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Bitcoin Blackouts: Russian Cryptocurrency 'Miners' Minting Millions While Sucking Abkhazia's Electricity Grid Dry

November 25, 2020

In the side streets and narrow alleys of Abkhazia’s main city, a low growl and an oily stench are common once again. Thrumming diesel generators provide power amid rolling blackouts that have infuriated residents and evoked memories of the postwar chaos nearly three decades ago.

But what’s more infuriating for many Abkhaz is what’s causing the blackouts: bitcoin.

Or, to be more precise, the cryptocurrency “miners” whose computer servers are sucking the breakaway Georgian region’s electrical grid dry.

“To be honest, after the war, in my opinion, it was easier,” said one frustrated Sukhumi resident, Rimma Khashba, 67.

“We have to get used to the schedule that they dictate to us. It’s very difficult, because it’s constant: The lights are on, the water’s off; the water’s on, the lights are off. Or the Internet goes off. You can’t even turn on the washing machine to do the wash,” she told RFE/RL.

Isolated and cut off from much of the world since 2008, Abkhazia’s economy relies heavily on trade with Russia, with produce heading north and Russian tourists and intrepid businessmen heading south.

But since 2016, the region of 250,000 people has also been home to a thriving cryptocurrency industry. Entrepreneurs -- mainly Russian -- are importing computer parts and taking advantage of Abkhazia’s cheap electricity rates, inexpensive real estate, and loose regulations from the de facto government to set up “server farms” and seek profit from the global explosion in digital currencies.

Unlike real-world currencies, which are printed or minted by governments, digital currencies, roughly speaking, involve running sophisticated computer algorithms that basically create -- or “mine” -- the currencies. That requires major amounts of energy-intensive, expensive computer hardware.

Independent of Abkhazia’s low-regulation environment, there’s another current benefit: cryptocurrency values are soaring. A single bitcoin is now worth around $19,000; the next most valuable currency, the Ethereum, is running nearly $600 a unit.

'Uncontrolled Consumption of Electricity'

Abkhazia, a lush region on the Black Sea coast, is considered by the vast majority of countries to be part of Georgia.

But it has been outside the control of the government in Tbilisi since a war in the early 1990s. Its independence claim was recognized by Moscow in 2008, after Russia invaded Georgia in an armed conflict that erupted in another breakaway province, South Ossetia. Russia maintains troops in both regions.

Abkhazia’s gray legal status has hobbled its development, preventing outside investments to modernize its economy. That includes its electrical grid, whose main power source is the Inguri hydroelectric plant, the largest in the South Caucasus.

Despite the persistent tensions, the Soviet-era facility, which straddles the line between Abkhazia and the rest of Georgia, provides electricity to both sides. In the past, about 60 percent of its power went to government-controlled territory and 40 percent to Abkhazia.

But Abkhazia’s overall demand for electricity has grown sharply in recent years. By one estimate, around 48 percent of Inguri’s output now goes to Abkhazia.

Cryptocurrency mining is to blame.

“Since 2016, cryptocurrency mining activities have started to develop in the republic in a chaotic manner. The lack of legal regulations governing this activity has led to uncontrolled consumption of electricity,” Kristina Ozgan, economy minister in the de facto government, told a cabinet meeting on November 18.

Further concerns loom. Inguri needs to be shut down in February for badly needed repairs to the Soviet-era equipment. That means Abkhazia could see even more drastic blackouts.

And adding still another layer of chaos: The electricity deficit has meant power-grid authorities have had to buy electricity from Russia, often at rates that are three or four times higher than standard internal rates within Abkhazia.

'Crypto-Farms'

Utility engineers have told government officials that there are about 150 “crypto-farms” -- the buildings or warehouses that hold rows and rows of power-hungry computer equipment -- in the region.

Collectively, they consume about 40 million kilowatt-hours of electricity per month, though some engineers estimate it could be as much as 120 million kilowatt-hours, a sizable percentage of the region’s overall demand.

Most of the investors who have set up the farms are believed to be from Russia, where authorities this year issued new regulations and oversight of the industry.

In Abkhazia, authorities have tried in the past to impose some rules and restrictions. Officially, cryptocurrency mining was banned in December 2018, but loopholes in the law rendered it mostly useless, and few, if any, punishments or restrictions have been enforced.

Then this year, the industry was legalized again after a new administration took control following a power struggle among rival political clans.

In September, the authorities adopted several measures to try and rein in the industry. The measures include a 60-day restriction on importing computer hardware and introducing a permitting system. Moreover, the measures call for quadrupling electricity rates for cryptocurrency miners.

That didn’t prevent the regional electrical grid operator from imposing rolling blackouts earlier in November.

“Overloading of the power grid, which is already in a deplorable state, leads to frequent accidents; it disables transformers and substations,” a coalition of opposition groups said in a statement this month. “Household appliances and other electrical appliances burn out due to sudden and frequent voltage fluctuations in houses. With such a disorganized approach to the problem, things will only get worse.”

At the Sukhumi Drama Theater, a beloved institution in the capital, the constant blackouts have blown out the pumps that keep rooms from being soaked by seeping water, theater director Irakli Khintba said. And the theater’s stage machinery and computers are constantly going off-line.

“In general, it's wonderful, of course,” Khintba said sarcastically, “due to the fact that someone is making a lot money by mercilessly consuming a collective resource (electricity), and we, and the entire state, must incur losses and generally suffer in every possible way.”

“I try to figure out how to make money if I have just four hours of [no electricity] in my working day. But today there was no electricity at all. It was on for only five minutes,” Yekaterina Yenik, a local journalist, told RFE/RL.

“It’s completely obvious that here we need the harshest measures. The whole world needs to unite and strictly prohibit this activity until we put things in order in our electrical grid,” said Aleksei Lomia, a Sukhumi lawyer. “Legal, illegal -- ban it all, because we won’t stand for it anymore.”

RFE/RL senior correspondent Mike Eckel reported from Prague; Izida Chania and Anaid Gorgoyan of RFE/RL’s Echo of the Caucasus reported from Sukhumi

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