Crypto miners in Russia have been unscathed so far by the war in Ukraine, but sanctions could soon indirectly squeeze their businesses.
Last August, Russia was the world’s third-biggest bitcoin mining country after the U.S. and Kazakhstan, according to the Cambridge Center for Alternative Finance’s Bitcoin Electricity Consumption Index. Mines are mostly located in remote parts of Siberia, some around 3,700 miles away from Kyiv, and so they haven’t seen any serious interruptions to their operations. By contrast, earlier this year in Kazakhstan, another former Soviet state, civil unrest led to internet shutdowns that disrupted the operations of crypto mines for a few days.
Mining remains a “sustainable business” in Russia despite the conflict, said Sergey Arestov, co-founder of Russian mining hosting firm BitCluster. He pointed to the supply of relatively inexpensive energy and construction materials as well as to the weak ruble. As a result of the local currency’s fall, bitcoin is worth more in rubles, and so “mining has become even more profitable,” Arestov said.
Further, the ruble’s decline has made local energy cheaper by global standards, said Denis Rusinovich, co-founder of Berlin-based Cryptocurrency Mining Group (CMG) and Switzerland-based miner Maveric Group. Electricity tariffs in Russia dropped 25%-30% in U.S. dollar-denominated terms, he said, a few days into the conflict.
The global bitcoin hashrate, a measure of computing power on the network, has been unchanged three weeks into the war, which Russian President Vladimir Putin calls a “special military operation.”
On top of the conflict itself, however, Russia has become the world’s most sanctioned country, with banking restrictions, export and import bans and the freezing of assets owned by some of Russia’s richest and most powerful people.
“We definitely will not see any investments in new sites or hosting for bitcoin mining in the region from anyone outside Russia,” Rusinovich said. That once again raises concern over the centralization of the network and the ever-diminishing range of options for geographic diversification of computing power, he said.
At least two Europe-based miners interviewed by CoinDesk have abandoned plans to expand operations in Russia. Rusinovich said he has given up on projects in Russia in light of the current situation.
“We don’t plan to look for new sites in Russia, but we are developing more than 300 megawatts in the next six to eight months,” Roman Zabuga, a spokesman for BWC UG, a Germany-based mining hosting firm, told CoinDesk. BWC UG will likely host Chinese miners from Kazakhstan once the firm’s mines are complete, he said.
BitCluster, which also hosts mining rigs for other firms, will reorient itself from Western Europe and North America to the east when looking for investors and clients, Arestov said. The Middle East, Central Asia, India and Africa are huge markets, he said.
The decisions of some European and U.S. miners to pivot away from Russia won’t severely disrupt the crypto mining industry, said David Carlisle, director of policy and regulatory affairs at blockchain analytics firm Elliptic.
Switzerland-based BitRiver, which is one of the largest mining players in Russia, declined to comment for this story.
Those who stay in Russia “might face a shortage of spare parts and difficulties with logistics” because of the sanctions, Arestov said.
But specialized chips for crypto mining, known as application-specific integrated circuits (ASICs), can still be purchased from China, Carlisle said. The major manufacturers of ASICs remain in China, which hasn’t placed any sanctions on Russia.
Rusinovich predicted a rise in tariffs for air shipments of hardware, now that Russian airline carriers have banned European airlines from flying into Russia.
The restrictions and logistics difficulties regarding equipment procurement will lead to a slight uptick in mining hardware demand inside Russia, as it could also be seen as an investment protected by soaring inflation, Rusinovich said.
Prior to the conflict, Russia was brewing what was likely to be its biggest regulatory step in crypto trading and mining yet.
About a week before the war started, the Russian Ministry of Finance submitted a bill that would regulate crypto trading and mining to the parliament. The press release announcing the bill gave few details about how mining would be regulated, only mentioning that dedicated government agencies would be responsible for the industry.
There is uncertainty about how the new legislation will treat mining, as well as how Russia’s capital controls will be implemented on crypto.
The central bank ordered exporters to convert 80% of their foreign currency deposited to their bank accounts under cross-border traded contracts into rubles. A similar logic could be applied to bitcoin as it is a convertible digital hard currency, Rusinovich said.
One Russian miner said that he expects regulation to be introduced quickly to deal with the federal budget deficit and capital flight.
The regulation might turn out to be a ban on cryptocurrency activities, with higher electricity tariffs for miners (similar to what China has done), instead of a tax rebate, as previously hoped, this miner said.
By contrast, Elliptic’s Carslile thinks the Kremlin may suddenly see mining as a much-needed source of cash flow: “A key question is whether the Russian government may look to mining as a way to generate revenue in the face of sanctions – either by directly getting involved in mining, or by seeking to license and tax it,” he said.
Considering that sanctions are now specifically targeting Russia’s oil and gas industries, it is “increasingly likely that Russia could turn to mining.” State-owned Russian natural gas giant Gazpromneft is among the firms that has been engaged in mining itself.
COMING NEXT WEEK: CoinDesk reporters across the globe visited cryptocurrency mining facilities, interviewed key players and crunched network data to shed light on a little-understood industry. Mining Week, a special series, kicks off March 21.
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