Will early adopters be rewarded in Ukraine's legalised market?

In August 2020, Ukraine passed the law on state regulation of gambling after 11 years of prohibition. It is a massive breakthrough for the industry, considering the quite negative perception formed over the years of prohibition. Moreover, Ukraine became one of the last countries in Europe to legalise this type of business.

However, there is a catch in the gambling business legalisation in Ukraine. Even though the law has been adopted and signed (although it requires some technical clarifications), there is no state position on the industry’s taxation. Although passing the law and the amendments process took place simultaneously, tax code amendments are not yet adopted.

The current situation puts an operator (especially a foreign one) in a non-regulated tax context of the market. Such context gives no competitive advantages for a Ukrainian gambler and places a heavy tax load on the operators, which, along with the overpriced licence, makes operating too expensive.

As for now, there are two types of companies that see a potential in the Ukrainian gambling market.

First are the global companies interested in being represented in a new market with an emerging legal opportunity to operate. These companies do not focus on the size of the market or player welfare – they are focused on 10-15-year prospects and systematically increase the global coverage and GGR, through engaging new users. However, although these companies are always interested in the new markets, clear regulations and transparent taxation are crucial to them.

Second are the companies that, in one way or another, have already been operating in the Russian-speaking segment. These companies are already in the context of a Ukrainian player’s mentality, which is somewhat peculiar.

Still, gambling is an exciting, reputable, high-tech and complex business that is often publicly represented on securities platforms. A new legal gambling market may be interesting for the funds open to working in high-risk related industries. And by “high risk,” we don’t imply compliance complications or reputation risks.

For example, even though sports betting is maths-based, it is associated with the occurring events that are impossible to predict relying purely on statistical or mathematical information. Therefore the liquidity of this business may require additional investments. That is a high risk in terms of capital reservations for this business to operate successfully.

For those funds and companies that historically cooperate with such types of business, entering the territory of Ukraine and starting to operate under a licence is only a matter of time as tax changes will enter the force. These companies will be able to enter the market at the beginning of next year freely.

As an investment company, we see great potential in the current situation as we have experience interacting with the audience from the territory of Ukraine and other Russian-speaking countries. We understand the mentality, know the business specifics, and have the right connections in the tech and marketing segment. These starting positions are quite comfortable for us to start working with businesses that operate under a B2C licence.

Talking of global investors, they are to enter the market towards the middle of next year, once the tax code amendments will occur and the licensing committee is at least 70% formed to issue the regulations. After that, it will take them a couple of months to receive legal opinions regarding the Ukrainian market and another three months to decide to enter the territory.

Yet again, since it is a high-risk industry, it is for each fund to calculate the ratio with which they believe the Ukrainian market will be thriving, depending on three variables: current tax model; the potential opportunity to change the current model; and how the market will operate if the change does not occur. The outcome of these three variables will define an investment attractiveness allowing a conditional coefficient for risk.

Maksym Liashko is a partner at JKR Investment Group. He is also a partner of Parimatch Holding. He has more than 15 years of experience in M&A, competitive law, tax optimisation, international jurisdiction, legal and business consultancy as well as years of practice in corporate, intellectual property, commercial law, and online businesses.

Liashko oversees JKR’s legal strategy at the partner level. His proven proficiency in legal affairs, corporate governance, financial matters, conducting the legal restructuring of assets and communications gives the group a strong legal standing.