Mining for Bitcoin in a remote Russian outpost

Andrei Mironovich used to sell “Baltic gold”, a nickname given to amber due to its colour and the fact that most of the world’s deposits of the fossilised resin are to be found along the northern European sea coast. But now he finds it more profitable to mine for “digital gold”, or Bitcoin.

I met Mironovich on a recent trip to Kaliningrad. (Tucked between Poland and Lithuania on the Baltic coast, the obscure Russian exclave gained wider recognition this month as a World Cup venue.) My initial communications with him were not via the encrypted messaging apps I often use with crypto types; rather, we were introduced in the headquarters of the Kaliningrad Region Development Corporation, a state-owned entity whose aim is to bring business into the region.

At the KRDC I was told how a couple of entrepreneurs from Moscow had recently been shown around two sites in the city, where they were looking to set up their own cryptocurrency mines — large data centres where specialised computers process transactions, consuming vast amounts of energy, in return for Bitcoins. The entrepreneurs decided to take not just one but both sites, with an investment of $50m in the mines — a not inconsiderable sum for a region whose GDP is less than $7bn.

I ask Sergei Evstigneev, the region’s IT and communications minister, whether he is concerned that cryptocurrencies have not been regulated at the state level yet. “Whatever is not illegal is legal,” he tells me. “There are no laws regarding cryptocurrency mining because it’s a new kind of business.”

Russia’s approach to cryptocurrencies is unclear — it had said it would ban them but its tone appeared to soften after Vladimir Putin met Vitalik Buterin, the creator of Ethereum, one of Bitcoin’s rivals. What is clear is that Kaliningrad is very much open for business — and it doesn’t seem to mind what form it comes in.

Surrounded by both the EU and Nato, but a member of neither, the region finds itself cut off from its neighbours, with any goods that it wants to export — the majority of which go to Russia — having to travel through two different countries in order to reach the mainland, 300 miles to the east. Since 1996 though, Kaliningrad has been designated a special economic zone, meaning it can entice investors with benefits, including some duty-free imports, reduced social security premiums and various tax breaks. The federal government decided that as of the start of this year tech companies should be given extra tax breaks in Kaliningrad — exporting virtual goods across three borders is a lot easier than exporting physical ones.

As a result of this new regime, entrepreneurs such as the pair from Moscow will not have to pay income or property taxes for the first six years — and that’s not all. KRDC’s director-general Vladimir Zarudny says: “Kaliningrad has become a kind of lab where we can test new initiatives and legislation. We think we could be a liberal Russian territory which is friendly for doing business, and a gateway to Russian markets.” Moreover, he says, the region’s beautiful beaches and historical connections with Europe should make it an attractive place for foreign investors.

Later, I am driven by Mironovich in his BMW 5 Series to an old Soviet factory in the north of the city, which houses 60 Bitcoin and Ethereum mining machines. The building is in a state of considerable disrepair and hadn’t been used in more than 15 years, so only costs Mironovich and his business-partner cousin Rbs15,000 — about £180 — to rent each month.

The pair manage to make two Bitcoins a month, worth about £10,000 at current rates. But with prices plunging, I wonder how long they will be able to keep the business running. Mironovich, clad in western designer gear, doesn’t seem too worried. A serial entrepreneur, he supplements his crypto income with other revenue streams. And he has recently started doing business in yet another commodity: waste disposal.

Anything goes in Kaliningrad — as long as you’re making money.

Jemima Kelly is an FT Alphaville reporter

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