Behind Russia’s Bitcoin boom: Crypto mining in “shadow regions”

Original article by Neil Barnett, RUSI

원문: 펠릭스, PANews

In a world where the Kremlin is increasingly insular and focused on foreign influence operations, there is a strong incentive to engage in Bitcoin mining for cross-border activities. As the Russian gas market shrinks, the phenomenon of converting excess energy into electricity and then into 암호화폐currencies has gradually gained popularity. Since 2018/19, this has been happening on a large scale in Russias shadow territories (Transnistria, Donbass and Abkhazia). The use of these legally unclear categories can conceal facts and allow the plunder of the Russian states gas and electricity resources. And, as is typical of post-Soviet Russia, private sector actors are conducting covert operations.

How to turn cheap energy into anonymous currency

The anonymity of Bitcoin is questioned by crypto advocates who point out that Bitcoin is traceable and that cryptocurrencies actually offer unprecedented transparency. While this is true to a certain extent, there are several ways to cover the tracks for nefarious purposes. These methods include using mixers such as Tornado Cash to obscure on-chain tracking; using a darknet system called The Onion Router; or simply purchasing offline Bitcoin wallets from their owners for a cash premium. Mining new Bitcoins also provides a degree of protection, as there is no history of the coins when they were first transferred, so data cannot be provided to investigators.

In order to mine, the Bitcoin network requires computer processing power. Because the system is decentralized, Bitcoins designers provide incentives for parties to provide computing power. The incentive is to deliver new Bitcoins to nodes that provide processing power for network transactions. Bitcoin miners invest in mining equipment (dedicated servers) to perform these calculations and generate new tokens.

The key cost variable in Bitcoin mining is the energy required to power these servers, which is one of the reasons why Russia’s “shadow territories” are attractive. Research conducted by Nftevening.com in September 2024 showed that “Bitcoin mining in Ireland costs $321,112, while in Iran, miners only pay $1,324, which is more than 240 times cheaper.” Even with Bitcoin approaching $100,000, Bitcoin mining in many jurisdictions is still uneconomical.

Transnistria, Donbass, and Abkhazia were not included in the list of the 10 cheapest regions for Bitcoin mining, as they are all gray areas beyond the control of sovereign governments. In addition, the methods of obtaining electricity in these regions were not recorded in the survey, which was based on the electricity prices published by the state. If the cost of electricity is close to zero and the relevant regions are not internationally recognized, such research methods will be invalid.

Gray Area

The “shadow territories” of Transnistria, Donbass and Abkhazia (all under Russian “protection”) offer special opportunities for Bitcoin mining for those allied with the Kremlin.

Transnistria: Using energy from the MGRES power station, which is fueled by natural gas provided free of charge by Gazprom. The technopark established to attract miners provides electricity at $0.043 per kilowatt-hour.

Donbass: Since 2021, electricity from coal-fired power plants has been used, which in normal times would power heavy industry. Power stolen from the Zaporizhia nuclear power plant may also be used. The Ministry of Human Resources reports that there is a mining center at the Donetsk Metal Plant and at least one more, both of which operate under the protection of the Federal Security Service (FSB).

Abkhazia: Since 2015/16, it has been using electricity from the Enguri hydropower station on the border with Georgia, as well as imported Russian electricity. The cost of electricity is as low as $0.005 per kWh. However, open source reports show that mining in Abkhazia and Georgia itself has fallen sharply since 2023.

Transnistria: Perfect Environment for Bitcoin Mining

Transnistria has access to free natural gas from Gazprom and a large amount of power generation capacity, making it an attractive location for Bitcoin mining.

The key factor is the arrangement between Moldova proper and Transnistria for gas supply and power generation. Both regions receive gas from Gazprom via pipeline, and both regions’ gas is billed through Gazprom’s contract with Moldovagas (which is 50% controlled by Gazprom). But while Moldova pays for its gas, Transnistria’s gas is nominally added to Moldovagas’s debt of about $709 million, an amount that has little prospect of being repaid and is controversial.

Since Maia Sandu took office as Moldova’s president in 2021, the country has reduced its reliance on this energy source. But what has not changed is that Transnistria’s natural gas is effectively free and is used to power the 2,500-megawatt MGRES power station. Moldova also relies on MGRES for about 80% of its electricity, illustrating the strange interdependence between otherwise hostile entities.

The free energy is a subsidy from Moscow designed to keep Transnistria’s outdated, polluting and inefficient heavy industries, including chemicals, steel and cement, running. It also provides very cheap domestic natural gas, helping to consolidate popular support for the regime there.

The scale of this subsidy can be seen in the staggering gas consumption of the two entities: Transnistria (population 300,000) consumes about 2 billion cubic meters per year, while Moldova proper (population 2.5 million) consumes about 1 billion cubic meters per year, according to information provided by the Moldova government. At the delivery point, Transnistria receives about 16 times more gas per capita than Moldova (this figure is offset, however, by the fact that some of Transnistrias gas is used to generate electricity at the MGRES plant and then sold to Moldova). Whether this situation will continue until 2025 is unclear, as Ukraine has refused to renew its gas transit agreement with Gazprom.

Currently, the location provides a near-perfect environment for Bitcoin mining. Given the MGRES power station’s large power capacity and access to free natural gas, the incentive to participate in Bitcoin mining is obvious. In 2018, the Transnistria region passed legislation that provides a clear legal basis for accelerating the development of cryptocurrency mining.

In 2019, a state-owned mining enterprise zone called Tehnopark OJSC was heavily advertised to attract foreign miners, offering electricity at $0.043 per kilowatt-hour. This is a very competitive price; according to BestBrokers.com research, electricity prices in Kazakhstan in 2024 are $0.073 per kilowatt-hour and $0.127 per kilowatt-hour in the United States. While there is no reliable data available, the fact that Transnistria gets free gas means this price could be the cheapest in the world.

According to BestBrokers.com, the electricity consumption per Bitcoin is currently 854,403 kWh (a figure that has risen significantly in recent years). Based on the above figures, this means that the electricity cost per Bitcoin in Transnistria is $36,739, while Bitcoin costs about $97,000. The corresponding figures for Kazakhstan are $62,371 and for the United States $108,509 (this US figure is a national average; miners may operate in states where electricity is cheaper).

Since 2019, however, there have been few further reports and the website is no longer online, although it remains operational until 2022. This does not mean that Bitcoin mining in Transnistria has ceased, but rather reflects that international miners (except Russians) have not flocked to Tiraspol as hoped. Therefore, given the wartime conditions and the need for caution, there was no need for publicity.

The report by the Moldova NGO Anticoruptie indicates that the main mining players are Goweb International Limited and Tirastel GmbH.

While Western investors are allegedly involved, the “investors” are primarily Russian, with links to Gazprom (benefiting from some of the gas subsidies that Gazprom provides to Transnistria).

Goweb International Limited is an interesting case. Anticoruptie reported that in January 2018, the British Virgin Islands entity Goweb International Ltd spent $8.7 million on crypto mining equipment shipped to Transnistria, with the funds transferred through ABLV Bank in Latvia. The following month, the U.S. Treasury Department’s Financial Crimes Enforcement Network named ABLV as a target of investigation for “institutionalized money laundering” related to “Azerbaijan, Russia, and Ukraine.” ABLV was also at the center of the 2016 “money laundering scandal” in which $1 billion was stolen from Moldova Bank.

The Anticoruptie report states:

“Goweb International Limited is an offshore company managed by a group of businessmen from Russia, led by Nikita Morozov, that specializes in the production and marketing of mining equipment.

The company’s official website shows that it has the largest mining capacity in Moldova, which is 40 MWh, equivalent to six to eight mining farms.”

With Russia’s invasion of Ukraine in February 2022, Moscow’s ability to sell natural gas internationally has diminished, and the Russian state’s incentive to divert natural gas to Bitcoin mining has only increased.

How Bitcoin is used

There is every reason to believe that “shadow state” Bitcoin mining, while being conducted by private sector actors, is run under the auspices of the Kremlin. In Transnistria, this connection is very clear due to the direct involvement of Igor Chaika. He is nominally the Transnistrian representative of the Russian business organization “Delovaya Rossiya”, but is known to be the de facto head of the Federal Security Service in the region.

Chaika is the son of Yuri Chaika, former Russian prosecutor general (2006-2020), who has been closely associated with the Kremlin’s abuse of the justice system. His father currently serves as Putin’s envoy to Ramzan Kadyrov in Chechnya. Meanwhile, his other son Artyom Chaika is a businessman who serves as Kadyrov’s adviser on “humanitarian, social and economic affairs” — a role that presumably leaves him plenty of time to pursue other interests.

Chisinau-based Balkan Investigative Reporting Network reported in 2018 that the region was in the early stages of Bitcoin mining:

Chaika later told Russian daily Kommersant that he hopes to move forward with the Bitcoin plan. Now there are the prerequisites for moving forward. We agree with the Tiraspol governor that after the law comes into effect, the authorities will provide us with the infrastructure for the project. We expect them to make recommendations on the location for creating the mine.

Wired reported that Chaika “stated that he was ready to invest 400 million rubles in cryptocurrency mining in Transnistria.”

According to the August 2024 Swiss SECO sanctions against Igor Chaika, he is responsible for financing the destabilizing activities of the Russian Federal Security Service (FSB) in Moldova itself. The Swiss sanctions statement states that he worked closely with Dmitry Milyutin, the deputy director of the Federal Security Service for Moldova. In addition, Chaika was included in the sanctions list along with Moldova individuals who played a role in destabilizing the country, including Ilan Shor and Vladimir Plahotniuc, with the citation stating:

“Igor Chaika is a Russian businessman responsible for raising funds for Russian Federal Security Service (FSB) projects aimed at destabilizing the Republic of Moldova. He acts as a Russian “treasury”, funneling funds to FSB assets in the Republic of Moldova in order to keep the country under the control of the Kremlin…”

Given Chaika’s role in establishing the Russian-Transnistrian Bitcoin mining cooperation since 2018, the resulting Bitcoins could very well be used to destabilize Moldova.

The use of Bitcoin to support Kremlin subversion extends far beyond Moldova. For example, a loophole in the United States allows political donations of less than $200 to be anonymous. Large sums can be automatically divided and transferred electronically as small donations, and cryptocurrencies add a layer of anonymity. In 2020, for example, the Trump campaign received $378 million this way, while the Biden campaign raised $406 million. There is simply no way for the campaigns themselves or the Federal Election Commission to determine where this nearly $800 million came from.

In 2018, the U.S. Department of Justice filed an indictment against Netyksho and others. They were accused of being members or associates of GRU (Russian Military Intelligence Agency) Unit 26165 (better known as Fancy Bear) and Unit 74455 (Sandworm). The indictment stated that the organization was responsible for the DCLeaks and Guccifer 2.0 incidents:

“While the conspirators transacted in a variety of currencies, including the U.S. dollar, they primarily used Bitcoin to purchase servers, register domain names, and otherwise pay for their hacking activities…

Cryptocurrencies are equally effective in evading sanctions and paying for embargoed military equipment. This is especially true when working with partners such as India, where banks are vulnerable to secondary sanctions if discovered. In September 2024, the Financial Times published leaked materials detailing the establishment of an India-Russia “closed circuit” transaction route to evade sanctions:

Poida outlined a five-stage plan to help Russia use the rupee and establish a stable supply of dual-use components. Russia will create a closed payment system between Russian and Indian companies that is not subject to Western supervision, including the use of digital financial assets…

In November 2024, the U.S. Treasury Department sanctioned four employees of VTB Shanghai and Sberbank New Delhi, a move that was likely a warning to the banking community. These restrictions are expected to increase the appeal of Bitcoin as a means of settlement because it does not put local banks at risk.

In light of this analysis, Bitcoin mining in Russia’s “shadow regions” is an undeniably lucrative and virtually anonymous way to convert vast amounts of power into money that can enrich well-connected Russians and allow them to live a life of luxury in places like Dubai and Turkey.

It also poses multiple threats, including destabilizing its neighbors, exerting covert influence over Western democracies, and facilitating sanctions evasion in collaboration with allies such as India.

As Ukraine’s allies continue to work to limit funding and resources for the Kremlin’s illegal war of aggression in Ukraine, combating this mining activity is a key priority that requires a dedicated effort. This could include: cyber warfare measures; blockchain tracing of newly minted tokens to reveal those tied to Russian illicit activity; sanctions on digital asset platforms that facilitate mining; and policies to cut off cheap energy to “shadow regions.” Western restrictions often lag behind Russian circumvention tactics; and when it comes to the vulnerability of Bitcoin mining, the evidence is clear.

This article is sourced from the internet: Behind Russia’s Bitcoin boom: Crypto mining in “shadow regions”

Related: Arthur Hayes: Bitcoin will reach $250,000 by the end of 2025

Original translation: Wu said blockchain In a recent interview with the podcast Alpha First, Arthur Hayes shared his bold predictions for the future of the cryptocurrency market. He believes that with the possible rise of the Trump administration, the United States loose monetary policy will trigger a depreciation of the US dollar, which will in turn drive up the prices of Bitcoin and other crypto assets. He also discussed global inflation, sovereign monetary policies, and how to benefit other crypto assets such as Bitcoin and Memecoin. He emphasized that investors need to be vigilant in the bull market and avoid ignoring market risks due to greed. In addition, he looked ahead to future market trends and predicted that Bitcoin could reach the milestone of $250,000 by 2025. Please note: The…