Bye Georgia? The impact of a clampdown on a market that punches above its weight

South of the Caucasus Mountains and on the Black Sea’s eastern edge, Georgia has long been a hotbed for commercial gambling, both offline and online. That inherent appetite for betting reached new heights in 2020 as government data revealed turnover hit more than GEL32bn (roughly £7.7bn going on today’s exchange rate) last year – a record high for the former Soviet state.

The online segment is worth around €400m a year, according to a recent note by Regulus Partners, which equates to €110 per capita based on Georgia’s population of approximately 3.7 million. That means the inhabitants gamble more per person than those in the UK or Nordic countries, despite a GDP per capita of just $4,300. Around 27%, or one million people, gamble in the digital realm, Regulus Partners said.

Online gambling is clearly big business in this Central Asian country. Now though, it seems that moves are afoot to clip the wings of an industry overseen by the country’s Revenue Service of the Ministry of Finance. These efforts are spearheaded by Prime Minister Irakli Garibashvili – a 39-year-old politician and member of the ruling Georgian Dream party who assumed the post last February for the second time – with his anti-gambling rhetoric of late and his desire expressed publicly to see online casinos being banned. Garibashvili insisted, when outlining his plans on 22 November, that GEL1.5bn is “drained out of the country through online casinos” to the “benefit of foreign economies”.

“Our citizens, the youth, gamble every day and lose money,” he added.

Details regarding the wide-reaching proposals – drawn up by Minister of Finance Lasha Khutsishvili in a bid to protect citizens from gambling-related harm – were initially sketchy, yet an announcement on 29 November involving Garibashvili and Khutsishvili shed (slightly) more light on the situation. As part of the clampdown, the legislation proposes that the sector’s overall tax base be hiked by 65%-70%.

Right now, operators pay 15% on distributed profits (profits not reinvested in the business) for igaming and 7% on turnover when it comes to online sports betting. What’s more, there would also be a near-blanket ban on advertising, including TV and online, following the trend we have seen in certain European markets as governments, as well as the public to some extent, push back at gambling’s prevalence.

However, Georgian operators would be able to display their logos via sponsorships, so the country’s top football division, Erovnuli Liga, could then suddenly become an attractive draw for gambling brands. Furthermore, gambling, and this includes online, would be off limits to the under-25s, although there would be an exception for foreign nationals, along with restrictions on money transfers abroad.

The government said payment service providers would be required to block the transfer of funds to gambling companies outside the nation. With these measures part of an overarching plan to have online casinos outlawed (Garibashvili originally said online casinos will be banned altogether, “at a later stage”), an idea supported by the opposition party, the obvious fear is that it will eventually play into the hands of the black market.

But did this attempt to curtail gambling catch industry observers off guard? “This proposal came as a surprise not only for us, but practically for everyone involved in the Georgian market that we know of,” reveals Ilya Machavariani, CEO and senior partner at boutique consulting firm 4H Agency.

Ilya Machavariani, 4H Agency

“We were astonished by the fact this online casino prohibition initiative puts the whole Georgian market into reverse. For the last several years, Georgia has been emerging, with the help of the government as well, as one of the most well-developed igaming jurisdictions in the region; but if these prohibition initiatives move forward, the Georgian market may very soon lose its hard-earned position and become no different than other struggling jurisdictions with the dominance of the unregulated offshore gambling sector.”

A kick in the Caucasus

Garibashvili said the restriction of access to gambling would affect around one million adults, so this will clearly be a worry for licensed online operators, including international giants. Flutter Entertainment made its move into Georgia at the beginning of 2019 by taking a 51% controlling stake in local operator Adjarabet for an upfront fee of £101m.

The betting, casino and poker operator held a 40% market share in Georgia, according to Flutter at the time of the deal announcement. And Adjarabet, which is present in the regulated neighbouring market of Armenia, looks to have been a particularly shrewd bolt-on play.

Flutter revealed during its full-year 2020 presentation in March that Adjarabet’s annual revenue swelled 1.9x between 2018 and 2020, although precise figures were withheld. Fellow FTSE 100 operator Entain entered Georgia even earlier, again with an acquisition, by snapping up a 51% share of Crystalbet for a total consideration of €41.3m.

The 10-year-old brand’s NGR increased more than 40% in constant currency year-on-year (YoY) in 2020 and 52% YoY in H1 2021, while Entain, which settles the 7x EBITDA earnout of Crystalbet in 2021, claims its subsidiary is the leader in Georgia, a market that accounted for 3% of group revenue last year.

Then there is Betsson; the Swedish operator bought Georgia’s Europebet six years ago and has a few hundred staff in the country, 200 of whom are based at Europebet’s head office in the capital, Tbilisi.

David Arutinyan, a Tbilisi-based affiliate marketing manager at 1xSlots, hit out at the proposals when contacted by EGR Intel, adding that the whole industry contributed GEL349m to Georgia’s budget in 2020 and employs 10,000 people. On the prospect of online casino being banned, he warns: “In my opinion, this decision will be very wrong because, in the current realities, a complete ban encourages people to switch to unregulated websites, through a VPN, and therefore, the amount spent by citizens on gambling will go to foreign unregulated casinos.”

He continues: “I am not a supporter of a complete ban on gambling, and the regulations that the country is adopting are too critical. Unfortunately, one of the most diverse spheres of the economy will stagnate due to these regulations.”

In the aforementioned note, Regulus Partners labelled the proposals as the “politicisation of online gambling in Georgia” and underlined how the country was facing mounting political pressure to curb its “liberal commercial gambling framework”. The stark reality for those international firms that have bought into Georgia is that there was always a risk a political backlash could be on the cards.

And cracking down on a ‘vice’ like gambling and accusing foreign sites of funnelling citizens’ squandered money out of the country is hardly going to lose you many votes at the next election.

We will have to wait and see what becomes of the draft legislation and how the international online companies react if it becomes law.

On the potential impact for the Georgian market and the likes of major local players like Adjarabet, Crystalbet and Europebet, Machavariani issues this gloomy prediction: “It is no secret that the international investors were picking Georgian gambling companies to invest in or acquire because they saw the promising potential of the market, and it was sensible to expect that the market will grow further and the investments will deliver returns.

“At the same time, if the announced plans were to find their way into reality, it would harshly affect the market’s image, taking away its investment attractiveness and casting a shadow on its perspective for further development.”

Flutter, Entain and Betsson declined to comment for this article.