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Story Publication logo October 29, 2019

The Shady Cryptocurrency Boom on the Post-Soviet Frontier

Illustration by Sashkin / Shutterstock. 2019.

Why is there a rush for cryptocurrencies in places that don't exist? A story set in the post-Soviet...

Statue of Vladimir Lenin in Tiraspol, Transnistria. Image by Shutterstock. Moldova, 2017.
Statue of Vladimir Lenin in Tiraspol, Transnistria. Image by Shutterstock. Moldova, 2017.

At the edge of a lake on a fault line of the new Cold War stands a building that, depending on how you look at it, is either a relic of a failed revolution or the beating heart of a new one.

In Soviet times, the Kuchurgan electricity plant powered a swath of the empire from Romania to Ukraine. Today, its red and white striped smokestacks still loom over the surrounding cornfields, making ants of the workers who file out at quitting time. Recently the station and its adjoining town—planned to Soviet perfection—has been a stop on the nostalgia tours that have boomed across eastern Europe off the back of the HBO series Chernobyl. Kuchurgan sits not far from the blast site, just inside Transnistria, a wholly unrecognized quasi-state slivered between Moldova and Ukraine and marketed by its tourist board as the place where the USSR never ended. There are Russian peacekeepers, brutalist statues, streets named after communist heroes, and a steady stream of sightseers snapping shots of them all.

But although the tourists won't guess it as they stand at Kuchurgan's gates, admiring how the evening light reflects off the silver plaque of Lenin, this plant is pumping out juice to a modern-day gold rush: a cryptocurrency boom that is underway all across the former Soviet Union, from the battlefields of eastern Ukraine to time-warp enclaves like Transnistria and freshly annexed Crimea.

Around Kuchurgan, under a web of pylons and electricity lines, plots of land are being readied for cryptocurrency miners to build industrial farms. In a news story aired on Transnistrian television, Chinese investors gawp at the size of the empty warehouses where their servers could soon be housed.

"Yeah, perfect. I can play football here!" says one, as he gazes around an 11-acre shell.

Similar scenes are unfolding throughout the old empire, as a small army of developers and entrepreneurs use cheap electricity and abandoned buildings—the curios of their Soviet past—to get rich quick on cryptocurrencies.

This summer I set off across the fringes of the former Soviet Union to meet the people behind this crypto-rush. In towns where communist-era murals watch over crumbling pavement, I found geeks, tycoons, and visionaries—the libertarians of the old Eastern Bloc. Tinkering with cryptocurrencies is not just about technology or money, they told me; it is about creating a whole new decentralized system, where everyone and no one has the power. It is about ultimate liberty. It is about democracy taken to the extreme.

But in the post-Soviet crypto-verse I also saw how the promise of an unshackled financial order beguiles authoritarians, criminals, and terrorists—and how it has already greased the wheels of Russia's attempts to influence US elections.

In Moscow, which is roiling under Western sanctions even if its glossy central streets don't show it, Vladimir Putin flip-flops between publicly supporting cryptocurrencies and outright trashing them. In June 2017, Vitalik Buterin, the Russian-Canadian whiz kid developer of the Ethereum cryptocurrency platform, reportedly managed to convince Putin of blockchain's charms during a chance meeting at a conference. Immediately, analysts told Vice, the Russian state development and central banks both launched blockchain projects. Four months later, though, Putin had changed his mind, denouncing cryptocurrencies as a "gift to criminals." The head of the Russian central bank also changed tack, saying they were "the definition of a pyramid scheme."

But Kremlin insiders say Putin remains interested—and that the Russian state is experimenting. "Putin is fond of new technology. He believes that Russia has no future without it," says Vladislav Ginko, an economics expert at the Russian Presidential Academy of National Economy and Public Administration. "Medvedev just likes iPhones. But Putin actually understands that the future of Russia as a sovereign state is an issue of improving new technologies."

Moscow's money is sniffing around. Gazprom, Russia's giant gas corporation, has announced it will start using blockchain contracts. Several oligarchs have invested in cryptocurrencies, which could help them hedge their bets against against future sanctions.

There is also evidence that the Kremlin itself has been dabbling in cryptocurrencies for a while: In July 2018, amid the investigation on Russian influence in the 2016 US presidential election, Robert Mueller indicted 12 agents with the GRU, the Russian military's intelligence arm, some of whom had mined bitcoin in Romania and used it to pay the hackers who stole Hillary Clinton's emails as well as the registration fee for the website where they posted the messages just weeks before election day.

After having left the fledgling industry in limbo for years, the Russian parliament finally legislated on cryptocurrencies in October. But follow the tendrils of money and influence out from the Kremlin and you reach Putin's real crucibles of cryptocurrency—the gray zones on the edges of his expanding sphere of influence, where the electricity is abundant, the regimes subservient, and the links back to his regime fuzzy. This could be a libertarian tech revolution—or the dawn of a new crypto order.

Think of the international banking system as a circle of rowdy school kids, with a skilled teacher in the middle who can not only hear everything they say but block conversations if they break the rules. If one kid asks another to come outside for a cigarette, the teacher will keep the receiver from ever hearing the question. Even if the kids talk in code, the teacher, on hearing something they don't recognize or are suspicious of, will consult and compare notes with other teachers and school authorities. Between them they will be able to crack the meaning of most messages. Habitually bad kids can be banished from the circle altogether, leaving them sitting alone and unable to interact—except with others who have been cut out.

The SWIFT network, the system that banks use to communicate with one another to send money electronically, functions much like these circles. In the middle of every transaction, between the entity paying the money and the entity being paid, sit banks on the lookout for suspicious transfers. Of course, dodgy entities do not announce what they are doing as openly as a teenager offering a smoke to a friend, and so the banks work with law enforcement and intelligence services to crack their codes. If they detect any signs that money is passing for illegal purposes, they will block the funds.

Until fairly recently, the only way to pass money outside this system was to do so in hard cash, either by handing it to the person you are paying or by sending it through a hawala network, a kind of informal Islamic Western Union that relies on trust and familial bonds rather than wire transfers and regulations. But even after you've received your piles of banknotes you still have a problem. If you try to buy anything that costs more than a few thousand dollars, the seller is legally obliged to alert the authorities. The same will happen if you try to deposit a large amount of cash in a bank account or invest it in stocks or bonds. The only way to spend the cash you have received without attracting scrutiny is piecemeal, through small purchases, or to launder it like Walter White through a cash-heavy business. So ultimately all of us—individuals, businesses, even nation-states—sit in the school kid circles, knowing that our conversations will be monitored.

The mighty dollar makes America the schoolmaster. If the US Treasury decides that a US bank has facilitated illegal payments, it can withdraw its banking license. And if the treasury finds that a bank outside the US has broken the rules, it can block the institution from communicating with any US bank. Effectively that bank is then cut off from any payment system that uses the dollar, and from holding dollars in the Federal Reserve.

And the dollar is more than just a sovereign currency: 62 percent of all foreign exchange reserves held in nations' central banks worldwide are in dollars, and it is used in 90 percent of all foreign exchange transactions, according to the finance website the Balance, making the US the gatekeeper to the global banking system. President Donald Trump wields the dollar like a weapon. The US Treasury slaps new sanctions down nearly weekly, on Iran, North Korea, Venezuela, Syria, and Russia. Since 2012 the US has imposed more than 60 rounds of sanctions on Moscow—punishment for its annexation of Crimea and its meddling in the 2016 election, among other things—halving the country's foreign direct investment, wiping out $500 billion in investments in its energy sector, and hammering Russian banks' ability to do global business.

That's a perfect opening for cryptocurrencies. They do away with the need for banks altogether, creating a network free from intermediaries where money can be passed unimpeded. What's more, no banks means the US role of gatekeeper, along with the power of its sanctions, vanishes. And so, like a virtual retelling of The Breakfast Club, the kids can take over the school—and do whatever they want.

Sanctions offer their own opportunities, grifts ready-made to plug into a cryptocurrency system just over the horizon. In July, at his chic restaurant in the Belarusian capital of Minsk, local businessperson Sergey Mirgorodsky explained how his country is cashing in on the Russian embargoes. After Putin annexed Crimea from Ukraine in 2014, the EU restricted trade, investments, and tourism to the peninsula. In retaliation, Putin banned some European food imports, emptying many luxury goods from shelves in Russian supermarkets.

Companies in Belarus, which shares a border and a customs union with Russia, started filling the gap. "European producers send their products here, stamp them with a 'Made in Belarus' label, and then send them on to Russia," Mirgorodsky laughed. "I know of one European salmon company which sends it here to be smoked so it can get the stamp."

Elsewhere, Belarus is an economic basket case, littered with state-run zombie enterprises that do little more than enrich government cronies and keep much of the population in unproductive employment. President Alexander Lukashenko, once the manager of a Soviet collective farm, just celebrated a quarter-century in power and has a habit of putting his opponents in jail. Belarus is the only European country to have kept the death penalty and is periodically placed under US and EU sanctions (many EU restrictions were lifted in 2016).

Lukashenko likes to appear in military uniform on Belarus' national days, when the army parades Soviet-style down the grand Minsk boulevards. Having once described the internet as "garbage," he seemed an unlikely contender to implement the world's most forward-thinking cryptocurrency regime. But in December 2017, Lukashenko passed a decree allowing businesses registered with (although not necessarily physically located in) High Technology Park, an anodyne business center on the gray outskirts of the capital, to mine, develop, and trade in cryptocurrencies. It has, in theory, turned this ex-Soviet backwater into the most progressive blockchain jurisdiction in the world—"like a Seoul inside Pyongyang," says one Belarusian crypto-entrepreneur.

Viktor Prokopenya, a prominent Belarusian businessperson who first suggested the idea to Lukashenko, says the president was "very supportive of the idea from the get-go and was excited by the prospect of growing Belarus into a hub for blockchain technologies and cryptocurrencies."

Within a year of his pitch to Lukashenko, the decree had been drafted and signed. "It makes Belarus the first country in the world to create a dedicated legislative framework tailored to cryptocurrencies and their industry. The decree has made Belarus a trailblazer in the blockchain technology space," Prokopenya says.

Since the decree was enacted in March 2018, around a dozen blockchain-based startups have registered in High Technology Park. Mirgorodsky and his Russian business partner are preparing to manufacture cryptocurrency mining equipment that uses the heat it generates to warm houses. Another of the park's new ventures is an exchange that sells Belarusian government bonds in crypto form—a world first, according to the company.

Alexander Lozben is a rangy 29-year-old Belarusian entrepreneur who has built a multimillion-dollar business fueled by cryptocurrency mining from nothing in the space of three years. We meet in a newspaper-themed coffee shop opposite the British embassy in Minsk, its walls emblazoned with blown-up front pages from the UK tabloids, at odds with the blanket footage of Lukashenko playing on the televisions. Lozben is dressed in a dark blue suit with pocket hanky in the style of an English eccentric. One of his three crypto companies is registered at the park, giving him access to tax breaks and easy work permits for foreign staff.

But he's been honing his personal style and amassing his crypto-fortune since well before Lukashenko stepped in, he says. In 2016 he teamed up with a friend to buy a cryptocurrency mining rig after spotting an opportunity in Belarus' archaic energy policy. Lukashenko had launched a foray into renewables in 2010, freeing the sector from state monopoly and allowing private and foreign investors to set up wind farms.

The experiment was short-lived; five years later, he announced that the country was building a nuclear plant instead, and the state slashed the price it paid for wind energy. Lozben jumped in to buy cut-price electricity from the now redundant wind farmers to power his cryptocurrency mine. "We spent $1,500 on that first rig. I'd read on the internet that we could return our money in three months. But the money started coming in immediately—after two months we'd made our investment back," he says.

Within six months Lozben had sold off his car and marketing company, and his friend sold his car-wash business, to go all-in on cryptocurrency mining. He found unfinished buildings on the outskirts of Minsk—"just walls and doors, cheaper to rent"—and filled them with rigs. Cryptocurrencies gained like crazy in 2017, led by bitcoin, which shot from $812 in January to $17,500 by December. At the height of the frenzy, Lozben was running 1,200 GPU cards in 200 rigs, plus another 300 ASIC servers—enough to mine $42,000 worth of crypto coins each week.

Lukashenko's decree has now corralled the Wild West industry where Lozben made his fortune into strict legislative order. Miners and any other businesses working with cryptocurrency in Belarus must now be registered to High Technology Park, which is managed by former state employees, and buy their electricity from official sources. Companies must make a security deposit of between $95,000 and $500,000 in a Belarusian bank to start operating. All crypto transactions in Belarus, both purchases and sales, must be made through park-registered operators and exchanges.

By the time the decree was passed, the bitcoin bubble was bursting, and Lozben had already moved on from mining. He sold his stocks just before bitcoin collapsed, along with almost all the rigs he had accrued, in order to fund his new venture—developing software for managing cryptocurrency mining and investing. Lozben kept just a few rigs for testing his software. It was a classic move: Selling picks and shovels to the miners rather than digging for gold himself.

He says most miners who set up in Belarus during bitcoin's spike have also pulled out, the huge profits they once made no longer possible in this new, state-controlled era. (And the value of bitcoin has more than halved, standing at about $8,500 today.) During a speech at the park in April, Lukashenko announced that the government will use surplus energy from its new nuclear power stations to mine cryptocurrencies. The first plant is due to come on line at the end of this year.

If the dollar is Trump's weapon, energy is Putin's. Russia boasts about a quarter of the world's natural gas reserves and around 6 percent of the planet's oil, enough to keep extracting for another 26 years at its current rate. It is the biggest supplier of crude oil, natural gas, and solid fossil fuels—coal—to the European Union, which crippled the bloc's ability to impose sanctions after Russia annexed Crimea in 2014.

Gazprom employs almost half a million people and claims to pump 12 percent of the world's natural gas through some 107,250 miles of pipeline. Putin happily throws his energy heft around, handing out huge discounts to subservient states and snatching them away if they don't keep doing what he wants.

Such brazen energy diplomacy is manna for the region's cryptocurrency miners. Making digital money gobbles up massive amounts of electricity, thanks to the processing power needed to solve the complex equations—a 2018 study estimated that it takes more than four times as much energy to mine $1 of bitcoin as mining $1 of copper. And, as time goes on, the number of coins earned for solving an equation drops, and so the energy needed increases; bitcoin alone now eats more electricity per year than Austria, according to a recent study from the University of Cambridge. That makes mining problematic in places where power is pricey. But when Putin is handing out energy for peanuts, cryptocurrencies become an attractive business proposition.

Belarus, once the westernmost edge of the Soviet Union, today gets 70 percent of its natural gas from Russia, sweetened with subsidies worth around 10 percent of its GDP, according to the Financial Observer. Putin likes to pull the lever: In 2004 he cut off all of Belarus' gas for 30 hours in a failed bid to force-buy Beltransgaz, the country's gas pipeline network. (Russian natural gas behemoth Gazprom finally acquired a 100 percent stake in Beltransgaz in 2011.) In 2016 he hoisted gas prices in retaliation for Belarus' growing ties with the EU.

Lukashenko—a Soviet nostalgic maybe, but by no means Putin's puppet—fights back. He refuses to recognize annexed Crimea as Russian territory and has positioned himself as a mediator in Moscow's war with Ukraine. He recently refused a new Russian air base in Belarus and eased visa requirements for EU citizens, much to Russia's distaste. His experiments with renewables and nuclear power seem to be attempts to free his country from Putin's energy embrace.

But Putin sees Belarus as a prize worth fighting for. If it were to be fully incorporated into the Russian Federation, he could extend his own tenure in the Kremlin beyond his current term limit of 2024 by claiming that he is standing for election in a whole new country. That would also clear a path for Russian tanks to the EU's frontier, along Belarus' border with Poland. Lukashenko will battle on but could eventually have little choice in the matter. Even the nuclear power stations that are meant to wean his country off Putin's gas are Russian-built and will be powered by Russian nuclear feedstock.

The Soviet Union's demise lit a fire under a myriad of frozen grievances. Across the huge span of Earth that was ruled from Moscow, ethnic groups and ancient nations started demanding their independence. This set off chain reactions that often saw minorities within the fledgling nation-states' borders either demanding their own autonomy or rejecting their new countries and reaching back to the Russian motherland. In Abkhazia and Transnistria, pro-Russian breakaway regions within the post-Soviet states of Georgia and Moldova respectively, rivers became de facto borders.

Luck fell on the separatists' side as this new order took shape. The hydroelectric dams on the Dniester river fell under the control of Transnistria following its war with Moldova in the early '90s, as did the Kuchurgan electricity plant, on the lake that forms its border with Ukraine. That has left tiny Transnistria in charge of the biggest power facilities in the region, and the Moldovan government in the unusual position of being forced to buy 80 percent of its electricity from an unrecognized country that has split from it.

The dam on the Enguri river that separates Abkhazia from Georgia was divided between the two following a war in 1992-3. The deal that was struck left Abkhazia free to use as much of the dam's energy as it liked for no cost, while the Georgian government picked up the bill for all operation and maintenance.

For the first 15 years of the arrangement, Abkhazia was still governed from the Georgian capital, Tbilisi. Then, in 2008, Russian troops entered Abkhazia and pushed out the Georgian security forces. It has since been nominally independent, mostly unrecognized, and cut off from the international banking system. Abkhazia now uses the Russian ruble and so is also feeling the Western sanctions aimed at Moscow. But it continues to reap the benefits of the Enguri dam deal.

These idiosyncrasies caused few problems until the sudden explosion of cryptocurrencies. After the breakup of the USSR, most of the massive old Soviet power plants went chronically underused, as many of the new countries saw reducing their energy dependence on Moscow as a matter of national survival. Those on the western periphery that joined the European Union are now obliged to both reduce their energy consumption and to comply with the bloc's competition rules, further cutting the amount they buy from Soviet plants.

Today, the Dubasari dam, on the Dniester river between Moldova and Transnistria, appears to be mostly a spot for tourists to stop and take photos. It is guarded by a Russian tank and bored soldiers, and on a hot, humid day, swimwear-clad bathers bask on the small man-made beach, drinking Russian beers between cooling dips in the river—an irresistible Instagram moment in kooky Transnistria.

But the dawn of the crypto era is giving these old plants new purpose. Abkhazia's energy consumption has shot up over the past three years, coinciding with the sudden surge in the value of bitcoin that began in early 2017. In the first five months of that year, the region's power usage increased by 100 gigawatts, almost twice the overall increase from 2010 to 2016. Abkhazia now uses so much power that in winter it now eats all of the Enguri dam's output and depends on free top-ups from Russia.

By January of this year, the Abkhazian government was forced to order the state electricity company Chernomorenergo RUE to cut 15 crypto-mining farms off the grid, claiming they were using as much electricity as 1,800 households and had caused power outages that were blighting the region. Even so, the Abkhazian state has recognized a rare opportunity to monetize its glut of electricity and accrue capital in a form that cannot be frozen on America's orders. Though the 15 farms remain without power, in early July the Abkhazian president, Raul Khadjimba, confirmed long-rumored plans to build a large state cryptocurrency mine. "We are trying to legitimate these processes so that they bring some income to the country's budget." he said.

In Transnistria, for now, cryptocurrency mining is still flourishing as a literal cottage industry. Like most of the region's youth, Roman Lutsenko, a 25-year-old musician, is chronically underemployed on paper, DJing at a local club a few nights a month.

But the bulk of his comfortable income comes from his six crypto-mining farms, which are scattered across the apartments of his friends and relatives. Apart from monthly cleaning, he barely even needs to visit them: He controls and monitors everything, from their temperatures and fan speeds to the amount of money they're producing, from an app on his cell phone that he studies incessantly.

"There was a real boom of cryptocurrency in 2017, so at first I bought some stocks," Lutsenko says. "It was a blind deal, I had no knowledge. But everything I bought was growing so hard. After six months I had made a lot of profit, but I realized that I needed to sell it and move to something more stable."

Mining was the obvious next step. Residents of Transnistria pay just $0.07 per kilowatt hour for their power—less than half the average cost in the US and around a quarter of the UK price—making mining here profitable even when cryptocurrencies are going through a slump.

Lutsenko started buying servers on trading sites and searching for places to set them up. It took his mother, a middle-aged matriarch who's fixing us chilled cherry juice in the kitchen downstairs, some time to be convinced of the merits of what is now happening up in her spare room. Next to a baby's cot and a couple off-duty plastic Christmas trees, six servers glow and hum on a wooden rack. "At first she was skeptical," Lutsenko says. "But then I told her it is a good heater. Now she thinks we should put one in every room!"

Her cottage on the outskirts of Bendery, the closest town in Transnistria to its border with Moldova, makes an unlikely setting for a tech startup. The road outside is unpaved, and its bathroom is tiled with Soviet-made originals, gorgeous avocado-green embossed with geometric designs that would be coveted by Brooklyn hipsters. The huge garden out front is lush with grape vines and apricot trees. "Out here, there's the old farm," quips Lutsenko, as he stretches up into the tree to grab some fruit for us. "And in there, the new one!"

As in Abkhazia, growing numbers of tech-savvy Transnistrians like Lutsenko are getting into mining. He is currently mining coins, mainly Ethereum, worth around $450 a month—a generous income in Transnistria, where the average monthly salary is $225. But there is little chance that Lutsenko's hunger for kilowatts will see him exiled from the grid. Quite the contrary. In December, Aleksandr Martynov, Transnistria's prime minister, announced that the Kuchurgan power station, currently running at just 17 percent of capacity, is to be revved up to full speed to meet the demands of cryptocurrency miners.

Transnistria has also launched a glossy drive to attract foreign investors into its burgeoning cryptocurrency mining sector. In February 2018, it followed Belarus in adopting a liberal cryptocurrency law and establishing a tax-free trading zone for miners. A slick website in Russian, English, Turkish, Korean, and Chinese advertises the lowest electricity prices in Europe, $0.05 per kilowatt hour, even less than the minimal rate Lutsenko pays. It also offers project support, mining spaces of up to 161,000 square feet, and plots next to the Kuchurgan station.

Transnistria would welcome an injection of foreign capital. But boosting Kuchurgan's gas consumption is also an end in itself—a nifty way of sucking money out of Moldova and pumping it into its own coffers.

Here's how the scheme works: Kuchurgan runs on gas supplied by Gazprom through a contract with Moldovagaz, which itself is two-thirds owned by Gazprom and the other third by the Moldovan state. Moldovagaz then supplies gas to Tiraspol Transgaz, the Transnistrian state's supplier. But in a perk similar to Abkhazia's, Transnistria has not paid its gas bill to Moldova since secession, running up an estimated $6 billion tab over the past 29 years.

Tiraspol Transgaz sells the gas to Transnistrian buyers at a whopping discount of around 75 percent off market price, with the Kuchurgan plant its biggest customer. All the revenue from those sales goes straight into the Transnistrian budget, explaining why electricity is so cheap here—and why the government is so enthusiastic about bumping up its gas consumption with cryptocurrency mining.

Lutsenko is thinking of expanding his operation. He has his eye on an old Soviet canning factory in the center of Tiraspol, the Transnistrian capital. It's an echoing, empty space that he could fill with hundreds of servers and fit with industrial cooling units. He says he knows of around 30 people like him in Transnistria who have started similar ventures of varying sizes, from a single server in their bedroom to massive banks of machines behind the shuttered facades of the crumbling warehouses that blight almost every potholed road here, windows all broken and murals of industrious workers peeling off. But one cryptocurrency speculator dwarfs them all.

A single company owns most of Transnistria. Sheriff Holding is a conglomerate that was set up, a year after the war with Moldova ended, by Viktor Gushan and Ilya Kazmaly, two former special forces officers. Today it is the biggest employer in the territory and holds a monopoly over big business, running supermarkets, gas stations, a cell phone network, fitness centers, a cognac distillery, and one of the region's two television networks (the other is state controlled). It also owns Sheriff FC, the local soccer club, which buys around half of its players from overseas and has played against the Premier League giant Tottenham Hotspur, even though it only charges a dollar per ticket for its matches and its stadium capacity is just 16,000.

"Sheriff, Sheriff, Sheriff," laughs Lutsenko, as we drive past yet another of the company's blue and white signs, which are as ubiquitous as Lenin in Transnistria.

Sheriff also brandishes massive political power, particularly since the one president in Transnistria's short history who tried to curtail it was voted out in 2017 and then forced to flee the country. (Rumor has it that he swam across the Dniester at night, not far from the Dubasari dam.) Superficially, the new president, Vadim Krasnoselsky, has opened up the country, making the border crossing easier for tourists and disbanding what was still called the KGB. But he has also nestled the state even further into Sheriff's embrace; Krasnoselsky's party, Renewal, is owned by the company.

Sheriff is cutting into Transnistria's cryptocurrency boom too. The Russian Business Centre, opposite the House of Soviets on Tiraspol's main street, is a Sheriff-owned office block built three years ago as an annex to the Russia Hotel, also part of the Sheriff empire. It is listed as the address of the Transnistria Blockchain Agency, which runs the multilingual website wooing foreign investors, and Technopark, the private company to which all cryptocurrency mining businesses must be registered. It was Sheriff's TV station that made the news report in which Chinese investors marveled at the size of the warehouses available as crypto mining facilities, and Vyacheslav Chernikevich, Technopark's CEO, is a business associate of Sheriff founder Gushan.

The Russian Business Centre is a hyper-modern cylinder of smoked brown glass, its cavernous lobby populated by a couple of cleaners in Sheriff-branded polo shirts. Its rents are too expensive for most small businesses, one local tells me, and according to the directory next to the elevators, only 13 of the 54 units are occupied.

Knocking on Technopark's door, number 206, I find two women tapping at computers at a huge desk in the middle of an otherwise empty room, apart from some bland corporate art pieces still in their shrink wrap and propped up against one wall. Chernikevich is not available, they tell me—and is not willing to speak to journalists anyway. By email he tells me that Technopark is a "subordinate organization," and that I should direct my questions to Transnistria's economic development ministry. At the ministry, I am told that they will not talk about Technopark without the permission of Chernikevich.

Marketed on the internet as a modern venture open to outside investment, Technopark appears to be in the flesh a closed, secretive enterprise run by cronies of the Transnistrian and Russian states. Chernikevich was also handed the Crimean telecoms monopoly in 2014, shortly after the peninsula was annexed by Russia. One of the first investors to express interest in Transnistria's Technopark was Igor Chaika, son of Russia's prosecutor general, who has said he is ready to sink 400 million rubles into cryptocurrency mining.

In Moldova, on the other side of Transnistria's Russian-guarded de facto border, Sergiu Tofilat, a banking adviser turned anticorruption campaigner, has unpicked the threads of Technopark and its investors to reveal the scale of Transnistria's cryptocurrency mining ambitions—and possible links to the hacking of Hillary Clinton's emails in 2016.

"It is a money-laundering operation first of all," he tells me in a cafe in Chisinau, the Moldovan capital, on a balmy Friday evening. Tofilat's forensic calculations, based on the rate that the Transnistrian prime minister has proposed to boost Kuchurgan's output, together with the price that they are selling electricity to miners registered with the Technopark, add up to some startling figures: $71.1 million in extra Transnistrian gas consumption per year.

The Transnistrian government will pay nothing—the entire gas bill will be picked up by Moldova, a massive tab for a country whose GDP is just $12 billion. But by selling that gas on to the crypto miners through the Technopark, even at the slashed rate it is advertising, Tiraspol stands to add $15.5 million to its coffers. Meanwhile, that extra capacity will allow $55.6 million in cryptocurrency to be mined inside Transnistria. And that is just the start: Should Kuchurgan be revved up to full capacity, it could swallow $900 million in Moldova-bought gas every year.

Despite Technopark officially falling under the Transnistrian economy ministry, there is no transparency and no public record of who has invested in the territory's cryptocurrency mining and stands to benefit from this massive gas graft. The government did not respond to multiple requests for comment. But Tofilat has obtained documents suggesting that GoWeb, an entity owned by a former Russian state employee, imported $8.7 million in mining equipment into Transnistria in January 2018, a month before the region passed its cryptocurrency law. GoWeb also established a cryptocurrency mine in Romania in early 2016—the same time that, according to the Mueller report, Russian military intelligence was mining there in order to pay the Clinton email hackers.

Meanwhile, Chaika, the Russian oligarch who has talked of investing millions of rubles in Technopark, is the co-owner of Innovatii Sveta, a company that has huge contracts with the Russian state. His business partner is Oksana Diveykina, wife of Igor Diveykin, a former Russian intelligence operative who the FBI claims met with Carter Page, an American energy investment adviser who had lived in Russia from 2004 to 2007, and a decade later became a Trump adviser. According to a heavily redacted report released in July 2018, Page and Diveykin met in Moscow in 2016, while Page was visiting to give a talk at an economic forum, and discussed creating a dossier of "kompromat" on Hillary Clinton. Page denies ever having met Diveykin.

"So the question is," Tofilat says, "is this just about stealing money, or is it a Russian intelligence operation?"

Maybe, it is both.

There are layers to how Russia might weaponize cryptocurrencies in the era of hybrid warfare. The first is already well underway: using cryptocurrencies to pay for acts of political sabotage, like the hacking of Hillary Clinton's emails. The next appears to be in progress: the mass stockpiling of cryptocurrencies through intense mining using Russia's huge gas reserves. If it manages to gather enough, it could secure itself an influential position as blockchain usage continues to grow, perhaps comparable to the place the US holds through the dollar in the traditional banking system. In the meantime, it provides the Kremlin with access to a vast hoard of capital that is difficult to control and trace.

But the third layer is most troubling, experts say. At some point in the future, perhaps within the next decade, Russia and other rogue states could create an alternative financial system based on blockchain that allows them to trade freely with one another, channeling money to armed groups and attracting investment to keep their economies afloat despite international sanctions.

"We don't really know how this is going to shake out, but what is clear to me is that this is the direction that, if there were going to be a way to go outside the US financial system, it's going to involve this type of technology," said Yaya Fanusie, a former CIA analyst and now the founder and chief strategist for Cryptocurrency AML Strategies, a consulting firm advising on how digital currencies can be used for illicit purposes. "We need to understand that this is how things are going. And Russia is experimenting. They're taking this technology seriously. You have these two worlds. One of them is incentivized to try something new, to build this new system. And in the US, we're not even thinking in that way."

The US Treasury Department did not respond to a request for comment.

What happens in the 21st century when the place where you live suddenly ceases to exist? First your cell phone stops working, as the networks cut off your signal. Then you have to switch over your car's license plate, along with your own driver's license, and the hundred other bits of paperwork that prove your existence. Journeys to anywhere outside your little patch of land become longer and more complex as you are forced to negotiate new borders. Often, thanks to political hostilities, you will have to make a huge loop to get to somewhere that, on the map, is right next door. Your shops will fill with unfamiliar products and your currency will be worthless.

That is what happened to Crimea in 2014. After Russia annexed the peninsula, a rough diamond of land hanging into the Black Sea from the southern end of Ukraine, Washington and Brussels imposed rounds of sanctions on Russian banks, businesspeople, and politicians. The grand neo-classical building that housed the Ukrainian National Bank in Simferopol, Crimea's capital, was emptied and Crimeans found their bank accounts frozen. (A majority of those with savings lost everything, while the ones with debts had their ledgers wiped clean. The Russian government later compensated some of the lost savings.)

Since most countries—and crucially the US—consider the annexation illegal, Western companies can no longer do business there without risking fines for busting embargoes. Travel companies have been forced to strike Crimea off their destination lists, throttling an industry that once brought 6 million visitors to the peninsula each year. Tourists who travel there independently now find that their phones cannot roam and their credit cards will not work.

Simferopol's huge new Moscow-funded airport has passport gates and bills itself as "international," but it can run flights only within the Russian Federation. There are roads, bridges, and luxury mansions under construction, but look closely at the Apple and Victoria's Secret ads hung from Simferopol's lampposts and you will see that the proportions of the logos are a little off—don't expect to find genuine iPhones or Incredible bras on sale here.

A Putin adviser named Sergey Glazyev urged the Crimean government to embrace digital currencies in order to sidestep the sanctions that have made international business so arcanely tricky.

In short, Crimea almost six years after annexation has a connectivity problem. But in 2015, Moscow announced big plans to create a "Crimean Digital Valley," centered around a new technical university and sponsored by private businesses, turning Russia's rundown new acquisition into the hub of a tech revolution. One idea in particular grabs Crimean politicians, businesspeople, and Putin's inner circle: developing a Crimean cryptocurrency.

In April, at an economic forum that Russia has held annually since annexation in the Black Sea resort town of Yalta, a Putin adviser named Sergey Glazyev urged the Crimean government to embrace digital currencies in order to sidestep the sanctions that have made international business so arcanely tricky here.

Georgiy Muradov, Putin's representative on the peninsula—himself the subject of EU sanctions on the grounds that he has "played an important role in consolidating Russian institutional control over Crimea since the illegal annexation"—has also publicly pondered the possibilities that digital currencies might offer. In January he told RIA Novosti, a Russian state news agency, that the region is developing a cryptocurrency investment fund that will "solve the urgent problem for Crimean projects of avoiding the dollar and existing banking restrictions" and "ensure the implementation of various investment programs in the Crimea."

Chinese backers are already interested in Crimea's burgeoning cryptocurrency startups, Muradov added. The possibility of building the equipment locally, to avoid the embargoes that make importing it difficult, had also been discussed at Yalta. Muradov declined to comment for this article.

On the ground, foundations for the Crimean Digital Valley are being laid by blockchain entrepreneurs like Roman Kulachenko. He has a mousy, graying combover, a patterned shirt that he wears tucked in and tieless, and black slip-on brogues that need polishing. The place he chooses for our meeting is not like anything you'll find in Silicon Valley. The lobby of the Hotel Moscow, on the outskirts of Simferopol, is a tacky symphony of bright red faux-leather chairs and gleaming white floor and walls. The souvenir rack is empty, the receptionist bored. Through smoked glass double doors at one end there is a nightclub that my translator tells me gets packed with escorts and their clients in the evenings. But the hotel is deserted at midday on a Monday, apart from me, Kulachenko, the translator, and a group of thick-set men in the corner who knock back whiskey on the rocks as they huddle over a conversation.

Kulachenko heads the local collective of cryptocurrency entrepreneurs, under the banner of a very un-tech name: the Crimean Republican Association of Blockchain Technology Investment. His flimsy business card suggests a low-budget operation and the association's registered address is a tatty building on an unremarkable Simferopol backstreet.

But Kulachenko tells me he has the backing of the Crimean government, and the association's leaflet boasts that Putin has approved a digital economy package in which Crimea has been "chosen as one of the key actors to prepare best practices" for integrating blockchain into the Russian economy. Its projects include a cryptocurrency exchange, a "mining island," a tokenized investment fund, a tour operator that accepts digital currencies as payment, and centers "to train highly qualified specialists on blockchain."

Pivotal figures behind Belarus' digital economy decree say that other post-Soviet countries, including Russia, have been eyeing their crypto law with the intention of cloning it. What Kulachenko is developing in Crimea appears to mirror the Belarusian law almost exactly—minus its anti-money laundering and sanctions-busting safeguards, meaning foreign money could swerve into the region despite embargoes.

Kulachenko has no qualms about that.

"People should be able to exchange their economics freely, and since the Crimean people decided in a referendum to be part of Russia then no one should interfere with that," he says. "We are ready to help the Republic of Crimea to develop a cryptocurrency economy. We have an online platform to attract investors. We can tokenize any sector of the economy—investors will be able buy tokens of Crimean enterprises and then resell them. It will be highly decentralized and provide anonymity for investors."

Privacy is the key to blockchain's potential usefulness to sanctioned economies like Crimea's. Bitcoin, the original and most famous cryptocurrency, keeps its ledger of transactions public, making it hard for anyone using it to remain anonymous. That thwarted Hamas, the terror-listed Palestinian militia, in its first attempt to use cryptocurrencies to gather donations and circumvent the sanctions that block it from gathering money through the banking system. A series of schoolboy errors, such as posting their bitcoin wallet address on public social media accounts and using a US-based cryptocurrency exchange that requires users to input their real name and address, meant that the regulators quickly caught on and shut the wallets down before they had gathered more than a few hundred dollars. Soon though, Hamas and others had figured out new ways to keep ahead of the authorities.

Russia's GRU used fake names, addresses, and email accounts to register the hundreds of bitcoin wallets it used to pay the Clinton email hackers.

"When Hamas were soliciting donations to their own wallet it was very easy to track them," says Brenna Smith, a researcher who has monitored cryptocurrency funding going to sanctioned groups. "The issue is that the group has started using a new wallet for each transaction. The intelligence services have more powerful tools, but tracking them all would require major surveillance."

Russia's GRU used fake names, addresses, and email accounts to register the hundreds of bitcoin wallets it used to pay the Clinton email hackers in 2016. Nonetheless, thanks to the public ledger Robert Mueller's investigators were able to untangle the web and pinpoint the accounts and transactions.

But there are already private cryptocurrencies with anonymous ledgers on the open market, some developed in the US, which makes it unlikely that Russian intelligence will use trackable bitcoin again. If a place like Crimea were to develop its own cryptocurrency and limit who controls the nodes—the computers that verify each transaction and update the ledger—then the identities of the people making payments would be known only to Russia and its vetted users. Other countries have tried to mint their own cryptocurrencies, most famously Venezuela. Its experiment, meant in part to circumvent US sanctions, was a flop; called the Petro, the currency is not sold on any major crypto exchange or accepted in any Venezuelan shops. Nonetheless, analysts say the effort has formed part of a learning and development process, shared between all nations that are suffering under Western sanctions.

"Russia is prepared to play the long game. It can wait years until it gets a net return," Smith says.

Kulachenko is coy about what exactly his network is developing, but the end goal, he says, is to develop an entirely self-sustaining cryptocurrency system that cannot be intercepted or cut off by any outside hand. That means not only building the mining servers and all components in Crimea to evade embargoes, but also thinking about how they could be run off-grid, using solar power or other renewables.

"We have to pay for the electricity for the mining in dollars, euros, or rubles, so at the moment we can't say that cryptocurrencies are independent. And we can't speak about freedom because the electricity providers can switch off the supply," he says. "But we're at the beginning of a new digital world. The financial system should be free. It should be controlled only by the algorithm."

If a new crypto order is coming, then Vladimir Putin has a sprinting head start. Russia's huge energy reserves and ready-made network of underused power plants is the cryptocurrency equivalent of a blank check. The US, complacent in its old position as gatekeeper of global finance, hasn't yet fully grasped the danger. Some US states have passed blockchain laws but the treasury hasn't yet touched it. (Although the IRS is pursuing cryptocurrency traders for tax on their profits.)

The most obvious and easiest first step is to target the exchanges—the entry and exit points where cryptocurrencies are changed for traditional money. After all, there is still little that you can spend digital money on in the real world—for now—outside the dark web and at isolated businesses, like a handful of luxury car dealerships. The Financial Action Task Force, a Swiss-based global money-laundering and terrorist-financing watchdog, introduced rules for digital currencies in June, including a requirement that exchanges carry out checks on their customers and share information, just as banks are obliged to do. To date, it's the most ambitious global attempt to contain and control cryptocurrencies' nefarious potential.

"We recommend all our clients abide by the law. But the US should understand that the world needs to move ahead. Nobody can stop disruptive technology—not even the US."

Belarus has adopted the task force's guidelines, but there are no signs that Crimea, Transnistria, or Abkhazia will do the same, even as they cherry-pick bits of Belarus' regulatory system. The task force has few teeth other than putting countries on its black and grey lists, which can damage their credit rating. North Korea and Iran are on the lists, but currently Russia is not.

"You either abide by the law, or you don't touch US citizens and you develop a parallel system in the East," says Denis Aleinikov, the lawyer whose firm helped draft Belarus' cryptocurrency legislation. "We recommend all our clients abide by the law. But the US should understand that the world needs to move ahead. This is not a joke, it's not just speculation about the future. Nobody can stop disruptive technology—not even the US."

The US shows no sign of reducing its reliance on sanctions and its control over the banking networks as its main means to rein in bad behavior. The US treasury has just lifted the sanctions imposed on Turkey's President Erdogan in a bid to halt his military assault on Kurdish forces in Syria. Trump claims the US reined in Erdogan's excesses, partly with the force of sanctions, though really it was Putin who finally engineered the ceasefire, extending his own regional influence in the process. Meanwhile, the US courts are now preparing to hear the case against Halkbank, the majority state-owned Turkish bank that is accused of facilitating Iranian sanctions-busting through a complex gold-for-oil scheme. Halkbank's former general manager has already been convicted for his part in the graft; the fresh indictment accuses Erdogan of complicity. Should Halkbank lose the case new embargoes will come down, and this time they will hit Turkey hard.

But Erdogan already has a good friend in Putin, a man who has now built up some experience of surviving under Western sanctions. When they stood together in the Black Sea resort of Sochi on October 22 to announce their Syrian ceasefire deal, they also hinted at another realm where they are increasingly cooperating. Russia and Turkey have just signed deals to start doing their bilateral trade in local currencies rather than the dollar, with Turkey perhaps even set to join the Mir payment network, developed by Moscow as an alternative to Visa and Mastercard.

Maybe it's just coincidence that, in July, the Turkish government announced that it, too, is planning to develop a national blockchain currency. But as Erdogan's isolation grows, and Trump whips out the threat of sanctions against him more regularly, there is mounting incentive for him to explore other options. The success, or failure, of any alternative to the dollar-dominated system is the size and wealth of its members—and Turkey, a NATO member, EU candidate, and G20 member, is in the big league. The US may not realise it yet, but its sanctions regime may simply be empowering a new crypto order.


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