Bitcoins instead of Bombs

Das bergige Dagestan im Süden Russlands ist einer der Mining-Hotspots des Landes. Bild: öffentliche Domäne.

Russian President Vladimir Putin Complains That Crypto Miners Are Causing Power Outages in His Country. Do the Miners Contribute to Involuntary Disarmament?

One of the newer killer applications of Bitcoin mining is that not-so-democratic governments blame miners when the power grid falters.

After Venezuela and Iran, Russia now appears to be adopting this tactic. Recently, Russian President Vladimir Putin stated in a video on economic issues that unregulated crypto mining is affecting Russia’s power grid and causing widespread blackouts.

„An uncontrolled increase in electricity consumption for mining cryptocurrencies can lead to power shortages in various regions,“ Putin explained. „Crypto“ here primarily refers to Bitcoin.

The Russian Ministry of Energy estimates that crypto mining consumes about 16 billion kilowatt-hours per year, which is approximately 1.5 percent of Russia’s total power consumption. This would account for about one-tenth of Bitcoin’s total consumption globally, which seems slightly exaggerated.

If this were indeed the case, if Bitcoin mining were causing power shortages in Russia, it would be a welcome development. Because with the electricity consumed by miners, no bombs and weapons are produced. Thus, Bitcoin could contribute more to peace than some sanctions.

Aging Grids and Illegal Farms

However, it sounds scarcely credible that a mere 1.5 percent increase in consumption would push Russia’s power grids to their limits.

In reality, much depends on the regions. For instance, the North Caucasian republic of Dagestan is considered a mining hotspot in Russia. Low electricity prices and lax oversight have attracted many miners, who often draw power uncontrollably in illegal farms, sometimes even stealing it.

Authorities shut down 16 illegal mining farms in Dagestan in 2023 alone. Many residents report how old industrial plants were suddenly reactivated, leading to frequent power outages. About a year ago, a power outage during a heatwave knocked out air conditioners for several days, leading to widespread protests in Dagestan’s capital, Makhachkala.

Power outages are also mounting in other regions of the country, such as North Ossetia, Chechnya, Kabardino-Balkaria, Karachay-Cherkessia, Krasnodar, and Rostov. Most of these regions are in the south of the country, where air conditioners are currently driving up electricity consumption due to high temperatures.

According to the Moscow Times, one primary reason for the power outages is the aging infrastructure. As always, when a country focuses on waging war, it comes at a price. A nuclear power plant is throttled, maintenance work and disruptions cause parts of the network to fail, sanctions make it difficult to replace Western components, and Ukrainian drone attacks on refineries also have their effect.

Politically Contradictory Statements

However, some observers make it too easy by dismissing Putin’s claim that miners are to blame as „typical Russian lies“ or simply calling it „ridiculous.“

Not only can the clustered concentration of mining farms consume far more than just 1.5 percent of the available electricity regionally. Some experts, like a representative from the Russian mining company BitRivet, believe that the state energy agency’s 1.5 percent figure is far too low. They only account for official, corporate farms, ignoring private mining, which makes up at least as much again.

The more vital Bitcoin becomes to Russians, the stronger the incentives for mining. Combined with cheap electricity and partially dilapidated grids, this could be the straw that breaks the camel’s back.

So when Putin cites the concerns of regional authorities that Bitcoin mining „could threaten new businesses, residential centers, and social institutions with supply disruptions and delay promising investments and infrastructure projects,“ it could be propaganda to divert from homemade issues, but there could also be a kernel of truth.

Russia’s head of state is now calling on the Duma to pass federal legislation to standardize the taxation and regulation of miners. In particular, special electricity prices for miners are likely to be introduced.

At the same time, just a week earlier, the Duma approved a draft law that legalizes mining. The draft, submitted in November 2022, places mining on a legal basis in Russia for the first time but simultaneously bans the circulation of digital currencies in the country. Russia’s crypto policy thus remains as contradictory as ever.