Crypto fuels Russian shadow trade for weapons parts
The smuggler, Andrey Zverev, took the late 2022 order to a Hong Kong electronics distributor. The U.S. was trying to cut off such deals, and even sanctions-wary Chinese banks were blocking payments from Russia.
The solution: Zverev used tether, the cryptocurrency, to relay millions of dollars of funds from Kalashnikov to its supplier.
Describing the transaction several months later in messages to a group of Russians, Zverev offered the same service. “We will deliver everything you need to exterminate each other,” he wrote in a Telegram chat. Payment was “ideally with crypto, of course.”
Tether has emerged as one of the world’s default black-market payment methods. The digital currency says it is backed one-to-one by the U.S. dollar. But unlike government-issued dollars inside the banking system, authorities have limited ability to trace its use around the world.
The “stablecoin” is the most-traded cryptocurrency, with as much as $120 billion in tether changing hands each day—often about twice as much as bitcoin. Transactions totaled over $10 trillion in 2023, not far off what payment giant Visa says it processed in its most recent financial year.
For Vladimir Putin’s war machine, Tether has become indispensable. It helps Russian companies weave around Western sanctions and procure so-called dual-use goods that go into drones and other high-tech equipment. Importers working with such goods make transfers in rubles into Russian bank accounts operated by middlemen who convert the rubles into tether and pay out local currency to their foreign suppliers in places like China and the Middle East.
The U.S. Treasury Department has pressed Congress to pass legislation that would grant it the ability to block transactions in U.S. dollar-denominated stablecoins like tether. Last week, the department blacklisted a Moscow company that had partnered with a sanctioned Russian bank to provide tether-based payments.
“Russia is increasingly turning to alternative payment mechanisms to circumvent U.S. sanctions and continue to fund its war against Ukraine,” Brian Nelson, Treasury’s undersecretary for terrorism and financial intelligence, said in a statement.
Tether’s privately held issuer, Tether Holdings—registered in the British Virgin Islands and owned by a small group of individuals—distributes tether to customers in exchange for dollars, which it has mostly invested in U.S. Treasurys. Customers trade tether on virtual public ledgers known as blockchains or via private exchanges, sometimes to purchase other cryptocurrencies or, as in Russia’s case, to pay for goods and services.
Tether Holdings didn’t respond to questions for this article. Last December, the company said it had begun a voluntary policy to freeze digital wallets used to transfer its tokens that were connected with sanctioned entities. Tether later told U.S. senators in a letter that it had an “unwavering dedication to contributing positively to the global financial ecosystem.”
This account of tether’s role in Russian trade is based on interviews with people directly involved, along with thousands of messages on the Telegram chat app exchanged by brokers and importers. Many used pseudonyms, but The Wall Street Journal identified those described here.
The Journal verified details from Zverev’s account through interviews with his associates and Russian import and tax records. The records showed a supply chain of electronics connecting Zverev’s Hong Kong supplier, Kynix Semiconductor, and Kalashnikov’s main drone subsidiary.
Kalashnikov, which the U.S. first sanctioned in 2014, and Kynix didn’t respond to requests for comment.
Zverev, 41 years old, confirmed his work in an interview and shared the bill of materials he said Kalashnikov had given him. “Kalashnikov asked me to find some possibilities,” he said. “How to buy parts in China, and how to supply them.”
Going by the nickname Zodd, Zverev said he could speak frankly because he wasn’t breaking any laws in Russia. But he later said others were instructing him not to talk, referring to Russian security forces, so he couldn’t share more information. He had traveled to Moscow, he said.
“I just don’t need any problems,” he wrote in one message. “Not in Russia, not in other places.”
The trick is tether
Zverev saw few prospects in Russia while studying in 2004 for an economics degree from a state university in the Siberian city of Omsk. After helping manage a Russian company’s supply network, he flew to Shanghai to chase new opportunities.
With China’s export engine reshaping global consumer-goods trade, Zverev built ties with local factories and arranged supply routes to Russia that enabled companies to avoid paying Russian customs duties. “I became a smuggler,” he once told a Telegram group.
He helped run bitcoin-mining operations in China, and resold microchips to buyers back in Russia to power their own mining rigs, which solve complex formulas to mint new bitcoin. He already was using tether to charge Russian customers: A product list he sent to them in 2022 was priced in the cryptocurrency.
Zverev preferred tether over traditional banks because it was anonymous, he told customers. The Tether Foundation rarely froze digital wallets due to users moving “dirty money” through them, he wrote.
His preferred tether-trading platform was a Moscow-based crypto exchange called Garantex. Launched in 2019, Garantex runs a network of cash exchangers inside Russia and abroad that allow customers to swap rubles for tether and then into foreign currency.
When Russia invaded Ukraine, Zverev wrote on a personal blog that readers should protect their savings from the plummeting ruble by buying tether on Garantex. Because Garantex worked almost exclusively with Russian clients, “the evil regulators” in the U.S. and Europe wouldn’t be able to shut it down.
Garantex was blacklisted by the U.S. two months later for being a haven for cybercriminals. True to Zverev’s word, its business continued to thrive. A Garantex spokeswoman denied the exchange facilitates criminal activities and said it abides by Russian law, adding the company appreciated Zverev “giving a high appraisal of our services.”
The waves of Western sanctions did, however, make life difficult for Russia’s military companies.
The U.S. and European Union barred the export to Russia of certain industrial parts and components as having a dual military use. Banks in China, along with those in countries popular with Russian émigrés, increasingly blocked ruble payments for fear of losing their Western correspondent-banking relationships.
The shadow trade
Russian importers looked for new ways to subvert the Western blockade.
In April 2023, Sergey Mendeleev, a bearded former Moscow local official and founder of Garantex, convened some of Russia’s most experienced crypto figures in a Telegram group to discuss importers’ problems. He referred queries about their China payments to Zverev.
One member, who worked for a company building cloud computing data centers used by Russian state agencies, said dual-use goods were being imported “with great difficulty.” Paying for the company’s imports in tether would help it “receive goods without problems,” he wrote.
Mendeleev, who had since left Garantex, told the group he was launching his own payment firm, Exved, to help importers pay foreign suppliers within hours via tether. He refused to disclose the tether conversion’s mechanics “because otherwise it would stop working for obvious reasons.”
In another message in August, Mendeleev estimated the monthly volume of the entire “shadow trade”—as members called it—at as much as $10 billion. Others working in the trade agreed with this figure, though it couldn’t be confirmed by the Journal. Mendeleev later said in a speech that Exved handled hundreds of millions of dollars of Russian foreign-trade payments in tether monthly just after starting operations.
Mendeleev declined to comment beyond saying he only would answer questions from reporters in “unfriendly countries” if they met his conditions, including making a $1 million donation to a Russian charity.
Zverev advertised his services in a separate Telegram group, mentioning: “Kalashnikov Concern is purchasing from China for its drone project, bypassing sanctions through me.”
A deal for drones
After the invasion, Zverev had begun orchestrating the transport of electronics from China to Russia under a so-called government-sponsored parallel import program introduced to import products Russia needed for the war without the original manufacturers’ consent.
Electronics he purchased were loaded onto trucks, often in Shenzhen or Guangzhou, and dispatched to Russia through Kyrgyzstan and Kazakhstan.
A video he shared with the Journal showed workers taping up boxes in a Chinese storeroom, with Russian cargo destinations advertised on its facade. Goods went undeclared at borders to minimize the paper trail, and customs officials rarely inspected cargo, he said—a claim supported by other people involved.
“Nobody knows what you’re bringing inside the truck,” Zverev said.
Zverev continued to use Garantex, along with other intermediary firms, to convert customers’ rubles into tether, moving the cryptocurrency on a blockchain system called Tron, which has heightened user privacy and low fees. He swapped the tether for yuan at over-the-counter brokers in Hong Kong, and then wired suppliers the money by a local bank transfer.
The Garantex spokeswoman said it operates solely in Russia and has no knowledge about how Russian companies may buy tether abroad via intermediaries.
In December 2022, Zverev said a Kalashnikov subsidiary, which he didn’t identify, sent him the bill of materials that the Journal later reviewed.
The document lists 248 types of electronic parts, including versions of a popular high-performance microcontroller called STM32, made by a Swiss semiconductor manufacturer. Ukrainian forces have found STM32s in recovered drones produced by a Kalashnikov subsidiary called Zala Aero, including in its exploding Lancet models, according to a government database that also lists a dozen other parts from Zverev’s document.
Zverev took the order to Kynix, the Hong Kong distributor, which priced the order at about 70 million yuan, just under $10 million. Kynix had been supplying Russian firms since as early as 2018, including at least one other that makes drones, according to records from Import Genius, a data company. He delivered the order to Kalashnikov through his standard “gray” transport route via Central Asia, he said.
For the payment, Zverev said he used tether to “break up the connection” between both companies, making it harder for Western governments to trace the transactions. “USDT is a key step in the chain,” he said, calling tether by its alternate name.
The U.S. tightened its snare on Russia’s military industry in December when Treasury rolled out new restrictions, called secondary sanctions, for foreign financial institutions.
Mendeleev, the Garantex founder, said in January that tether had already proven useful for importers in avoiding secondary sanctions elsewhere. “If you are looking for a way to pay Iranians, you can perfectly easily pay them with tether,” he told a Moscow conference. “No problem.”
—Elaine Yu, Kate Vtorygina and Victoria Simanovskaya contributed to this article.
Write to Angus Berwick at [email protected] and Ben Foldy at [email protected]
