coindesk.com
After Russia started the war in Ukraine in February, the European Union and U.S. expanded sanctions. Western companies fled Russia, leaving behind facilities, goods and local staff.
You would think the Russian cryptocurrency mining market, long popular for cheap Siberian hydropower, would feel the heat, too. In April, one of the largest mining companies in Russia, BitRiver, was hit by U.S. sanctions.
That immediately affected BitRiver’s business: Compass, a U.S. mining company, ceased doing business with BitRiver and reportedly tried to sell the hardware it placed in BitRiver’s facility in Siberia. The machines got stuck in negotiations between the erstwhile partners. Then, Japanese bank SBI said it was out of Russia – meaning, out of BitRiver’s farm, as CoinDesk reported.
Read more: Sanctioned Bitcoin Mining Firm BitRiver Loses Another Client as SBI Leaves: Sources
However, no other Russian mining firms have been sanctioned so far, and clients from the EU and U.S. aren’t leaving in a panic – on the contrary, old clients have stayed and some new ones have come in, say people in the industry.
“Nothing changed. In crypto, people don’t care about these sanctions. Everyone who has been working here keeps working,” said Artem Eremin, CEO of Chilkoot, a mining hardware reseller.
The reason: Russia is still an attractive place for mining thanks to cheap electricity, even more so now when other previously popular jurisdictions have made life harder for miners. China outlawed mining last year. Kazakhstan cut off all power to mines for several months in early 2021 and increased energy costs for miners with a new tax this year.
“There is nowhere else to go,” Eremin said.
‘No one’s leaving’
MEATEC, a German company, is operating a mining facility at a former abandoned factory in Irkutsk, one of the largest cities in Siberia. The firm currently has 110 megawatts (MW) of hosting capacity, of which 40 MW are unoccupied, and is looking to add another 60 MW before the end of this year, Dan Haas, MEATEC’s CEO and co-founder, told CoinDesk.
This capacity, comparable to BitRiver’s, is in high demand among clients from Germany, the U.K., the U.S., Canada, Iran, Japan, New Zealand and other countries as well as local Russian miners, said MEATEC’s head of foreign relations, Alexander Swid. Europe accounts for around 50% of the mix; Russia, up to 30%. The U.S. makes up about 10% and “a big request” for placement of specialized mining chips, known as ASICs, came from the U.S. recently, Haas said.
“No client is leaving,” Swid said. Even now – with the ruble stronger against the U.S. dollar than it was before the war and electricity prices (which are set in rubles) higher – Russia remains a preferable mining location, Swid said.
MEATEC started its mining business in 2017 in Austria, Haas said. However, electricity prices there were not attractive. Later, MEATEC partnered with a U.S.-based mining farm (neither Haas nor Swid would name it), but the collaboration was not satisfying, Haas said: according to him, the uptime on the facility was usually around 60% to 70%, meaning the hardware was running no more than 70% of time.
In 2017, MEATEC moved to Russia, repurposed the abandoned factory into a mining farm and signed a 65-year contract with Irkutskenergo, the local power grid company, according to Haas and Swid. For several years the company kept a low profile and didn’t do any marketing, so clients had to find MEATEC through word of mouth.
The reason miners from the U.S. and Europe are interested in MEATEC’s Siberian venue is that the local electricity grid has a lot of spare capacity. In the U.S., by contrast, the recent heat wave stretched power resources thin and miners had to unplug a few times, noted Tatiana Yakim, the chief financial officer of Summit Mining, an Ireland-based mining company working mostly with customers in France.
Read more: The End of the Texas Bitcoin Mining Gold Rush
Summit Mining’s business essentially started in Russia, Yakim told CoinDesk, when founder Mathieu Vincent asked her to help set up his mining equipment there in 2019. Now, Summit has hardware in the U.S., Canada and Iceland as well, but Russian farms in Irkutsk and Krasnoyarsk still host 40% of the 20,000 machines the firm is operating worldwide, Yakim said. All the machines in Russia were purchased before the war started in February 2022, she said.
Expansion on hold
The news of the war and sanctions did not worry Summit’s clients, Yakim said: The matter hardly came up during Vincent’s weekly ask-me-anything (AMA) sessions. However, the firm decided to scrap a plan to build its own mining facility in Russia, which had been in the final stages of approval just this winter.
In early February, the company was about to invest 1 million euros (about US$1 million) in building its first mining farm in Russia, Yakim said. So far, Summit has been hosting its machines in venues owned by big Russian mining firms – she wouldn’t say which ones. But after the war started the project was shut down.
“It’s not clear how far the sanctions will go,” Yakim said. “If something goes wrong, it’s not clear how to get money out of Russia and back to our European company.” Now, Summit only considers expansion into the U.S. and Canada, Yakim added.
The main problem with Russia now is that no European bank will send money to a Russian company, Yakim said, even if the Russian company uses a bank not on any sanction list.
“If you’re a new miner in Europe and are trying to send money to Russia for the first time, your bank would ask questions [about] why you suddenly started doing business with Russia,” she said.
However, banks in Dubai and the United Arab Emirates continue to do business with their Russian counterparts, Yakim said. As for Summit, it has found a solution to send money to and from Russia through a bank outside of Europe, Yakim said, without naming the institution.
Ninety percent of Summit’s clients are French, Yakim said, mining mainly bitcoin (BTC) and ether (ETH mining machines are on sale now due to Ethereum’s switch to a different consensus protocol, proof-of-stake instead of proof-of-work).
Scary precedent or nothing?
BitRiver was the first mining company to have the dubious honor of being listed on the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) list, and its case was different from other sanctioned crypto projects such as the over-the-counter (OTC) broker Suex, the Chatex exchange and non-custodial mixer Tornado Cash (all with Russian roots as well).
BitRiver was not accused of any wrongdoing, such as money laundering; the problem was that mining companies “help Russia monetize its natural resources,” according to an OFAC press release from April.
“The United States is committed to ensuring that no asset, no matter how complex, becomes a mechanism for the Putin regime to offset the impact of sanctions,” the document explained.
MEATEC took the news in stride: The company’s main legal entity, MEATEC LLC, is registered in the republic of Georgia, and the firm owns two companies registered in Russia, so “there is no risk,” Swid said.
“We are working with lawyers specializing in global sanctions and they said we’re not violating any sanction at the moment,” Yakim said.
These days, miners working in Russia are hiding their actual beneficial owners more often than they once did, Chilkoot’s Eremin said, but the demand for Russian mining farms stays high.
Some miners from the West left their equipment in Russia and quit, but others are sitting tight and continuing to mine, Nikita Vassev, founder of a popular mining conference in Russia, TerraCrypto, told CoinDesk.
Every four years, the Bitcoin network’s software reduces by 50% the amount of new bitcoin paid to miners for mining a block, making this business more challenging over time.
“Now it's an important time: only two years left before the next halving, and everyone understands they need to work hard to make some money before the rewards are cut in half,” Vassev said.
“Not a single client [from Europe and America] has left,” Sergey Arestov, co-founder of a Russian mining firm BitCluster, told CoinDesk, adding that Chinese clients, in the meantime, are as willing to mine in Russia as ever.
He acknowledged that purely pragmatic issues have arisen after the war started and sanctions were imposed on Russia. As the country became more isolated from the global financial system and payments to and from Russia became problematic, clients from the West stopped importing new mining equipment to Russian mining sites.
Plus, the extraordinarily high exchange rate of the Russian ruble against the greenback, combined with the low dollar price of bitcoin, makes mining in Russia less profitable, Arestov added. When the war started, some of BitCluster’s clients put on hold transporting their machines to Russia, but then, everything resumed as usual.
“People looked around, saw that the nuclear war didn’t start and got back to work,” Arestov said.