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The Dark Side Of Kyrgyzstan's Crypto Boom

  • The crypto-mining farm near Bishkek consumes vast amounts of power, raising concerns about its impact on the nation's power grid.
  • Connections between the crypto operation and high-ranking energy officials suggest potential conflicts of interest.
  • While the government claims there's an energy surplus, locals and experts warn of power shortages and potential corruption.
Crypto Mine

While Kyrgyz authorities were preparing the population for possible electricity shortages this winter, a giant crypto-mining farm was consuming more power every day than cement factories, gold mines, and bazaars that employ thousands of people.

Until this week, perhaps.

On July 26, in a direct response to an investigation by RFE/RL's Kyrgyz Service (Radio Azattyk), President Sadyr Japarov tried to justify the work of an energy-hungry cryptocurrency-mining operation in Chui Province, near Bishkek, the capital.

The operation close to an electrical substation in the Kemin district was paying for its electricity at the highest possible rate, Japarov said, claiming that Kyrgyzstan enjoys a power surplus in the summer.

Cryptocurrency-mining operations "could be turned off in the winter months" if power deficits appeared, he added, crediting the Kemin development with providing 225 million soms (more than $2.5 million) to the state budget in taxes and 480 million soms ($5.5 million) in electricity payments.

But on July 31, Energy Minister Taalaibek Ibraev told RFE/RL's Kyrgyz Service that the company behind the gargantuan crypto-farm had "ended cooperation" with the state electricity grid and blamed Azattyk's investigation for the farm's decision to use power from neighboring Kazakhstan instead.

"There has been no theft [from the grid]. But after this investigation, the company ended cooperation [with the state] from August 1. So now we are losing money. The company will buy electricity from the Kazakh company and we will only receive [transit payments]. Instead of 480 million soms, we will receive 17 million soms ($195,000)," Ibraev complained.

But is the operation as good a deal for the country as officials are making it out to be? Or were powerful insiders, not for the first time, enjoying special protection?

'Should We Hold A Protest?'

Ibraev's sudden irritation over lost profits is in sharp contrast to his comments a little more than a week ago, when he was spearheading a national energy-saving campaign.

On July 20, during a cabinet meeting, Ibraev called for a presidential decree on a three-year state of emergency in the energy sector, after authorities were forced to purchase 3.5 billion kilowatt-hours (kWh) of electricity from Russia and Turkmenistan last fall and winter.

"If this year the electricity deficit amounted to 3 billion kWh, next year it will grow larger. For example, if in 2023 [demand for electricity] is 17.2 billion kWh, then in 2026 this figure will reach 19 billion kWh. In this way, there will be a deficit of 5 billion-6 billion kWh," Ibraev warned.

Japarov has since signed a decree declaring an emergency.

There is no doubting the scale of the problem.

Kyrgyzstan's Toktogul hydroelectric power plant (HPP) has a total capacity of 1,200 megawatts (MW) and provides around one-third of all domestically produced electricity. But the reservoir upon which that power generation depends is currently at its lowest level in the last three years.

And despite the government covering the deficit with imports, many parts of Kyrgyzstan still suffered power cuts last winter.

One of them was Kemin, where residents living near the crypto-mining farm are only too aware of the toll being exacted on the power supply by their new neighbor.

"In autumn [the transmission line] was extended and many transformers were installed.... I heard that the electricity that [the cryptocurrency mine] consumes in one day is enough for Kemin for three days," said local resident Zholdoshbek Dalbaev in an interview with RFE/RL's Kyrgyz Service.

"At first, they were turning off our electricity. I called the dispatcher and asked him: 'Why are you turning us off, for the sake of that thing? Should we hold a protest?' After that, they stopped switching us off," he said.

The enterprise that locals say was built on the territory of a former state-owned summer camp for children is certainly well protected.

It sits behind a high fence, on more than two hectares of land, and consists of steel containers grouped into three sections, drone footage by Radio Azattyk showed.

A Kyrgyz policeman guarding the cryptocurrency mine called it a "strategic object" when an RFE/RL correspondent attempted -- unsuccessfully -- to gain access to the site.

Appetite For Power

That object's burden on the state grid is not just anecdotal.

It is backed up by Energy Ministry data on electricity consumption by major consumers, which was publicly available -- until recently.

Standings for April published on the Esep.energo.kg website showed a company called Solarcoin at the top of the pile, using far more electricity (over 17 million kWh) that month than even large taxpayers and employers like the Kant Cement Plant (13.5 million kWh) -- the largest cement producer in Kyrgyzstan.

Solarcoin's usage during that period dwarfed that of TransElectro (4.7 million kWh), a private electricity company, and was three times the amount used by the operators of Jerooy, the country's second-largest gold mine, Alliance Altyn.

Since Radio Azattyk published its investigation, that list has been removed from the website.

But the supposition that Kemin's cryptocurrency behemoth belonged to the company was confirmed by grid official Gulzhigit Murzakarimov, who told RFE/RL that the company's 30 MW-capacity operation might expand in the near future.

Murzakarimov also said that a rule imposed in 2019 preventing crypto-miners from using power from the grid was no longer in force.

Now, firms like Solarcoin can access the grid if "technical capacities allow," said Murzakarimov, who refused to comment on the reported power cuts in Kemin.

Cryptocurrency mining relies on blocks of computers working around the clock to solve complex cryptographic equations in exchange for rewards in cryptocurrency. Cooling systems are deployed to prevent the computers from overheating.

The process is incredibly energy-intensive and also expensive in jurisdictions where electricity tariffs are high.

That is not the case in Central Asia, a fact that has made it an attractive location for crypto-miners, some of whom fled China after a crackdown on the practice there.

In Kyrgyzstan, the top tariff for electricity -- as paid by cryptocurrency farms and other major consumers -- is 5.04 soms, or just under $0.06 per kWh.

That is about five times the super-low rates paid by Kyrgyz households, but broadly comparable to tariffs paid by homes in energy-rich countries like Venezuela, Russia, and Saudi Arabia.

Since Solarcoin's operation began in December, the price of the most popular cryptocurrency, Bitcoin, has almost doubled, and is currently just under $30,0000 per Bitcoin.

Crypto-Kings

According to data published by industry sources, Kyrgyzstan's neighbor Kazakhstan has now become the second-biggest crypto-mining country in the world after the United States.

Kazakh energy officials have sometimes bemoaned the impact that new demand from the cryptocurrency sector has had on an ailing grid, particularly in the southern part of the country, where power shortages are the most common. Kazakh law enforcement has trumpeted the shutdown of apparently illegal operations benefiting power-station owners and, in at least one case, Bolat Nazarbaev, the disgraced brother of former Kazakh President Nursultan Nazarbaev.

Kyrgyz security services have also carried out numerous raids on cryptocurrency farms. Yet the investigation by RFE/RL's Kyrgyz Service suggested conflicts of interest involving current energy officials may be at play in Solarcoin's case.

Correspondents discovered, for instance, that a woman named Tatyana Martinova, was listed as one of the co-founders of Solarcoin. Martinova had in the past worked as director of another company, Ai Element, which was founded by a former lawmaker, Farkhat Iminov.

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Data on a government portal indicates that somebody with a surname and initials matching those of Iminov paid the equivalent of $300 in land taxes and just over $50 in nonresidential property taxes to the local tax service in Kemin on Solarcoin's behalf in January.

That is significant insofar as Iminov was in November 2022 elected to the board of directors of JSC Electric Power Plants -- the majority state-owned company that oversees nearly all of Kyrgyzstan's power generation -- just as construction of Solarcoin's operations were nearing completion.

Martinova is also listed as the founder of another company, Metrum KG, a status she shares with Jyrgalbek Turuskulov, another former lawmaker turned energy official. While Iminov represents JSC Electric Power Plants, Turuskulov serves as a board member for the state grid itself, whose full title is the National Electrical Grid of Kyrgyzstan (NESK).

Turuskulov told Radio Azattyk in a telephone call that he had seen Martinova only once in his life and did not know her beyond that.

Neither Martinova nor Iminov could be reached for comment, while Aisana Ismailova, listed as Solarcoin's director, told RFE/RL via telephone that she would provide comment, though she failed to do so.

Due to Kyrgyzstan's dependence on hydroelectric power, dry years like 2023 -- coupled with commitments to provide downstream neighbors Kazakhstan and Uzbekistan with water -- can spell trouble for the grid.

Earlier this year, the deputy chairman of the cabinet of ministers, Bakyt Torobaev, estimated that Kyrgyzstan will enter the heating season with a volume of approximately 12.4 billion cubic meters of water in the Toktogul Reservoir -- more than 1 billion less than last year.

During the winter, more water is drawn to provide power as demand grows, with inflows into the reservoir falling sharply by the beginning of autumn.

History suggests that Kyrgyzstan needs to retain 6 billion-7 billion cubic meters of water in Toktogul during the cold months to avoid the regular shutoffs that deepened popular anger with the ill-fated regime of President Kurmanbek Bakiev more than a decade ago.

Current President Japarov was a top official in that government.

In his comments following Radio Azattyk's investigation, Japarov repeated the refrain of his predecessors that Kyrgyzstan "will become an electricity-exporting country" as new HPPs come online in the near future.

But energy expert Ernest Karybekov told RFE/RL's Kyrgyz Service that the Solarcoin project is another example of private interests being prioritized over the public good when it comes to the domestic energy sector.

"If you, I, or another citizen asks for electricity to open a factory, they will say that there is no capacity, and block permission," Karybekov said.

"Does it pose a risk? Yes it does. [But the authorities] will give permission for somebody else to enrich themselves," he added.

By Chris Rickleton via RFE/RL

 

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