 star hotels only

The high licensing fee coupled with short granting periods will certainly act as a deterrent to foreign companies. If a business can’t possibly show ROI due to a short recouping period and high costs of running the business, thus thin bottom lines, investing becomes impossible. Local players on the other hand, who have the comfort of solid government connections, influence on law makers and a long list of other tricks to making business easier and more stable, will have more certainty in being able to renew their licenses and prolong the ROI period. When you are confident that you have 15 or 20 years to recoup your money, investing seriously in infrastructure makes more sense all of a sudden. The government’s fear to grant long term licenses will actually be the downfall of the whole effort to revamp the industry in the Ukraine and keep major international players out, while also discouraging any major investment into the sector.

The other major barrier might be the government’s track record and capacity to protect its investors. When a business pays heavily for an online license for example, but the authorities make no effort or are incapable of stopping illegal sites operating on the same market without the burden of paying taxes and playing by the rules, the competitive disadvantage is simply too big to survive. The same may go for the brick and mortar operators if they are not protected from illegal competition.

There are many examples for legal businesses suffering from illegal competition all over the world. Chile comes to mind, where they created a solid casino gaming law in 2004 allowing legal land-based gambling in these 24 casinos only. At the same time and till recently they did nothing against illegal street market operators offering home made slot machines in thousands of locations in mostly popular neighborhoods. It was estimated to have three times more illegal slots on the streets than the ones that were paying taxes and operating legally in the casinos. It took these licensed entities over a decade to close legal loopholes and shut down these competing operations.

With this setup the gambling landscape will look very much the same as before the ban of 2009. Small private operators, that will eventually merge into a few major local oligarchic operators.

The country is at a crossroads and the kind of legislation they pass will determine not just what kind of a gambling culture will from now on flourish in the Ukraine but in y belief whether or not the country will be ever able to shake its shady reputation and attract foreign investment on a different scale, whether or not their attempt to establish closer ties with the European Union will be successful. Gambling is a funny animal. While gambling taxation represents relatively low volumes to most governments, its weight in judging a country’s standing and reputation is certainly overrepresented. It’s an issue a bit like the cleanliness of the bathrooms in a restaurant