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Russia Digs Deep in Face of China's Cryptocurrency Mining Supremacy

Abandoned in the wake of the fall of the Soviet Union, Kaliningrad's factories are now the new bitcoin battlegrounds.

Photo: Cryptocurrency mining: A dark and esoteric art, seldom enjoying official government backing. (Shutterstock.com)
Cryptocurrency mining: A dark and esoteric art, seldom enjoying official government backing.
Photo: Cryptocurrency mining: A dark and esoteric art, seldom enjoying official government backing. (Shutterstock.com)
Cryptocurrency mining: A dark and esoteric art, seldom enjoying official government backing.

Russia is set give China a run for its (virtual) money as it bids to become one of the world's leading centres for cryptocurrency mining. At present, China is believed to be responsible for more than 70% of all such mining – the mathematical process by which new cryptocurrency units are created, verified and released. Although seen by the uninitiated as magically creating money apparently from nothing, the whole process is reliant on access to a high-level of computing power, as well as having sufficient financial resources to meet the inevitably expensive electricity supply costs.

While China has long taken a lead in this sector, due to its high concentration of computing expertise and ready access to low-cost coal reserves, developments in Kaliningrad, in the far west of Russia, could be set to change all that. Indeed, according to a number of observers, the economic and legal realities pertaining in the region, combined with its easy access to mineral resources, make it an all but perfect locale for cryptocurrency mining, a practice that has benefited from a policy of official indifference throughout the Russian Federation in recent years.

Traditionally, largely renowned for being home to the world's foremost amber deposits, Kaliningrad has been recently reinvented as Russia's only genuinely successful Free Trade Zone, with its VAT-free status and other locally applicable incentives seeing its consumer electronics and furniture manufacturing industries surge in the immediately post-millennium period.

Its automotive sector has also proved to be hugely successful, attracting production work from the likes of BMW and Kia, South Korea's second-largest carmaker, and establishing the region as Russia's third-largest vehicle-manufacturing hub, after the city of Kaluga and the Volga Federal District. In terms of less-conventional industry developments, while the region has also been designated as one of just four areas of Russia where gambling is legal, its casino and related facilities have yet to be fully-developed.

The region's resurgent status, however, comes as quite a contrast to the situation some 30 years ago, when the immediate post-Soviet era saw many of its state-owned and managed industries fall into prompt disarray, leaving a substantial number of factories and production plants abandoned and destined for disrepair. Fortunately, many of its power-production facilities, water supply systems and transportation networks remained intact and operational. Now, many of these heritage facilities, together with the shells of the abandoned public-production factories, have been repurposed for the digital age and are home to Russia's first generation of cryptocurrency miners.

One former facility in a northern suburb of Kaliningrad, for instance, is the site of 60 cryptocurrency mines, largely focused on the production of Bitcoin, the most well-known virtual currency, and Ethereum, a lesser-known cryptocurrency developed by Vitalik Buterin, a Russian-Canadian programmer, and launched onto the general market in 2015. According to local sources, the investor concerned is paying just US$230 a month, which covers both the rental cost and the electricity usage.

The success of such mining operations has been widely-acknowledged across the country, with Vladimir Putin, the Russian President, going so far as to having an official meeting with Buterin, after which he commented positively on "the challenge of the New Economy". Despite such semi-official approbation, though, the industry still lacks formal recognition in the country and most companies find it all but impossible to list their crypto-assets on their official balance sheets.

The shadowy status of the sector, however, may soon be set to change. The Kaliningrad Region Development Corporation, a local statutory trade and investment promotional body, is seeking to normalise the nascent industry, while also looking to actively encourage domestic and overseas investors to back the development of the region's cryptocurrency mining sector. To that end, it has a number of incentive measures on offer, including a six-year exemption from corporate income tax and a highly competitive rental regime relating to many of Kaliningrad's currently-disused industrial sites.

Leonid Orlov, Moscow Consultant

Content provided by Picture: HKTDC Research
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