Cryptocurrency Threatens Abkhazia’s Energy Access 

Investors are exploiting cheap power with dire consequences.

Cryptocurrency Threatens Abkhazia’s Energy Access 

Investors are exploiting cheap power with dire consequences.

Cryptocurrency “farms” consume massive amounts of electricity.
Cryptocurrency “farms” consume massive amounts of electricity.
Tuesday, 16 February, 2021

Cryptocurrency mining has long been a widespread practice in Abkhazia, with residents exploiting extremely low electricity prices. However, the issue has reached a crisis point since the territory’s main supplier of electricity closed for repairs last month.

Under normal circumstances, cryptocurrency mining companies need to apply to the authorities for permission to operate. However, given the work to the Ingur (also known as Enguri) hydro power plant – which means it has suspended its operations until May 2021 - and ongoing energy crisis, all cryptocurrency mining has been banned in Abkhazia.

Mikhail Logua, the head of Abkhazia’s energy company Chernomorenergo, said that the industry was a serious drain on resources. 

“Mining today significantly overloads our networks,” he continued. “During the pandemic, when everything was shut down, consumption remained as high as it was last year because of mining. Over the years the problems have mounted. Of course, nothing is wrong when people make money, but it must be done without harming others. We cannot continue to deliver more than we produce,” Logua concluded. 

The cryptocurrency “farms” take the form of buildings filled with computer equipment consuming massive amounts of electricity. This is facilitated by the fact that the failure to institute an effective collections system means that most residents do not pay for their electricity, despite it being one of the cheapest in the world. The problem has become ever more acute and has been reflected by regular blackouts in the country, especially during the winter.

Abkhazia’s economy is heavily dependent on Russia’s direct budgetary assistance. Its agricultural produce is exported to Russia, sea resorts host mainly Russian tourists in summer. All these substantially reduced because of the pandemic and against the background of the worsening economic situation and almost free electricity, locals are looking for alternative ways of generating income. Crypto mining has intensified more since its price started to skyrocket in December last year.

Cristina Ozgan, the minister of economy, said that in recent years Russia had supplied Abkhazia with cheap electricity to make up for this deficit. 

“Over the past five years, in order to eliminate the energy deficit of the Republic of Abkhazia, in the winter period electricity was imported from the Russian Federation. The source of financing the costs of covering the deficit in previous years was the Investment Programme [Russian financial assistance to Abkhazia]. The source of funding for the flow in 2020 has not been identified,” Ozgan told IWPR. 

Abkhazia had an outdated metering system which did not take into account the current situation, she continued. 

“For optimising energy consumption, improving billing and collection of payments for consumed electricity, it is necessary to increase control mechanisms by introducing an automated metering system,” Ozgan said. “Currently, there is no proper methodology for calculating the tariffs for consumed electricity. The current system of tariffs was adopted back in 2011. It is necessary to develop a methodology for economically justified tariff calculation and adopt a tariff policy plan for the next three to five years.” 

The long overdue repairs in the reservoir tunnel of the Ingur (aka Enguri) plant have served as a wake-up call for the government to seriously reform the sector. 

The hydro power plant is the only facility jointly operated by Georgia and Abkhazia, despite the unresolved conflict between the two dating back to the early 1990s. Abkhazia broke away from Georgia shortly after the fall of the USSR, after which the two fought a year-long war which ended in a ceasefire that left the conflict unresolved. Russia is the only major country that recognizes its independence. Tbilisi and much of the international community continues to see Abkhazia as part of Georgia. 

As elsewhere in the world, the Covid-19 pandemic has also had a significant impact. According to those working on the Abkhazian side of the HPP, for a six-month period at the start of the pandemic they were unable to collect any payments. As a result, they were barely able to cover the minimum required to keeping the plant running and pay workers’ salaries. 

Some experts believe that part of the problem is that the authorities have thus far punished illegal cryptocurrency mining operations with only a small fine, not nearly enough to deter operations in such a profitable industry. A more serious deterrent could be the confiscation of mining equipment when illegal farms were discovered. 

However the authorities decided to tackle the issue, Logua said that it was clear that the energy sector in Abkhazia was at serious risk. 

“Today, the leadership of the republic [and] the legislative branch understands that there is a very serious crisis in the energy sector,” he said. “The solution must be comprehensive, the decisions must be future oriented, the policies must be long-term and they must be implemented and adhered to.

This publication was prepared under the "Giving Voice, Driving Change - from the Borderland to the Steppes Project" implemented with the financial support of the Foreign Ministry of Norway.

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