As Western governments impose financial sanctions against Russia following its illegal invasion of Ukraine. Regulus Partners outlines far-reaching repercussions for a globalised gambling sector.
Ukraine has a thriving gambling industry, a first-rate gambling services sector, a highly educated population, and relatively transparent governance. Until the last few weeks, it was therefore an attractive country to operate from and in, regulatory bumps in the road notwithstanding.
Our thoughts and prayers are with all people who are caught up in the terrible events that have occurred over the last few days, as we write the fate of Kyiv hangs in the balance. Russia’s resort to military force to settle a territorial question which still does not have a clear endgame provides all stakeholders with a brutal reminder that global networks can suddenly present extreme asymmetric risk which has nothing to do with the narrow world of gambling.
However, because the proposed Western response will be overwhelmingly economic and financial rather than military, Russia’s military action could have long-term and far-reaching repercussions for the sector globally, in our view.
Until relatively recently, online gambling was a truly global but highly niche business, while landbased gambling was overwhelmingly local rather than cross-border. Regulation, mass-market engagement and business maturity have significantly blurred these lines at a rapid rate, with a material number of B2B and B2C companies relying upon easy cross-border access for operations, transactions, and capital flows. While the EU provides a complex trading zone where protectionism is tempered but not prevented, it is at least relatively homogenous and safe.
For the last five years or so, China has exerted its considerable international weight from a gambling policy perspective, successfully in Cambodia, effectively within its own SAR of Macau, and with more mixed results in the Philippines. However, with the potential exception of Taiwan nobody is expecting war to complicate the legal-regulatory map of East Asia. Nevertheless, China and Russia are now cooperating economically against Western sanctions aimed at Russia. This cooperation adds a further dangerous twist for the sector in the developing crisis.
It is worth reflecting that not long before the rush of M&A into the Georgian market (2015-18), Russia had invaded in 2008. Russia also invaded Crimea in 2014: Ukraine is an escalation, not a departure. Indeed, Russian security policy has been remarkably consistent since Ivan the Terrible; Yeltsin was something of a brief anomaly caused by profound but temporary geopolitical weakness.
Given the current military escalation, Russia is likely to use its considerable diplomatic leverage in Eastern Europe and Eurasia to shore up its regional defences and cushion Western sanctions. For the thirty countries in NATO (including Albania, Bulgaria, Croatia, Czechia, Estonia, Hungary, Latvia, Lithuania, Montenegro, Poland, Romania, Slovakia, Slovenia), picking sides is easy; for all non-NATO countries literally in between, many of which have material B2C and B2B gambling markets, picking sides is as fraught with risk as walking the tightrope of neutrality.
While it is tempting to see ‘good’ vs. ‘bad’ from a Western perspective, this is a very difficult decision facing around 20 countries: given Russia’s local military power and natural resources are combined with China’s investment leverage from the Silk Road to the Balkans, choosing a vacillating and waning West loaded with Covid policy response debt, facing economic inflation, and ruling out direct action, is far from obvious as a policy choice. Further, if China sees value in supporting Russia’s evolving position more explicitly, this terrible ‘diplomatic’ choice falls to all c. 160 countries outside NATO, not just Russia’s border regions. This matters for cross-border gambling businesses.
One of the big issues that the creation of ‘pro-Russia’, ‘pro-West’ and ‘attempted neutrality’ blocs raise is that the flow of money, people, and information services is likely to become much more restricted between them, much as in the Cold War. Online gambling, multi-jurisdiction businesses, and global M&A all rely upon the easy flow of all three to be either untrammeled or possible ‘under the radar’.
Outside the EU-NATO bloc, untrammeled can now be practically ruled out unless one side climbs down, while ‘under the radar’ is likely to be confronted with much more powerful cross-border surveillance and countermeasures to enforce sanctions. Similarly, the Russia-China bloc and its adherents have an even stronger motive to clamp down on offshore gambling as a source of financial leakage they can literally not afford if the US dollar declares war on them. It is therefore a dangerous time to have assets and business operations which rely upon cash transactions straddling these emerging borders. The problem with NATO being such a small group of countries, however powerful, is that many multi-national businesses and supply-chains will be caught in this potentially unravelling nexus.
Ukraine therefore potentially represents something far more than the immediate dislocation and tragedy of armed conflict, which contains the dangerous soporific of being visibly localised in a ‘faraway country’ (from a ‘Western’ perspective). Western sanctions and Sino-Russian countermeasures to Russian military policy are likely to involve restricting the lifeblood of global gambling either as collateral damage or on purpose.
The immediate threat to life is obviously the key direct business concern of any stakeholders with operational and supply-chain links to Ukraine. However, a far broader strategic issue may rapidly be felt across much larger swathes of the sector. Businesses should start thinking about how operations, assets, and financial flows cross NATO borders and how these might be protected or mitigated.
Featured article edited by SBC from ‘Winning Post’ Sunday 27 February 2022 (click on the below logo to access the full unedited analysis of Winning Post).