Cryptocurrency Operations Expand in Russia

Executive Summary

• Cryptocurrency use has expanded in Russia since the beginning of the war against Ukraine and is being embraced as a method of subverting economic isolation.
• Russia and Belarus are using the development of blockchain-based technologies to enable continued access to international trade without using traditional payment systems.
• The region’s traditional challenges surrounding money laundering and the rule of law make the use of cryptocurrencies and blockchain-based technologies across the post-Soviet space a challenge to international security.

On June 4, Russian news outlet Izvestiya reported that the Russian Ministry of Finance supports the recognition of cryptomining and is assigning it to the code of the Russian National Classifier of Economic Activities. This recognition will allow the Russian government to adopt regulations to monitor and track cryptocurrency developments in Russia. It will also provide better information for power grid construction to adapt to the increased power usage needed for cryptomining. Additionally, the official recognition of cryptomining and the wider use of cryptocurrency will allow Russian businesses to use cryptocurrencies in international transactions with countries where it is legally recognized and thus circumvent Western sanctions (Izvestiya, June 4). Moscow’s invasion of Ukraine has accelerated a move toward increased adoption of cryptocurrencies across the post-Soviet space, as well as cryptomining through the deployment of blockchain technologies for international trade. The prospective widespread use of such methods present a challenge to global security, as tracking illicit financing will become even more difficult.  

Russia already had some of the most well-developed cryptocurrency ecosystems in the world leading up to the war in Ukraine. The International Monetary Fund estimated in 2022 that Russians were earning 11 percent of the $1.4 billion in revenue generated every month by mining operations. Legally sanctioned mining operations were estimated to be in the hundreds of thousands, operating in tandem with a large number of unsanctioned operations (RBC, April 20, 2022). On the eve of the expanded invasion, Kremlin estimates placed Russian citizens’ cryptocurrency holdings at $214 billion, 12 percent of the global total. This number does not count currencies not listed in public blockchains (Vedomosti, February 1, 2022). 

Cryptocurrency mining operations have spread across Eurasia, often using underutilized electricity generation for operations. Mining operations in Russia consumed between 1.5 and 1.7 gigawatts of power in 2023, significantly expanding over the past two years. Only the United States rivals that capacity (RBC, April 17). In Russia proper, the Irkutsk region of Siberia has become the country’s center for mining activities, both legal and illegal, due to cheap electricity from the Angarsk Hydroelectric Power Station, with authorities receiving over 1,500 noise complaints from illegal operations in 2023 (Irk, December 25, 2023). The director of a regional energy company estimated that the amount of electricity diverted to underground cryptomining in Irkutsk is larger than the total power generated by the region’s hydroelectric power plant (Interfax, May 19, 2023).

Disputed regions of the post-Soviet space already began to embrace cryptocurrencies in the 2010s to combat their economic isolation and use dormant energy resources. For example, the breakaway region of Transnistria in Moldova has actively pursued mining operations and sought Russian investors by creating a legal framework in 2018 (see EDM, April 17, 2019). Mining operations now consume so much electricity that the Moldovan Security Service has labeled them a national security risk (EADaily, November 22, 2021).

The breakaway Georgian Republic of Abkhazia initially pushed for the expansion of cryptocurrency, legalizing mining in 2020 (see EDM, August 14, 2020). Operations rapidly expanded, placing the antiquated grid under enormous strain. As a result, the populace began experiencing blackouts the following year (Kavkaz Uzel, April 1, 2021). The problems did not cease with legal restrictions. Now, the legal authorities are establishing task forces in urban centers to deal with the scale of illegal cryptomining operations (Interfax, February 7).

Belarus has also faced the brunt of Western sanctions in the aftermath of the Ukraine invasion. Minsk first legalized cryptocurrencies in 2017 as part of a broader strategy to develop the information technology sector. The government has exempted cryptomining from taxation through January 2025 (see EDM, January 8, 2028; Bits.media, January 28). President Alyaksandr Lukashenka has openly called on the country to embrace cryptomining instead of agriculture to increase the country’s national wealth. Additionally, Belarusbank, the country’s largest bank, opened a cryptocurrency exchange service in 2020.

In general, Belarusian citizens do not need to declare their holdings in cryptocurrencies to the government (RBC, August 27, 2021). This activity is reflected in transaction data. A study based on incomplete blockchain transaction data given to the press by the Russian Central Bank found that 4.78 trillion rubles ($52.1 billion) worth of transactions were performed on accounts that Russian citizens controlled in 2023, compared with a nominal gross domestic product of $1.862 trillion (Interfax, March 29). The government estimate is likely conservative. Thirteen million Russians, approximately 9 percent of the total population, performed cryptocurrency operations. One million perform daily transactions from accounts that contain more than 10 billion rubles ($100 million), according to estimates by Sberbank, Russia’s state-owned bank (RBC, May 30, 2023).

The Russian Central Bank has expressed its own concern regarding the increasing use of cryptocurrencies and the risks that such activities pose for macroeconomic stability. The bank has begun recommending that financial institutions reduce their exposure, while ministers have expressed support for using mined cryptocurrencies for foreign trade (Vedomosti, February 28). The Russian State Duma has struggled to develop frameworks to regulate operations. The most recently introduced legislation called for limits on mining for Russian legal entities or register businesspeople and imposed limits on the energy that can be consumed by such operations (Hightech.plus, April 27).

One method of applying blockchain technology more securely is through Digital Financial Assets, a system being developed by the Russian Central Bank and the Ministry of Finance. These assets would also use a blockchain-based ledger but would be issued by a financial institution and tied to a physical asset, such as gold or oil (Izvestiya, February 16). These could be used in trade with the developing world, bypassing sanctions. In March, Russian President Vladimir Putin signed into law legislation legalizing such assets for international accounts (RBC, March 11).

These Digital Financial Assets are, in turn, being actively discussed as a basis for creating new financial systems that could process transactions for BRICS countries (a loose political-economic grouping originally consisting of Brazil, Russia, India, China, and South Africa) outside the limits of traditionally US- and EU-dominated financial institutions. They could also reduce the role of the US dollar as a reserve currency. In 2023, during a summit in Johannesburg, South Africa, BRICS leaders declared they would pursue these financial goals. Yuri Ushakov, an advisor to Putin, has noted that raising BRICS’s role in the global financial system is the group’s main goal for 2024 (TASS, March 5).

Russia is rapidly developing expertise in blockchain and cryptocurrencies. The war against Ukraine has expanded the need for cryptocurrencies beyond the region’s thriving cybercriminal underground into the hands of ordinary citizens and, potentially, the Kremlin and rulers of breakaway regions. Given the region’s traditional challenges surrounding money laundering and the rule of law, along with a desire among leadership to separate from Western-dominated financial institutions, the rapidly expanding use of cryptocurrencies and blockchain-based technologies across the post-Soviet space poses a challenge to international security.