Hennadiy Novikov: "Making sense of Ukrainian regulations"

On the night of March 11, a decree appeared on the website of the Office of the President, enacting sanctions from the National Security and Defense Council against 120 individuals and 287 legal entities related to the gambling business.

The list includes all licensed Russian operators of land-based and online segments. Even hippodromes involved in pool betting were included in the sanctions list.

Several Ukrainian companies were also included in the list: Parimatch (sports betting and online casino), Pokermatch (online poker), and Pointloto (online casino).

Obviously, sanctioning of Parimatch is something to note; Maxim Lyashko, CEO of the PM holding shared with local Ukrainian media that UAH 270 million (approx 6.7 mln EUR) of player funds were blocked on their accounts, and more than 2,000 employees at the same time are employees of a sanctioned company.

Lyashko also said that there was no contact whatsoever from the authorities about sanctioning the company.

The term of the sanctions is set at 50 years. Restrictions imposed by sanctions include blocking of assets, prohibition of trade operations, restriction of the export of capital outside Ukraine, annulment of state-issued licenses and other prohibitions.

Parimatch is one of the largest sports betting operators in the country and one of the largest online casino operators; in addition to its strong Ukrainian presence, Parimatch is also one of the globally renowned gambling brands.

Before the start of the Russian invasion of Ukraine, Parimatch’s market share was estimated at 50% of the Ukrainian market.

In my view, this situation brilliantly represents the whole narrative surrounding the legalization of our industry in Ukraine: legalization has indeed happened, but this is the only thing that happened, practically none of the steps that were anticipated by the industry or the public were taken.

Let’s do a quick and zoomed-out look back on the whole legalization process so far.

The gambling industry was banned in Ukraine in 2009 and during the period of the ban, various political forces made a number of unsuccessful attempts to regulate gambling in one form or another.

But, after the election of President Volodymyr Zelensky and the formation of a mono-majority in the Ukrainian Parliament, legalization attempts finally came to fruition with the adoption of the law installing the new gambling regulatory framework in 2020.

Six months after the law entered into force, the industry regulator (KRAIL) issued the first gambling licenses in 2021, which was considered a great success at the time.

But as time has passed, it became evident that high hopes and promises that were made over the course of legalization do not match with reality.

As of the end of 2021 and regardless of huge interest towards the market and Ukraine's alignment towards the EU, Ukraine has seen only two international operators entering the market (if we exclude Ukraine-originated operators, like Parimatch): GGPoker and Vbet.

One can speculate a lot about the reasons for this, but several practical issues complicate the go-to-market for international investors and global gambling brands that are still not resolved as of the date of this piece:

Unfinished taxation framework — the intention of the government was (and probably is) to use a GGR-based taxation system; however, regardless of this intention GGR-based system is yet to be installed. Nowadays licensees are required to use the taxation framework that was brought into existence even before 2009 when the gambling ban happened. More to that, current regulations also provide for a 19.5% tax that applies to any winnings.

Unreasonable operational requirements — gambling regulations contain a requirement to physically locate servers in Ukraine, which is an obvious hurdle for any operator outside of Ukraine.

Passive regulator — as soon as the initial stages of the legalization were completed (the law was adopted and the regulator was created), the regulator turned out quite passive in terms of the combatting offshore segment of operations.

This list can go on and on, absence of promised monitoring system, absence of clear and concise technical requirements as well as certification framework.

It would not be fair to say that the Ukrainian Government did not attempt to push through the issues above and achieve the goals that were set at the beginning of the legalization.

Throughout 2021, there were a lot of discussions and non-public work around revising the framework that was used at the legalization stage to create a more welcoming environment for the development of the gambling industry, increase government revenues from the industry and attract international investors.

These discussions were construed around the issues described above, but, unfortunately, we have never seen any outcome as on 24 February 2022 Russia launched a full-scale invasion of the territory of Ukraine and a lot of sectors of the economy started to stagnate for obvious reasons. This was also applicable to the gambling industry.

In April 2022, the Ukrainian Government installed a set of measures to stimulate economic activity, enabling businesses (including gambling) to pay a simplified tax at a reduced rate (2% of turnover) and postponing regular license payments for the duration of martial law in the country.

Licensed gambling companies leveraged this simplified system as well as the opportunity to postpone the payment of the license fees — Ukrainian license fees are one of thehighest in Europe: for instance, the sports betting license annual fee is 2,9 million Euro.

After the first few months of the war, the discussion around the gambling industry was starting again; this was quite encouraging to see as when the country finds time for our industry during times of war — it shows that the Government understand the value that our industry can bring to the table.

However, there was a difference between the discussions about potential reform that were held before and after the war started and this difference turned out crucial. This time, law enforcement agencies of Ukraine became involved.

Involved law enforcement agencies managed to identify a large-scale tax evasion scheme that was used by some of the licensed gambling operators in addition to the simplified tax mentioned above.

This discovery definitely was not something that helped the image of the licensed industry. More to that, these findings also led to the abolition of the preferential taxation, the abolition of the deferment of payment for gambling licenses and even the termination of the banking license from one of the banks.

Summing up, I would like to note that the situation in the Ukrainian gambling market today is quite complicated and there are several issues affecting the market. Generally speaking, it seems that the main issue is lack of the uniform "rules of the game" (taxes, certification, offshore sector, etc.).

At the same time, it is also clear that the Government is continuing to pay attention to the gambling industry and is still having certain hopes in its regard.

We hope that even regardless of the sanctions and turbulence surrounding the market and the country during the war times, we will see the revision of the 2020 legalization that will "restart" the market and open it to the World's TOP companies that will bring to Ukraine best business practices and help to fill the state budget of the country that will definitely win this terrible war.

Image credit: Casino Guru News