​“The country has huge prospects.” How the mining industry works in Russia

While Russian regulators determine the legal framework and how to treat mining and work with representatives of the cryptocurrency mining business, industrial players are increasing capacity, and private miners are adapting to the changing conditions.

By the end of 2022, the share of miners in the total energy consumption of Russia may grow by half or two times, up to 2%. Deputy Energy Minister Pavel Snikkars reported this while speaking at the conference “Cryptocurrencies, Mining and Digital Assets,” organized by RBC-Crypto

Russia is considered an attractive region for both industrial and private mining due to relatively inexpensive electricity tariffs. In this, the legislative process of bitcoin mining, both industrial and small-scale, remains in a “gray” zone. Both the Ministry of Finance and the Bank of Russia put forward their versions of the draft laws, but they have not been able to reach a consensus for quite a long time.

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At the same time, the regions are negotiating with major miners to attract investment. Dmitry Ionin, deputy governor of the Sverdlovsk region, told reporters that major players in the Russian bitcoin mining market may participate in attracting investments in the project to build a data processing center (DPC), in which part of the electricity will be used for cryptocurrency mining.

According to the official, there is a surplus of electricity in a number of places in the region. Local authorities have already held talks with three leading players in the Russian market, including BitRiver. Investments in the project may exceed 1 billion Russian rubles (RUB).

In June, BitRiver partnered with Gazprom Neft to mine cryptocurrencies using associated petroleum gas. In September, the company entered into a partnership with “Yakutsk Electric Grid Company” to build a data center in the Mirninsky district.

“No ban”

If Russia will have clear and non-repressive legislation regulating mining, not requiring universal licensing, the country has huge prospects for industrial mining of cryptocurrencies due to suitable energy and climatic conditions, says ENCRY Foundation co-founder Roman Nekrasov.

In this, bitcoin mining in Russia is not associated with environmental pollution. At the industrial level, it is more profitable to locate mining farms either near hydroelectric power plants or use excessive electricity from thermal power plants, the expert believes.

“Even the option of not adopting any legislation at all is suitable: there is no official permission to engage in mining, there is no mandatory licensing, but there is no ban either,” Nekrasov continues. But the mandatory licensing of miners will completely block the operation of small farms. Only large miners will be able to engage in mining.

Industrial mining is probably the only option for profitable business now. It is the structured approach that can help optimize costs on all fronts, and therefore makes this business profitable, even with the falling value of digital assets, says Berezka DAO and Weezi co-founder Roman Kaufman. “As far as I know, major oil and gas companies have been in mining for a long time and are doing it very successfully,” the expert adds.

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Meanwhile, the global industrial mining market is experiencing a liquidity crisis and a series of bankruptcies, especially among the largest US players. After the collapse of the FTX crypto exchange, local mining companies can not pay back loans and give up hundreds of thousands of devices provided as collateral to raise billions of dollars. Rising electricity prices or a legal ban on mining, as in China, encourage miners to relocate to regions more loyal to the mining industry, including Russia or Kazakhstan, where cryptocurrency mining also becomes a licensed business.

Foreign investors, including those from the United States, are already present in the Russian mining industry, Nekrasov says. But in the current geopolitical situation, they prefer to hide behind an extensive network of companies from Asia, as well as in general try not to openly state their presence, the expert adds.

According to Nekrasov, an inflow of foreign investors should not be expected now. This is associated with the risks of secondary sanctions. “Those who already have assets or interests here are sitting and not going anywhere. But they do not increase production and try to keep their presence here secret,” commented the ENCRY Foundation representative.

Open migration of foreign industrial miners in the current geopolitical situation is impossible, Kaufman believes. “On one side is geopolitics, on the other side is the tossing of legislative representatives to one side or the other. We hope for better times,” the co-founder of Berezka DAO explains.

“We can expect raids”

Speaking at the conference, Deputy Energy Minister also noted that there is a big problem in Russia on the part of individual miners who use cheap electricity, which leads to an increase in its consumption. This growth, according to Snikkars, in some cases is not covered by technical capabilities, and power engineers have to take preventive measures to ensure reliable supplies. Commenting on the mining draft law, Snikkars stressed that he is in favor of regulating the industry and for mining to get a definition.

Smaller miners will be negatively impacted by the proposed legislation, Nekrasov believes. “It is not easy to detect small-scale miners. I think if the legislation in its current form is adopted, we can expect raids on data centers and demonstrative court cases to intimidate businesses,” the expert warns.

“Private mining, like private business in Russia, is incredibly challenging,” Kaufman agrees when asked about the prospects for private mining in Russia.

Nevertheless, in the fourth quarter of this year, Russia recorded an increase in demand for ASIC miners. Chilkoot, a distributor of cryptocurrency mining equipment manufacturers, reported that sales in October and November exceeded volumes for the entire third quarter. In addition, sales for nine months exceeded the figures for 2021 by 65%. BitRiver also confirmed the growth of demand by one and a half times in ten months of this year. At the same time, demand for graphics cards, on the contrary, has fallen,

According to representatives of M.Video-Eldorado and Ozon, the cost of graphics cards has fallen by an average of 40-50%. According to experts, the drop in demand for graphics cards was caused by a general decline in global demand for computers, as well as the actual stop of mining on graphics cards. In addition, manufacturers still have significant inventories, which led to a price drop of 54% compared to last year. Citilink expects this trend to continue.

It is difficult to assess the prospects of GPU mining, Kaufman says. Ethereum, as one of the fundamental assets previously mined with graphics cards, has moved to PoS consensus. “It is very dangerous to mine something else, as many of the cryptocurrencies that work with mining have gone into oblivion,” the expert adds.

Buying used graphics cards has always been a dubious idea, Nekrasov believes. According to him, now it is possible to mine cryptocurrencies that are still mined on graphics cards, the same Ravencoin (RVN), but so far it is not profitable. “Buying used graphics cards for the future is totally crazy. It is better to invest in something else,” the ENCRY Foundation representative advises.