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. Last Updated: 07/27/2016

Gambling Banished, But Not Defeated

MTA man passing an electronic lottery promising wins of up to 1 million rubles ($34,000) in the lobby of a Kopeika.

Customers at a discount grocery store in northern Moscow have been gathering around the newest automated terminal there, a bright-green machine with a flashing touch-screen and a slot for “prizes.”

Emblazoned with the words “Charity Lottery,” the terminal accepts rubles and instantly rewards the lucky in kind. The proceeds go to an unspecified charity fund and the machine is licensed by a local branch of the tax service, according to barely visible print at the bottom of the screen.

Not far away, dozens of similar terminals crowd the smoke-filled parlor of a former slot machine hall near Savyolovsky Station. The front door is sealed, but the outline of the establishment’s former name — Zolotoi Arbuz, or the Golden Watermelon — is still faintly visible above a side entrance.

From the street, you can see the guards and waitresses, the metal detectors, and the dead-eyed clientele, all of which bear a striking resemblance to the notorious slot halls that provoked public resentment and nationwide restrictions on gambling.

Four months after the federal government banished most gambling to four special zones far from Moscow, the industry is thriving in the open under a legal loophole that allows lotteries — which must donate 10 percent of their proceeds to charity — to operate via electronic terminals.

Traditionally, lotteries involved ­paper tickets and a delay before finding out whether a ticket won or lost. Now, entire “lottery clubs” are appearing, which industry sources and government officials say are often operating well outside the law. Federal and regional authorities have complained that industry must be better regulated and policed, but legislative efforts have been faltering and law enforcement — spotty.

Alla, a woman in her 50s who did not want to give her surname, said she drops by the grocery store, a Kopeika on 2nd Streletsky Pereulok, near her home, to gamble.

Most recently, she came away 4,000 rubles ($140) lighter.

“I don’t gamble often, but I always lose a lot. Last week, I lost 4,500 rubles at a time and won only 500 rubles. It’s a hobby for me. I play the same game, Give Five, almost every time,” she said while inserting 100-ruble and 500-ruble banknotes into the lottery terminal.

Alla said she’s sure the terminal has nothing to do with charity. “It’s here just for gambling because the gambling halls have been closed.”

Banning the Bandit

Outlawed in Soviet times, gambling burst into the open in the early 1990s. Massive casinos opened on Tverskaya and the Arbat, dingy slots halls were never more than a walk away, and single machines were put in stores, residential buildings and underground passages.

By 2008, gambling had become a $3.6 billion industry in Russia, according to PricewaterhouseCoopers. The audit company expects that figure to fall to $1.5 billion in 2010.

The slot machines — dubbed “one-armed bandits” for their crank mechanism to begin a game — were particularly reviled for targeting people who could ill afford to lose. But the anti-gambling movement, long backed by religious and community leaders, only started to see political success in 2006.

During a meeting with lawmakers that October, then-President Vladimir Putin likened gambling to alcoholism, because it “inflicts serious moral and sometimes financial harm.” Duma Speaker Boris Gryzlov said lawmakers would consider a bill to ban gambling in all but four zones: two in European Russia, one in Siberia and one in the Far East.

They passed the changes quickly and almost unanimously, limiting gambling to the zones from July 1, 2009. Putin signed the law in December 2006.

Few believed then that the plan would eradicate the notoriously influential industry. Politicians called the changes a ploy ahead of the 2007 State Duma vote. Major casinos balked at relocating to undeveloped zones, saying they would rather move abroad.

But the government refused to back down, despite warnings earlier this year that the ban would leave thousands unemployed in the midst of the economic crisis and cost billions of dollars in tax revenue. President Dmitry Medvedev warned the Federal Tax Service in May that “there will be no revisions, no pushing back — despite the lobbying efforts of various businesses.”

And on the night of June 30, Moscow authorities swept through the city to close 525 gambling establishments, including 29 casinos, by midnight. A week later, Deputy Mayor Sergei Baidakov, who oversaw the capital’s anti-gambling effort, said 95 percent of the facilities had removed their equipment.

The government soon removed poker from a list of registered sports after casinos began rebranding as “competitive poker clubs.” The state also toughened regulations on bookmakers, allowing only state and municipal horse racetracks to run on-site bookies.

The Charity Machine

The rapid proliferation of electronic lottery terminals, however, has been a harder nut to crack. In the Soviet Union, only the state was allowed to organize lotteries, with the first and most popular, Sportloto, opened in 1970 to help finance sports.

The privilege was greatly extended in November 2003, when Putin signed a federal law on lotteries that allowed any private company to open a traditional or electronic lottery. The main requirements are that they must be licensed by tax authorities and transfer no less than 10 percent of their revenues to charity funds each quarter. The prize fund must be no less than 50 percent of revenue and no greater than 80 percent.

Lottery players like Alla rarely know where their money goes, as the terminals almost never specify an actual charity. And terminal makers are not shy about advertising the profits that the “lottery business” can make.

“Lottery machines [terminals] can bring a noticeable profit to their owners, although they are, above all, intended to develop socially focused charity work,” ENGY, a payment and lottery terminal maker, says on its web site. “At the present, there are no legal limitations on the lottery business that prohibit obtaining or distributing tickets through self-service lottery devices.”

The company’s terminals sell for between 87,000 rubles and 120,000 rubles ($3,000 to $4,100), according to its web site. The firm also breaks down a “business plan” for potential buyers, which says the terminals can become profitable within half a year, with 150 transactions per day averaging 100 rubles each.

St. Petersburg Governor Valentina Matviyenko, who banned gambling in her city from Jan. 1, 2008, wrote to Prime Minister Putin in June to express her concern about the spread of lottery facilities that “look like gambling machines and have the same operating principle,” Kommersant reported.

The Finance Ministry, on Putin’s orders, is developing amendments to the law on lotteries, a ministry spokeswoman said, declining to comment on the nature of the changes. The amendments are being discussed with the Interior, Economic Development and Industry and Trade ministries, she said.

Last month, deputies from A Just Russia proposed removing a clause that lets former slot machines be renovated as lottery terminals.

But additional regulation on lotteries could face skepticism from lawmakers. Yevgeny Fyodorov, who chairs the Duma’s Economic Policy and Entrepreneurship Committee, told The Moscow Times that he saw no reason for additional legislation.

“If we saw violations, we would make a move. But there has been no law enforcement experience so far that shows the law needs to be amended,” Fyodorov said. “Lottery terminals themselves pose no danger, but gambling machines disguised as lottery machines do.”

The only problem is that the police in some regions and in some districts of Moscow cannot tell the difference between a lottery machine and one for gambling. “It’s just a matter of time.”

Ticketing the Ticket-Less

Authorities say they are looking to slow the rising number of lottery machines and online gambling resources. About one-third of former Moscow casinos and slot machine halls closed in July are now selling instant lottery tickets, Baidakov told reporters Oct. 5.

But he blamed imperfect federal legislation for the sudden rise in “surrogate technologies,” namely lottery terminals and Internet clubs providing access to online gambling. The city has 91 registered Internet clubs, six bookmakers, 42 lottery clubs and 51 stand-alone lottery terminals, he said.

“Since the ban on gambling went into effect, Moscow police have closed 35 such places, opened 17 criminal cases and seized 618 lottery terminals,” Baidakov said, RIA-Novosti reported.

There are lots of illegal gambling facilities pretending to be lotteries, and the city shuts down about four so-called lottery clubs every week, said Filipp Zolotnitsky, a spokesman for the Moscow police’s economic crimes department.

“Only a special check can detect whether a machine is legal,” Zolotnitsky said. He declined to reveal the details of the examination, citing security reasons.

The Federal Tax Service provides lottery licenses, which are valid for five years, the service’s press office said in a statement. Tax authorities hold a scheduled check annually to make sure lottery organizers are following the law, but they also hold unscheduled inspections if they receive information about lottery organizers who violate the law.

The tax service also oversees the charity donations, the statement said.

If an inspection uncovers illegal machines, the case goes to prosecutors, who typically charge the accused with illegal entrepreneurship. Under Article 171 of the Criminal Code, the crime is punishable by a fine of up to 500,000 rubles or five years in jail.

Anatoly Palamarchuk, a senior official in the Prosecutor General’s Office, said in a recent interview with the Gazeta newspaper that since July, all but 14 of the 564 illegal gambling cases were opened under Article 171.

The criminals are usually let off with a fine, Zolotnitsky said.

Prosecutors are working on their own amendments, which would prohibit organized gambling outside the four federal zones, Palamarchuk said.

‘You Can’t Lose as Much’

In an apparent effort to stem the growing outcry, 36 lottery companies last week signed an agreement to create a self-regulating body for the industry, Vedomosti reported. Terminal makers and organizers say electronic lotteries are no different a from traditional one, and that they have nothing to do with gambling.

“The only difference is that you don’t buy a ticket from a dealer, but see it on the screen of a terminal. It’s normal. We live in a century of new technologies,” said Alexander Kosarev, technical director of a lottery terminal producer Terminal Technology.

There are currently no more than 1,000 electronic lottery terminals in Moscow, said Vladimir Kim, development manager at Terminal Technology. They work largely like ordinary payment terminals, with an Internet connection to a centralized server where winning and losing tickets have been uploaded in advance.

The gambler touches the screen during one of the games and the server then determines whether the chosen ticket is a winner or a loser. Lottery organizers say players can win up to 1 million rubles ($34,000) at terminals with a minimal bet of 10 rubles (34 cents).

“The server is independent and no one can influence the process. … There are about 20 winning tickets per 100,” Kim said.

Ilona Kesler, marketing director of lottery organizer LotProm, said every third ticket is a winner. LotProm bills itself as the first company on the Russian lottery business market, and says it has created more than 50 lotteries in the past nine years.

Established lotteries say their biggest concern is the increasing proliferation of open gambling in the industry.

“There are a lot of slot machines disguised as lotteries,” said Denis Kusenkov, marketing director of Orgloto, one of the biggest Russian lottery organizers.

The company organizes Gosloto for the Sports, Tourism and Youth Affairs Ministry. Earlier this month it signed a contract with TNK-BP to install 160 terminals offering paper lottery tickets at the oil company’s gas stations.

“A certain period should pass between the moment when a person buys a lottery ticket and learns the result. The result can’t turn up straight away, like it happens with a slot machine,” Kusenkov said. “Besides, one can’t lose a big sum of money playing a lottery. Lottery isn’t gambling, but a pastime.”

The law currently gives no clear definition of an electronic lottery, nor does it specify the difference between a lottery terminal and a gambling machine.

“An electronic lottery is legal if a terminal works properly and the organizers comply with the rules described in the law. That means they set an adequate prize fund, have real tickets and allot money to charity funds. But not all of them do,” said Denis Chuvilin, director of lottery terminal producer Auto-Pay.

Ruse by Any Other Name

While the larger lottery operators are moving to bring legitimacy back to their businesses, some smaller companies appear to be trying to make what they can before harsher regulations and policing take effect.

This summer, Auto-Pay terminated one of its contracts to provide Electrochance lottery terminals, saying owner Neiva was misusing the machines.

“We started partnering with Neiva in October 2008. But several months ago we broke off the contract. We think they work absolutely illegally,” said Chuvilin, the Auto-Pay director.

In July, he sent a letter to Neiva general director David Abagov explaining his company’s decision. After “permanent manipulations” with the prize fund, Neiva had increased it to 96 percent by June, according to a copy of the letter posted on Auto-Pay’s web site. “From that moment we understood that such work undoubtedly excludes the allotment of 10 percent of the revenue to a charity fund,” the letter said.

Auto-Pay managers asked Neiva to resolve the situation but got no response. Instead, Neiva deleted the monitoring function from its terminals, making it impossible to check the number of tickets sold, it said.

“It became impossible to count the size of the prize fund. Terminals showed only two indicators: ‘the sum paid’ and ‘the sum returned in cash.’ Lottery terminals turned into remotely controlled gambling machines,” the letter said.

“We didn’t know for sure whether they allotted money to charity funds, and we couldn’t check. But the calculations spoke for themselves. A company can’t work fairly if the prize fund is more than 95 percent, it allots 10 percent to a charity fund and pays us,” Chuvilin said by phone.

Neiva spokesman Igor Sigalov declined comment, saying only that his company had nothing to do with the lottery business.

On June 15, someone identifying himself as Sigalov wrote on Auto-Pay’s web site forum that Neiva really had allotted money to a charity fund, although the message did not identify the fund.

The terminal in the Kopeika lobby belongs to Neiva.

“I see people gambling on this terminal from time to time, but most of them lose much more than they win,” a security guard at the store said, declining to give his name. “It’s impossible to win more than 300 or 500 rubles here. I’m sure these terminals appeared to replace the gambling machines.”

2 Million Gamblers

Managers of the Kopeika chain said they knew nothing about the lottery terminal on 2nd Streletsky Pereulok.

“That Kopeika is a franchise store. We signed an agreement with a franchisee that works under our trademark. So we are responsible only for the goods in the sales area, not for the things outside of it,” Andrei Kondratyukin, head of Kopeika’s franchising program, said by telephone. “I know nothing about the lottery terminal, as it is placed outside of the sales area.”

The Moscow Times was unable to contact the franchisee. Kondratyukin said he did not know who owned the store, and the manager on duty said he was not allowed to speak to the media.

The Zolotoi Arbuz slot-machine chain has taken down its web site’s main page, but all of its subpages remain online. The web site lists 26 slots parlors in the Moscow area. Five numbers on its contacts page were either unanswered or out of order. A security guard escorted a reporter from the premises of the facility on Sushchyovsky Val.

The Interior Ministry’s economic crimes department did not respond to a request for comment faxed last week.

Anti-gambling advocates say the so-called lottery business — particularly in its increasingly popular electronic format — is just as dangerous and addictive as the roulette wheels or card tables. A local chapter of self-help group Gamblers Anonymous said its ranks were growing every week, with three or four newcomers who say they placed their last bets only the day before.

“Gamblers are interested in the process of gambling itself, regardless of whether it’s a lottery or placing bets in a bookmaker’s office,” a member of the group, Konstantin, said by telephone. He declined to give his surname, saying the community he belongs to is anonymous. “There are 2 million gamblers in Moscow, most of them switched over to Internet gambling and electronic lotteries after the closure.”

New betting facilities disguised as electronic lottery machines pose the same dangers as the banished one-armed bandits, he said. Gamblers Anonymous members who had not placed a bet in two years are now returning, hooked again on electronic lotteries.

“Electronic lotteries are socially acceptable,” Konstantin said. “That means a gambler can easily hide his addiction under the mask of taking part in a lottery.”