Behind Russia’s Bitcoin Craze: Crypto Mining in “Shadow Regions”

Original title: The Other Bitcoin Boom: Crypto Mining in Russia’s Shadow Territories

Original author: Neil Barnett, RUSI

Original translation: Felix, PANews

In a world where the Kremlin is increasingly isolated 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 cryptocurrencies has gradually become popular. Since 2018/19, this has been happening on a large scale in Russia’s “shadow territories” (Transnistria, Donbass and Abkhazia). The use of these legally unclear categories can conceal facts and allow the plunder of the Russian state’s 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 has been 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 one’s tracks for nefarious purposes. These methods include using mixers such as Tornado Cash to obscure on-chain tracing; using a darknet system called “The Onion Router”; or simply purchasing an offline Bitcoin wallet from its owner for a cash premium. Mining new Bitcoins also provides a degree of protection, as there is no history of when the coins 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, Bitcoin’s 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 coins.

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 "it costs $321,112 to mine Bitcoin in Ireland, while in Iran, miners only pay $1,324, which is more than 240 times cheaper." Even if Bitcoin approaches $100,000, Bitcoin mining will still be uneconomical in many jurisdictions.

Transnistria, Donbass and Abkhazia did not make 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 by the survey, which was based on the electricity prices announced by the state. Such research methods are invalid if the cost of electricity is close to zero and the regions in question are not internationally recognized.

Gray Areas

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

Transnistria: uses 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 a price of $0.043 per kilowatt-hour.

Donbass: Has been using electricity from coal-fired power plants since 2021, 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: Has been using electricity from the Enguri hydropower station on the border with Georgia since 2015/16, 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 has dropped sharply in Abkhazia and Georgia itself since 2023.

Transnistria: A Perfect Bitcoin Mining Environment

Transnistria’s access to free gas from Gazprom and significant power generation capacity make it an attractive location for Bitcoin mining.

The key factor here is the arrangement between Moldova proper and Transnistria for gas supply and power generation. Both regions receive Gazprom gas via pipeline, and both regions’ gas is billed through Gazprom’s contract with Moldovagas (which is 50% controlled by Gazprom). However, while Moldova pays for the gas, Transnistria’s gas is nominally added to Moldovagas’s debt of approximately $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 co-dependency between otherwise hostile entities.

This free energy is a subsidy from Moscow 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 local regime.

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 Transnistria's 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 offers a near-perfect environment for Bitcoin mining. Given the large power capacity of the MGRES power station and access to free gas, the incentive to engage in Bitcoin mining is obvious. In 2018, the Transnistria region passed legislation that provided 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 a price of $0.043 per kilowatt-hour. This is a very competitive price; according to BestBrokers.com research, the price of electricity in Kazakhstan in 2024 is $0.073 per kilowatt-hour and in the United States it is $0.127 per kilowatt-hour. Although there is no reliable data at present, the fact that Transnistria receives free gas means that this price may be the cheapest in the world.

According to BestBrokers.com, it currently takes 854,403 kWh of electricity to produce one Bitcoin (a figure that has risen significantly in recent years). Based on the above numbers, this means that electricity costs $36,739 per bitcoin in Transnistria, 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).

However, since 2019, 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 is no need for publicity.

Reports by the Moldova NGO Anticoruptie indicate that the main mining players are Goweb International Limited and Tirastel GmbH.

While Western investors are allegedly involved, the “investors” are mainly Russian and connected to Gazprom (benefiting from part of the gas subsidies provided by Gazprom 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.

Anticoruptie’s report reads:

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

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

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

How Bitcoin is Used

There is good reason to believe that “shadow state” Bitcoin mining, while conducted by private sector actors, is run with the support of the Kremlin. In Transnistria, this connection is very clear due to the direct involvement of Igor Chaika, who 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 abuses 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 at the time:

“Chaika subsequently told Russian daily Kommersant that he wanted 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 force, the authorities will provide us with the infrastructure for the project. We expect them to make recommendations on where to create the mine.”

Chaika "said he was ready to invest 400 million rubles in cryptocurrency mining in Transnistria," Wired reported.

According to the August 2024 Swiss SECO sanctions against Igor Chaika, he was responsible for financing the destabilizing activities of the Russian Federal Security Service (FSB) in Moldova itself. The Swiss sanctions statement said he worked closely with Dmitry Milyutin, deputy director of the Federal Security Service responsible for Moldova. Furthermore, Chaika was included on the sanctions list alongside Moldovan individuals for their 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 acted 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 collaboration since 2018, it is likely that the resulting Bitcoins were used to destabilize Moldova.

The use of Bitcoin to support Kremlin subversive actions 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 in the form of smaller donations, while 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 FEC to determine where the nearly $800 million came from.

In 2018, the U.S. Department of Justice indicted Netyksho and others, alleging they were members or associates of GRU (Russian military intelligence agency) Unit 26165 (better known as "Fancy Bear") and Unit 74455 ("Sandworm"). The indictment named the group responsible for the DCLeaks and Guccifer 2.0 incidents:

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

Cryptocurrencies are also 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 Indo-Russian “closed-circuit” transaction route to evade sanctions:

Poida outlined a five-phase plan to help Russia use the rupee and establish a steady supply of dual-use components. Russia will create a "closed payment system" between Russian and Indian companies, free from Western oversight, "including the use of digital financial assets"...

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

Given this analysis, Bitcoin mining in Russia's "shadow regions" is an undeniable, profitable and virtually anonymous way to turn a lot of power into money. This money can make well-connected Russians rich and allow them to live a wealthy life in places like Dubai and Turkey.

It also poses multiple threats. These threats include destabilizing neighboring countries, exerting covert influence on Western democracies, and working with allies such as India to facilitate sanctions evasion.

As Ukraine’s allies continue their efforts 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 illicit Russian 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.

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