Belarus is attempting to attract cryptocurrency miners by offering low taxes in order to boost its economy. Will global investors, however, put money into a country known as “Europe’s last dictatorship”?
President Alexander Lukashenko signed a decree in 2017 to make it easier to start high-tech businesses, including cryptocurrency mining. The decree, which went into effect in 2018, also made smart contracts legally enforceable – a world first.
More recently, in September 2021, Belarus introduced special electricity tariffs for cryptocurrency miners and in January, it began to encourage investment funds to purchase cryptocurrency.
“There aren’t many points of growth for our economy today,” said Denis Aleinikov, a senior partner at Minsk-based law firm Aleinikov & Partners. “The government has to do something brave and unusual.”
Businesses in Minsk’s High-Tech Park (HTP) are exempt from corporation taxes on profits under the terms of a decree that Aleinikov assisted in drafting, according to the company. Dmitry Matveyev, a partner at Aleinikov’s firm, also added that they just need to pay 1% of their gross revenue. According to him, it takes two months for a company to be admitted into the park after submitting all of the required paperwork.
The Cambridge Bitcoin Electricity Consumption Index estimates that Belarus, with a population of 9 million people, contributes less than 0.01% of the total Bitcoin hashrate (a measure of computing power on the network), even with all these incentives. The same index shows that Sweden, with its 10 million people, contributes for 1.18 percent of the network’s hashrate, which is a significant difference.
According to Sergey Klentsov, CEO of BiXBiT, a Belarussian mining technology business, Cambridge’s forecast for Belarus is “very close to the truth.”
Belarus’ failure to attract miners demonstrates how, even when business conditions are favourable, a country’s political environment may pose a significant obstacle to attracting international capital. That was even before Russian President Vladmir Putin, a close ally of Lukashenko’s, attacked Ukraine. The battle has resulted in severe sanctions from the West against Russia and Belarus, and it remains to be seen how this will affect Minsk’s attractiveness as a location for mining rigs.
Sanctions could spur interest in cryptocurrency, according to Vladimir Marchenko, chief knowledge officer of BiXBiT. The Minsk High Tech Park is considering allowing citizens to use crypto for settlements between counterparties, he claimed, implying that crypto may soon be used to circumvent sanctions. According to David Carlisle, director of policy and regulatory affairs at blockchain analytics firm Elliptic, 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.”
New electricity tariffs imposed on crypto miners
“At the moment, small-scale private mining is more common in Belarus,” Yury Kaliaha, mining director for local miner GreenMiner, explained. Until recently, Kaliaha added, electricity costs were too expensive for industrial-scale mining.
In September, the government declared that cryptocurrency miners, as well as other types of data centres, would receive favourable electricity rates. Miners typically pay between $0.07 and $0.09 per kilowatt hour (kWh), with the lowest rate being $0.058 per kWh, according to Klentsov.
That is on par with or better than electricity pricing in regions such as Texas and Washington, where major mining operations have been under construction in the past two years. According to the US Chamber of Commerce’s Global Energy Institute, costs there range between $0.07 to $0.09 per kWh.
Belarus’ electricity costs are determined by the scale of the mining operation, with mines with an energy capacity of around 3 megawatts (MW) or more paying lower tariffs, according to Vitali Sabaleuski, founder of Minsk cryptocurrency miner United Mining Company. Sabaleuski’s company mines ether (ETH) and bitcoin (BTC) with a combined hashrate of approximately 50 gigahashes, a small operation by global standards.
Another pivotal moment for Belarus’s energy industry was the launch of the country’s first nuclear plant in June 2021. According to the World Nuclear Association, the plant has a capacity of 1,110 megawatts (MW). Another reactor is expected to go into operation later in 2022, adding 1,110 MW to the system. Russia is funding both projects.
“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 more electricity generated by the nuclear plant is consumed, the more prices will be reduced as the plant recovers its initial investment, the lawyer stated.
While numerous incentives for crypto mining have been introduced, the barrier to entry remains high due to the fact that getting a special tariff is reserved for businesses with a capacity of around 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 explained.
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,” Klentsov stated, quoting the Russian Ministry of Economy.
Sabaleuski is collaborating with miners in Eastern Europe who are interested in relocating some of their hashrate to Belarus. He said that many Russian miners are considering relocating their operations due to the country’s current policy uncertainties.
BiXBiT has received numerous mining-related queries from Kazakhstan and Russia since the crisis began, Marchenko added.
Kaliaha, who is building a company in Belarus to provide turnkey mining services, is assisting a Singaporean company with its Minsk HTP paperwork. The company intends to enter the mining business in Belarus.
Stability concerns
It is expected that the new infrastructure will keep Belarus’ electricity supply stable, so that crypto miners don’t have to stop or cut back on their work.
There are a lot of miners coming to Kazakhstan in 2021 and the national grid is crumbling because of that. Electricity was first rationed and then cut off to legally operating mines, even though the government said it would not. In Kaliaha’s words: The energy system is one of Belarus’s strengths. The new nuclear plant will help the country avoid problems like Kazakhstan’s, she says.
When BiXBiT’s Klentsov talks about the Belarussian power grid, he says that it’s not as bad as the ones in Kazakhstan or Kosovo. Theoretically, if there are a lot of new mining sites, there could be blackouts, the man said. But the government is working with energy producers and distributors to figure out how much electricity the grid will need before mining licences are given out, he said. Unless there is a huge number of miners migrating overnight, the power grid will have no trouble handling the power demand, Klentsov said.
Investors from Western countries also worry about Belarus’s political stability because of how the country is portrayed in the international press: the violent suppression of anti-government protests, the forced landing of a commercial plane with an opposition figure on board, and what the European Union calls the “instrumentalisation of human beings”, referring to migrants and refugees being pushed from Belarus to EU borders.
Most recently, Belarus’ involvement in the Ukraine war has come under a lot of fire. Russian troops entered Belarus for military drills, then allegedly drove south to attack Ukraine’s capital, Kyiv. The Kremlin is also said to have used land in Belarus to launch missiles on Ukraine. President Lukashenko denied planning to use active troops in battle.
Alan Konevsky, the chief legal officer of U.S. bitcoin mining company PrimeBlock, says that crypto mining businesses are realising that they need to keep their capital allocation stable. Konevsky said that China and Kazakhstan are two places where political instability has killed the mining industry. Alan Konevsky, the chief legal officer of U.S. bitcoin mining company PrimeBlock, says that stability is extremely necessary for capital allocation. Konevsky said that China and Kazakhstan are two places where political instability has killed the mining industry.
Lawyers Aleinikov and Metveyev said that the government of Lukashenko wants to get crypto miners and other tech companies to come to the country, at least in the medium term.
There have been no changes since the president’s decree went into effect in March 2018, they said. Many IT firms that set up at the HTP after the decree are still there. The two suggest that the government should extend the tax benefits to cryptocurrency miners.
Mining has strong support from government agencies, according to Sabaleuski, who has been attending talks with officials. The Ministry of Economy finds the mining sector favourable since it effectively converts Belarussian assets, electricity, into an export product, cryptocurrencies. The central bank views it as a first step toward developing blockchain wallets and a digital currency, while customs authorities benefit from revenue generated by imported equipment.
The entrepreneur noted that, unlike in other former Soviet bloc countries, miners in Belarus do not have to worry about their machines being stolen overnight.
Crypto mining amidst sanctions
There is one thing that makes Belarus different from other countries that were part of the Soviet Union: It is facing restrictive measures by the U.S. and EU. Klentsov acknowledges that 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.”
When Lukashenko was re-elected president in August 2020, a wave of anti-government protests had already begun. According to human rights organisation Amnesty International, the government responded to the social disturbance with batons and rubber bullets, including attacks on journalists.
Belarus’ international reputation deteriorated further in May 2021, when officials forced a commercial jet carrying a dissident to land. The US Department of Justice decided to charge officials from Belarus’s government with aircraft piracy.
BiXBiT also has problems with supply chains and logistics when it tries to source components from other countries, says Klentsov.
United Mining Group’s Sabaleuski said he hasn’t had any difficulties sourcing equipment. Cheaper equipment can be found in Hong Kong, mainland China or Moscow.
The sanctions imposed on Belarus are not the same as those imposed on Iran or North Korea. They are directed at specific entities and individuals, who are 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.
Nevertheless, there is a catch, according to Carlisle, who previously worked on sanctions enforcement at the United States Treasury Department. Crypto mining companies that use “state-owned energy or industrial infrastructure” may be susceptible to penalties, said Carlisle. A company that is just getting some tax or other benefits from the government isn’t a problem, but if the government gets a lot of money from a company’s activities, sanctions law could come into play.
Sabaleuski said that it is possible to do business in Belarus while not dealing with companies that have been banned. “You know who they are, and you can just avoid doing business with them,” he said.