Will Belarus Lure Crypto Miners Amid Sanctions, Russia-Ukraine War?
Despite favorable business conditions, a country’s political environment can deter international capital. This piece is part of CoinDesk's Mining Week
Belarus is trying to attract cryptocurrency miners with low taxes to boost its economy. But will global investors put money into a country often referred to as “Europe’s last dictatorship”?
In 2017, President Alexander Lukashenko signed a decree to facilitate the creation of high-tech businesses, including crypto mining. The decree, which took effect in 2018, also recognized smart contracts as legally enforceable – a global first.
This piece is part of CoinDesk's Mining Week series.
More recently, in September 2021 Belarus introduced special electricity tariffs for crypto miners; in January it started paving the way for investment funds to buy crypto.
“There aren’t many points of growth for our economy today,” said Denis Aleinikov, a senior partner at Aleinikov & Partners, a law firm in the capital city of Minsk. “The government has to do something brave and unusual.”
Under the decree, which Aleinikov helped draft, businesses in Minsk’s High-Tech Park (HTP) are exempt from corporate taxes on profits. Instead, they pay just 1% of their gross revenue, according to Dmitry Matveyev, a partner at Aleinikov’s firm. It takes two months for a company with the necessary documents to be admitted to the park, he said.
Despite these incentives, Belarus, with a population of 9 million, accounts for less than 0.01% of the entire Bitcoin network's hashrate, a measure of computing power on the network, according to the Cambridge Bitcoin Electricity Consumption Index. By comparison, Sweden, with 10 million people, accounts for 1.18% of the network’s hashrate, according to the same index.
Belarus’s struggle to lure miners shows how, despite favorable business conditions, a country's political environment can be a major deterrent in attracting international capital. That was the case even before Russian President Vladmir Putin, Lukashenko’s close ally, invaded Ukraine. The war has brought fresh sanctions against Russia and Belarus from the West and it remains to be seen how this will affect Minsk’s allure as a place to spin up mining rigs.
The sanctions could increase interest in crypto, said an executive at a Belarussian tech provider, who requested anonymity, citing the country's sensitive political situation. The Minsk High Tech Park is discussing allowing residents to use crypto for settlements between counterparties, he said, which indicates that crypto could soon be used for to circumvent sanctions.
The main change after the war in Ukraine is that ballooning sanctions “may just further incentivize the Belarussian government to accelerate activity in the mining sector since they may need to find ways to work around the restrictions,” said David Carlisle, the director of policy and regulatory affairs at blockchain analytics firm Elliptic.
New electricity tariffs for crypto miners
“At the moment, small-scale private mining is more common in Belarus,” said Yury Kaliaha, mining director for local miner GreenMiner. Until recently the electricity tariffs were too high for industrial-scale mining, Kaliaha said.
In September, the government announced crypto miners would pay preferential electricity prices, as would other types of data centers. According to the Belarussian tech provider, miners usually pay $0.07 to $0.09 per kilowatt hour (kWh), and the lowest rate is $0.058 per kWh.
That’s on a par with or better than electricity prices in U.S. states like Texas and Washington, where massive mining operations have been built in the last two years. There, prices range from $0.07 to $0.09 per kWh, according to the U.S. Chamber of Commerce’s Global Energy Institute.
Belarus’ electricity tariff depends on the size of the mining operation, with mines with an energy capacity of approximately 3 megawatts (MW) or more subject to lower tariffs, explained Vitali Sabaleuski, founder of Minsk crypto miner United Mining Company. Sabaleuski’s firm mines ether (ETH) and bitcoin (BTC) with a total hashrate of about 50 gigahashes, a small operation by global standards.
Another breakthrough for Belarus’s energy market was its first nuclear plant, which started running in June 2021. The plant has a power capacity of 1,110 megawatts (MW), according to the World Nuclear Association. Another reactor is expected to be operational later in 2022, adding 1,110 MW to the grid. Both projects are financed by Russia.
“This power plant produces more power than we need in Belarus. Hence, we’ll have to either export electricity or mine crypto assets,” Matveyev said. The higher the consumption of electricity from the nuclear plant, the more prices will be lowered, as the plant makes back its original investment, the lawyer added.
Kaliaha said that while a lot of incentives for crypto mining have been created, the barrier remains high because obtaining a special tariff is reserved for fairly large operations, approximately 3MW.
“Even though there are enthusiastic private individuals trying to mine bitcoin or other cryptocurrencies, in general, the government is waiting for large investors to provide them with some capacities and then collect taxes from them,” he said.
Some investors have taken note of the new tariffs. “There are requests from investors to host mining sites, but so far these are rare. Most of them are miners from Russia and China,” the tech provider's executive said, citing the Ministry of Economy.
Sabaleuski is working with miners from Eastern Europe who are looking to move some of their hashrate to Belarus. He noted that due to the current policy uncertainty in Russia, many miners there are considering moving their operations.
Kaliaha, who is setting up a company to provide service for turnkey miners in Belarus, is helping a Singaporean company with its Minsk HTP paperwork. The company is looking to engage in mining in Belarus.
A question of stability
It is hoped the new infrastructure will bring a stable electricity supply to Belarus, such that crypto miners’ operations are not interrupted or curtailed, miners said.
In another part of the former Soviet bloc, in Kazakhstan, the national grid has crumbled under the pressure of an influx of miners in 2021 as well as failures in the infrastructure. Electricity was initially rationed and eventually cut off to legally operating mines, despite government assurances.
The energy system is one of Belarus’s strengths, and the construction of the new nuclear plant will help the country avoid pitfalls similar to Kazakhstan’s, according to Kaliaha.
While the Belarussian power grid, inherited from the USSR., has depreciated, its condition is not as critical as those in Kazakhstsan or Kosovo, a local executive said. Theoretically, if there is a huge jump in new mining sites, blackouts could occur, he acknowledged. But the government is working with energy producers and distributors to estimate the grid load before granting mining licenses to avoid an electricity crunch, he said. Given that it is unlikely a huge number of miners will migrate overnight, the grid can withstand the power demand from miners, the tech provider said.
Other than energy security, many Western investors question the political stability in Belarus, given its image in the international press. Headlines related to Belarus in the last few years have been dominated by the violent suppression of anti-government protests, the forced landing of a commercial plane carrying an opposition figure, and what the European Union calls the “instrumentalisation of human beings” related to migrants and refugees being pushed from Belarus to EU borders.
Most recently, Belarus’ involvement in the war in Ukraine has come under severe scrutiny. Russian troops entered Belarus for military drills and then allegedly drove south to attack Ukraine’s capital, Kyiv. The Kremlin has also reportedly used Belarussian land to launch missiles on Ukraine. President Lukashenko has repeatedly denied that he plans to deploy active troops in battle.
Capital allocation demands stability, and crypto mining businesses are realizing this, said Alan Konevsky, chief legal officer at U.S. bitcoin mining firm PrimeBlock. Konevsky pointed to China and Kazakhstan as examples of places where political instability has decimated the mining industry.
Lawyers Aleinikov and Metveyev said the Lukashenko government is committed to attracting crypto miners, and tech firms more broadly, at least in the medium term.
Since the president’s decree came into effect in March 2018 there have been no changes, they pointed out. Many IT firms that set up at the HTP after the decree are still there, they said. The two said they expect the government to extend the tax benefits afforded to crypto miners.
Mining has received broad support from government branches, said Sabaleuski, who has been sitting in meetings with the authorities. The Ministry of Economy finds the mining sector favorable because it essentially converts Belarussian assets, namely electricity, into an export product, cryptocurrencies. The central bank sees it as the first step towards building blockchain wallets and a digital currency, whereas the customs authorities enjoy revenue from imported equipment.
The entrepreneur added that unlike in other countries of the former Soviet bloc, miners in Belarus don’t have to worry their machines will be stolen overnight, he said.
International sanctions and crypto mining
There is one political aspect that distinguishes Belarus from other former Soviet countries: It is sanctioned by the U.S. and EU
The tech provider knows this is an issue: “The negative picture of our country after the events of August 2020 worries both private business and the authorities. Given the situation, it is unlikely that we will be able to attract cryptocurrency miners from Europe, United States, Canada or other countries anytime soon.”
A wave of anti-government protests had already been underway when, in August 2020, Lukashenko was once again declared the winner of the presidential election. The government responded to the civil unrest with batons and rubber bullets, including attacks on journalists, according to human rights group Amnesty International.
While the Belarussian power grid, inherited from the USSR., has depreciated, its condition is not as critical as those in Kazakhstsan or Kosovo, asaid. Theoretically, if there is a huge jump in new mining sites, blackouts could occur, he acknowledged. But the government is working with energy producers and distributors to estimate the grid load before granting mining licenses to avoid an electricity crunch, he said. Given that it is unlikely a huge number of miners will migrate overnight, the grid can withstand the power demand from miners, said the executive from the tech provider.
United Mining Group’s Sabaleuski said he hasn’t faced any issues with sourcing equipment. All it takes is finding a supplier in Hong Kong or mainland China or one in Moscow, if looking for cheaper equipment, he said.
The sanctions to which Belarus is subject are not similar to the near-blanket bans on Iran or North Korea. They target specific entities and people, usually associated with alleged government abuses.
“Theoretically, Belarussian companies engaged in mining that aren't subject to sanctions are not necessarily restricted from doing business with companies from other parts of the world,” said Carlisle.
There’s a catch: Crypto mining firms that leverage “state-owned energy or industrial infrastructure” could be subject to sanctions, said Carlisle, who previously worked on sanctions enforcement in the U.S. Treasury Department. A company that is simply reaping some tax or other benefits from the government is not problematic, but in a case where, for example, the government receives windfall profits from a firm’s activities, sanctions law could kick in.
It is possible to do business in Belarus while avoiding sanctioned companies, Sabaleuski said. “You know who they are, and you can just avoid doing business with them,” he said.
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