The Russian Bitcoin Craze Unveiled: Cryptocurrency Mining in the "Shadow Region"

Original Article Title: The Other Bitcoin Boom: Crypto Mining in Russia's Shadow Territories

Original Article Author: Neil Barnett, RUSI

Original Article Translation: Felix, PANews

In a world where the Kremlin is increasingly isolated and focused on foreign influence operations, there is a strong incentive for individuals to engage in Bitcoin mining for cross-border activities. With the shrinkage of the Russian natural gas market, the phenomenon of converting excess energy into electricity and then into cryptocurrency is becoming prevalent. Since 2018/19, this situation has been widespread in Russia's "shadow territories" (along the Dniester River, Donbass, and Abkhazia). Exploiting these legally ambiguous areas can obscure the truth and allow the plundering of Russia's natural gas and power resources. Moreover, as is typical of post-Soviet Russia, private sector participants are engaged in covert operations.

How to Convert Cheap Energy into Anonymous Currency

The anonymity of Bitcoin has been questioned by crypto advocates, who point out that Bitcoin is traceable, providing unprecedented transparency in cryptocurrency. While this is partly true, there are several ways to cover tracks for nefarious purposes. These methods include using mixers like Tornado Cash to obfuscate on-chain tracing; utilizing the darknet system known as "The Onion Router"; or simply purchasing offline Bitcoin wallets from owners at a cash premium. Mining new bitcoins also provides a level of protection, as the tokens have no transaction history upon initial transfer, therefore not providing data to investigators.

Bitcoin mining requires computer processing power for the network. As the system is decentralized, Bitcoin's designers incentivize the party providing processing power. The incentive is to deliver new bitcoins to nodes providing processing power for network transactions. "Bitcoin miners" invest in "mining equipment" (specialized servers) to perform these computations and generate new tokens.

A key cost variable for Bitcoin mining is the energy needed to power these servers, which is also one of the reasons Russia's "shadow territories" are attractive. A study conducted by Nftevening.com in September 2024 showed, "the cost of mining Bitcoin in Ireland amounts to $321,112, while in Iran, miners only have to pay $1,324, more than 240 times cheaper." Even with Bitcoin nearing $100,000, Bitcoin mining in many jurisdictions is still not cost-effective.

The Dniester River, Donbass, and Abkhazia did not make it to the top 10 cheapest regions for Bitcoin mining, as they all exist in a gray area that the sovereign government cannot control. Additionally, the methods by which these regions obtain electricity were not investigated and documented, as the investigation was based on publicly disclosed national electricity prices. If the cost of electricity approaches zero and the respective regions are not internationally recognized, such research methods will be ineffective.

Gray Area

The "shadow territories" along the Dniester River, in Donbass, and Abkhazia (all under Russia's "protection") have provided a special opportunity for Bitcoin mining for those allied with the Kremlin.

Dniester River: Energy from the MGRES power plant, where the fuel is provided free of charge by Gazprom, the Russian natural gas company. A tech park established to attract miners offers electricity at a price of $0.043 per kilowatt-hour.

Donbass: Electricity has been sourced from coal-fired power plants since 2021, which would normally supply power to heavy industry. Electricity stolen from the Zaporizhzhia Nuclear Power Plant may also be used. A report from the HR department states that there is a mining center at the Donetsk Metallurgical Plant and at least one more, both of which operate under the protection of the Federal Security Service (FSB).

Abkhazia: Since 2015/16, electricity has been sourced from the Enguri hydroelectric power station bordering Georgia and imported Russian electricity. The cost of electricity is as low as $0.005 per kilowatt-hour. However, reports from public sources show a significant decline in mining activity in Abkhazia and Georgia’s domestic production since 2023.

Dniester River: The Perfect Bitcoin Mining Environment

The Dniester River benefits from free natural gas from Gazprom and a significant amount of generating capacity, making it an extremely attractive location for Bitcoin mining.

A key factor is the arrangement between Moldova and the Dniester River regarding natural gas supply and electricity generation. Both regions receive Gazprom's natural gas via pipelines, and the gas for both regions is invoiced through a contract between Gazprom and Moldovagas (of which Gazprom controls 50% of the shares). However, although Moldova pays for the natural gas, the natural gas for the Dniester River is nominally added to Moldovagas' approximately $709 million debt, which is unlikely to be repaid and is subject to dispute.

Since 2021, when Maia Sandu took office as President of Moldova, the country has reduced its reliance on this energy source. However, what has not changed is that the natural gas along the Dniester River is actually free, used to power the 2,500-megawatt MGRES power plant. Moldova still relies on MGRES to provide about 80% of its electricity, highlighting a strange interdependence between originally hostile entities.

This free energy is a subsidy from Moscow intended to keep the outdated, heavily polluting, and inefficient heavy industry along the Dniester River operational, including chemical, steel, and cement plants. It also provides very cheap residential natural gas, helping to solidify popular support for the local authorities.

According to information provided by the Moldovan government, the staggering gas consumption from the two entities reveals the scale of this subsidy: the Dniester River region (with a population of 300,000) consumes approximately 2 billion cubic meters per year, while Moldova proper (with a population of 2.5 million) consumes around 1 billion cubic meters per year. At the delivery point, the per capita gas intake along the Dniester is about 16 times that of Moldova (although this is offset by the fact that some of the gas in the Dniester region is used at the MGRES plant for electricity generation, which is then sold to Moldova). Whether this situation will persist beyond 2025 is unclear as Ukraine has refused to renew its gas transit agreement with Gazprom.

Currently, the location has provided an almost perfect environment for Bitcoin mining. Given the ample power capacity of the MGRES plant and the right to use free natural gas, the motivation to engage in Bitcoin mining is evident. In 2018, the Dniester River region passed legislation providing a clear legal basis to accelerate the development of cryptocurrency mining.

In 2019, a state-owned mining enterprise zone called "Tehnopark OJSC" received significant promotion aimed at attracting foreign miners, offering electricity at a price of $0.043 per kilowatt-hour. This is an extremely competitive rate; according to BestBrokers.com research, by 2024, Kazakhstan has an electricity price of $0.073 per kilowatt-hour, and the United States has $0.127 per kilowatt-hour. While there is currently no reliable data, the fact that the Dniester River region receives free natural gas suggests that this price may be the cheapest in the world.

According to BestBrokers.com data, the current energy consumption for each Bitcoin is 854,403 kilowatt-hours (a number that has significantly increased in recent years). Based on the above figures, this means that the electricity cost per Bitcoin in the Dniester River region is $36,739, while Bitcoin is around $97,000. The corresponding figures for Kazakhstan are $62,371 and for the United States, it is $108,509 (this U.S. figure is a national average; miners may operate in states with cheaper electricity).

However, since 2019, there have been hardly any further reports, and the website is no longer online, although it was operational until 2022. This does not mean that Bitcoin mining along the Dniester River has stopped but rather reflects that international miners (excluding Russians) did not flock to Tiraspol as hoped. Therefore, considering the wartime conditions and the need for caution, there was no need for publicity.

A report from the Moldovan NGO Anticoruptie indicates that the main mining participants were Goweb International Limited and Tirastel GmbH.

While Western investors are said to be involved, the "investors" are primarily Russians with ties to Gazprom (beneficiaries of part of the natural gas subsidy from Gazprom to the Dniester River region).

Goweb International Limited is an interesting case. The Anticoruptie report states that in January 2018, the British Virgin Islands entity Goweb International Ltd spent $8.7 million to purchase cryptocurrency mining equipment, which was shipped to the Dniester River region, with the funds transferred through Latvia's ABLV Bank. The following month, the U.S. Treasury's Financial Crimes Enforcement Network designated ABLV as a target of investigation for "institutionalized money laundering" related to "Azerbaijan, Russia, and Ukraine." ABLV was also at the core of the 2016 "money laundering scandal" where Moldovan banks were defrauded of $1 billion.

The Anticoruptie report states:

"Goweb International Limited is an offshore company managed by a group of businessmen from Russia, led by Nikita Morozov, specializing in producing and marketing mining equipment.

The company's official website shows that it has the largest mining capacity in Moldova, at 40 MWh, equivalent to six to eight mining farms."

With the February 2022 Russian invasion of Ukraine, Moscow's ability to sell natural gas internationally weakened, and Russia's motivation to switch natural gas to Bitcoin mining only increased.

Use of Bitcoin

There are ample reasons to believe that while Bitcoin mining in the "shadow state" is carried out by private sector participants, it is done with Kremlin support. In the Dniester River region, this link is very evident due to the direct involvement of Igor Chaika. He is ostensibly the Dniester River representative of the Russian business organization 'Delovaya Rossiya,' but it is widely known that he is the de facto head of the Federal Security Service in the region.

Chaika is the son of former Russian Prosecutor General (2006-2020) Yuri Chaika, who was closely associated with Kremlin's abuse of the justice system. His father currently serves as a special envoy to Ramzan Kadyrov, whom Putin dispatched to Chechnya. Meanwhile, his other son, Artyom Chaika, is a businessman who serves as Kadyrov's advisor for "humanitarian, social, and economic affairs"—a role that presumably gives him plenty of time to pursue other interests.

The Balkan Investigative Reporting Network in Kieșinău reported in 2018 that the region was in the early stages of Bitcoin mining:

“Chaika then told the Russian newspaper Kommersant that he hoped to continue with the Bitcoin plan. ‘Now there are prerequisites for continued development.’ ‘We agree with the opinion of the Tiraspol Governor that, after the law comes into force, the authorities will provide us with the infrastructure for the project. We are looking forward to their proposals on the location of the mining farm.’”

Wired reported that Chaika “indicated he was ready to invest 400 million rubles in cryptocurrency mining along the Dniester River.”

According to the August 2024 Swiss SECO sanctions against Igor Chaika, he was responsible for funding the activities of the Russian Federal Security Service (FSB) in destabilizing Moldova. The Swiss sanctions statement stated that he worked closely with Dmitry Milyutin, the Deputy Director of the Federal Security Service responsible for Moldova affairs. Additionally, Chaika, along with Moldovan actors involved in destabilizing the country (including Ilan Shor and Vladimir Plahotniuc), were placed on the sanctions list. The citation reads:

“Igor Chaika is a Russian businessman responsible for fundraising for the Russian Federal Security Service (FSB)’s projects aimed at destabilizing the Republic of Moldova. He plays the role of the Russian ‘cashier,’ channeling funds to FSB assets in the Republic of Moldova to keep the country under Kremlin’s control…”

Given Chaika's role in establishing Russian-Dniester River Bitcoin mining cooperation since 2018, the resulting Bitcoins are likely being used to destabilize Moldova.

The use of Bitcoin to support Kremlin subversion efforts extends far beyond Moldova. For example, a loophole in the U.S. allows anonymous political donations under $200. Large sums can be automatically split and electronically transferred in small donations, with cryptocurrency adding an extra layer of anonymity. For instance, in 2020, the Trump campaign received $378 million in this manner, while the Biden campaign raised $406 million. Neither the campaign teams nor the Federal Election Commission can ascertain the source of this nearly $800 million in funds.

In 2018, the U.S. Department of Justice filed charges against individuals including Netyksho, accusing them of being members or associates of GRU (Russian military intelligence) Unit 26165 (more commonly known as "Fancy Bear") and Unit 74455 ("Sandworm"). The indictment stated that this organization was responsible for the DCLeaks and Guccifer 2.0 incidents:

"Although the conspirators conducted transactions in various currencies, including U.S. dollars, they primarily used Bitcoin to purchase servers, register domain names, and pay for other hacker activities...

Cryptocurrency is equally effective in evading sanctions and paying for restricted military equipment. This is particularly true when collaborating with partners like India, where if discovered, those countries' banks are easily subject to secondary sanctions. In September 2024, the Financial Times of London published leaked materials that detailed the establishment of an India-Russia "closed-loop" transaction route to evade sanctions:

Poida outlined a plan in five stages to assist Russia in using the rupee and establishing a stable supply of dual-use components. Russia would establish a "closed payment system" between Russian and Indian companies, free from Western oversight, "including the use of digital financial assets"...

In November 2024, the U.S. Treasury Department sanctioned four employees of VTB Bank's Shanghai branch and Sberbank's New Delhi branch, likely as a warning to the banking sector. These restrictions are expected to increase the attractiveness of Bitcoin as a settlement mechanism since it does not pose a risk to local banks.

Given this analysis, engaging in Bitcoin mining in Russia's "shadow regions" is an undeniable, profitable, and effectively anonymous way to convert substantial power into money. This money can make well-connected Russians wealthy, enabling them to live affluent lives in places like Dubai and Turkey.

However, this also brings various threats. These threats include destabilizing neighboring countries, exerting covert influence on Western democracies, and collaborating with allies like India to facilitate sanctions evasion.

As Ukraine allies continue efforts to restrict the Kremlin's funding and resources for its illegal aggression in Ukraine, combating this mining activity is a critical priority that requires dedicated efforts. This may involve: cyber warfare measures; blockchain tracking of newly minted tokens to expose those associated with Russian illicit activities; sanctions on platforms promoting mining digital assets; policy-making to cut off the "shadow regions" from cheap energy. Western countries' restrictive measures often lag behind Russia's evasion strategies; the evidence of Bitcoin mining's vulnerability is glaring when it comes to proof of work.

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