Q&A

If there is any sector that demonstrates the difficulties of operating in the Russian property market, it is probably the gaming industry. Though regulated by the government, the sector is still subject to the vagaries of Russian president Vladimir Putin. In an effort to do away with the country's ubiquitous small gaming halls, a recently introduced law says all casinos currently in operation must shut down by June 2009; going forward, casinos will only be allowed in four regional locations. Clive Tilley, the British founder of international gaming management firm Tilley Entertainment, is one of the few foreigners with experience of running a casino in Russia. Here, he discusses his plans to roll out US-style hotel casino complexes in Russia, the market's reaction to the new regulations and the difficulty of finding quality real estate for his projects.

How did you enter the casino market in Moscow?
I went to Moscow to set up a distribution network of slot machines for a manufacturer about five years ago at a time when I was already a casino operator, particularly in Latin America. In one of the transactions, I found this hotel with a tremendously large unused space. I met with the hotel owner, who also had the idea of putting a casino in there. The property is called the Korston. It is on the southern side of the city next to a university and also has a cinema, convention center, mall, business center and department store.

What is the overall strategy?
Having seen the growth of the casino industry, I knew there was growth in the market that hasn't been seen before—that is, for the introduction of the larger Western or US-style gaming complexes, rather than traditional British or European small-club gaming. The idea is to create a branded hotel and entertainment complex with Korston in strategic Russian cities, basically owned and operated by the Russian partner, though with senior management we have brought in.

How is the gaming industry in Russia developing?
The industry has been growing over the last few years and has a lot more potential for growth, particularly in the larger entertainment-driven casinos instead of than smaller, fragmented ad-hoc operations. However, very recently the government has created new legislation that requires all casinos to close by June 2009; it has designated four new regions where casinos can be developed. I think what the government is trying to do is control and regulate a business that got out of control.

How has the market reacted?
At the moment, nobody is leading the charge to go to these places [Altai, Primorsk, Kaliningrad and an area between the Rostov and Krasnodar regions]. You need certain critical mass, a local market and a lot of infrastructure to bring people in. Regions like Rostov are difficult regions because they don't have a feeder market. We are contemplating projects involving investment of several hundreds of millions of dollars, and you need all the infrastructure in place. This is the dilemma the industry faces today. There is potentially life for casino hotels in Russia but it is going to be in a different situation compared to what we know today.

What have been the other challenges?
Real estate. You cannot find locations: Scarcity and cost are the issues. The Moscow property was a change of use and retro-fit, but the new sites—we have about six—are new-build projects. They are on greenfield city locations. Having a Russian partner is the key. The principal shareholder of Korston, Anatoliy Kuznetsov, is well-connected to key players. He was quite visionary and started land-banking when land was a lot less expensive. We are fortunate in that these locations are well-situated, but we now have to consider how to modify the product if we are not going to be allowed to include casino gaming as part of the product. Also, doing business in Russia is more complicated. There are more regulatory issues. The biggest challenge is to understand how to operate within the legal framework because it is not always clear. Government tax inspectors come along regularly and check your operation. You find out pretty quickly where the issues are, if there are any.

Have you experienced interference from other groups?
No. You hear a lot of stories, but in my case I was fortunate. By the time I went to the market, things were a lot different.

Why have international gaming companies not moved in?
They were previously concerned about the lack of regulations, seeing as they are nearly all public companies. The hotel chains have done okay, though.

With the recent law change, have you given up on Russia?
Not at all. We believe in the market a lot. The profile is good for any service-oriented business. We have already established a product so we are hoping that we may be able to communicate and collaborate with the government to find a solution. One phase of the law has effectively closed all of the smaller operations, which is going to spark consolidation. And that is going to help.