A Russian self-proclaimed smuggler in China received a request from the manufacturer of the legendary AK-47 rifle. Kalashnikov Concern, Russia’s largest small arms manufacturer, needs electronic parts for drones. These drones have become one of the most effective weapons against Ukrainian armored forces.
The smuggler named Andrey Zverev handed over the order for the end of 2022 to a Hong Kong electronics dealer. The United States was trying to cut off such transactions, and even Chinese commercial banks, wary of sanctions, were blocking payments from Russia.
Solution: Zverev used the cryptocurrency tether to transfer millions of dollars of Kalashnikov’s funds to his suppliers.
Months later, Zverev described the deal in a message to a group of Russians and offered the same services. “We will provide everything you need to kill each other,” he wrote in a Telegram chat. The payment method “is preferably cryptocurrency, of course.”
Tether has become one of the default black market payment methods in the world. This digital currency claims to be anchored 1:1 to the U.S. dollar. But unlike government-issued U.S. dollars within the banking system, authorities have limited ability to track Tether’s global usage.
This “stablecoin” is the most traded cryptocurrency, with as much as $120 billion changing hands in Tether every day, often twice as much as Bitcoin. The total number of transactions in 2023 exceeds $10 trillion, which is not far behind the transaction volume of payments giant Visa in its most recent fiscal year.
Tether has become indispensable to Vladimir Putin’s war machine. It helps Russian companies bypass Western sanctions and procure so-called dual-use products for use in drones and other high-tech equipment. Importers dealing in such goods transfer rubles to Russian bank accounts used by middlemen, who convert the rubles into Tether and then pay their foreign suppliers in places like China and the Middle East in the local currency.
The U.S. Treasury Department has urged Congress to pass legislation giving it the ability to block transactions in U.S. dollar-denominated stablecoins such as Tether. Last week, the Treasury Department blacklisted a Moscow-based company that had partnered with a sanctioned Russian bank to provide Tether-based payment services.
“Russia is increasingly turning to alternative payment mechanisms to circumvent U.S. sanctions and continue to fund the war in Ukraine,” Brian Nelson, the Treasury Department’s undersecretary for counterterrorism and financial intelligence, said in a statement.
Tether Holdings, the issuer of Tether, is registered in the British Virgin Islands, is owned by a small group of people and is not listed. Tether Holdings issues Tether to customers in exchange for U.S. dollars, which are mostly invested in U.S. Treasury bonds. Customers trade Tether on a virtual public ledger known as a blockchain or through private exchanges, sometimes to buy other cryptocurrencies and sometimes, as is the case in Russia, to pay for goods and services.
Tether Holdings did not respond to questions for this report. In December, the company said it had begun voluntarily implementing a policy to freeze certain digital wallets that had been used to transfer tokens associated with sanctioned entities. The company later told U.S. senators in a letter that it was “unwaveringly committed to making a positive contribution to the global financial ecosystem.”
This report on Tether’s role in Russian trade is based on interviews with people directly involved, as well as thousands of exchanges between brokers and importers on the Telegram chat app. Many people used pseudonyms, but The Wall Street Journal confirmed the identities of those mentioned here.
The Wall Street Journal verified details in Zverev’s statement through interviews with Zverev’s associates and Russian import and tax records. The records show an electronics supply chain between Zverev’s Hong Kong supplier Kynix Semiconductor and Kalashnikov’s main drone subsidiary.
Neither Kalashnikov nor Kynix responded to requests for comment; the United States first imposed sanctions on the former in 2014.
Zverev, 41, confirmed his work in an interview and shared a list of materials he said Kalashnikov gave him. “Kalashnikov asked me to look for some possibilities,” he said. “How to buy components in China and how to supply them”.
Zverev, who goes by the nickname Zodd, said he could speak out because he had not broken any laws in Russia. But he later said he had been instructed not to speak, referring to Russian security forces, so he could not reveal more information. He said he had been to Moscow before.
“I just don’t want any trouble,” he wrote in one message, “in Russia or anywhere else.”
The trick lies in Tether
In 2004, while studying for an economics degree at a public university in the Siberian city of Omsk, Zverev discovered there were few prospects in Russia. After helping a Russian company manage its supply network, he flew to Shanghai to look for new opportunities.
At a time when China’s export engine was reshaping global trade in consumer goods, Zverev established connections with Chinese factories and arranged supply routes to Russia, allowing some companies to avoid paying Russian tariffs. “I became a smuggler,” he once said in a Telegram group.
He helped run a Bitcoin mining operation in China and resold the microchips to buyers in Russia for use in those buyers’ own mining equipment, which minted new Bitcoins by solving complex formulas. He was already charging Russian customers in Tether: a list of products he sent to Russian customers in 2022 was priced in the cryptocurrency.
Zverev told clients that he preferred Tether to traditional banks because of its anonymity. He wrote that the Tether Foundation would rarely freeze digital wallets due to users transferring “dirty money” through them.
His preferred Tether trading platform is a Moscow-based cryptocurrency exchange called Garantex. Launched in 2019, Garantex operates a network of cash exchangers within and outside Russia, allowing customers to exchange rubles for Tether and then into foreign currencies.
When Russia invaded Ukraine, Zverev wrote on his personal blog that readers should protect their savings from the plummeting ruble by buying Tether on Garantex. Since Garantex works almost exclusively with Russian clients, the “evil regulators” in the United States and Europe will not be able to shut down the exchange.
Two months later, Garantex was blacklisted by the United States on the grounds that it had become a haven for cybercriminals. As Zverev said, Garantex’s business continues to thrive. A spokesperson for Garantex denied that the exchange facilitated criminal activity and said the company complied with Russian law. He also said that Garantex was grateful to Zverev for speaking highly of its services.
However, the massive Western sanctions have indeed put Russia’s military-industrial enterprises in a difficult situation.
The United States and the European Union have banned the export of certain dual-use industrial parts to Russia. Chinese banks, as well as those in countries popular with Russian immigrants, are increasingly blocking ruble payments for fear of losing Western correspondent banking relationships.
shadow trade
Russian importers have found new ways to break 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 cryptocurrency figures in a Telegram group to discuss the problems faced by importers. Mendeleev referred inquiries about the Chinese payments to Zverev.
One of them, who works for a company that builds cloud computing data centers for Russian state agencies, said it was very difficult to import dual-use products. He wrote that paying for imports in Tether would facilitate the smooth receipt of goods.
Mendeleev, who later left Garantex, told the people at the time that he was starting his own payments company, Exved, to help importers pay foreign suppliers in Tether within hours. He declined to disclose the Tether conversion mechanism because once announced, the mechanism would cease to function for obvious reasons.
In another message in August, Mendeleev estimated that the entire “shadow trade” had a monthly turnover of up to $10 billion. Others involved in the trade agreed with the figure, but the Journal could not confirm it. Mendeleev later said in a speech that Exved was processing hundreds of millions of dollars in Russian foreign trade payments in Tether every month soon after it started operating.
Mendeleev declined to comment, saying he would only answer reporters’ questions if reporters from unfriendly countries met his conditions, including donating $1 million to a Russian charity.
Zverev advertised his services in another Telegram group, mentioning that “Kalashnikov Concern is sourcing from China for its drone project, bypassing sanctions through me”.
Drone trading
After Russia invaded Ukraine, Zverev began planning to ship electronics from China to Russia under a government-backed parallel import program designed to import products Russia needed for the war effort without the consent of the original manufacturers.
Electronics purchased by Zverev are usually loaded onto trucks in Shenzhen or Guangzhou and then shipped to Russia via Kyrgyzstan and Kazakhstan.
A video he shared with the Wall Street Journal showed workers sealing boxes with tape in a Chinese warehouse whose exterior walls were plastered with ads for destinations for Russian goods. He said goods were not declared at the border to minimize paper records, and customs officials rarely inspected goods. Other relevant personnel also confirmed this statement.
“No one knows what you put in the truck,” Zverev said.
Zverev continued to use Garantex and other intermediary companies to convert customers’ rubles into Tether, transferring the cryptocurrency in a blockchain system called “Tron” that offers greater user privacy and lower fees. He converted Tether into Chinese yuan at an over-the-counter broker in Hong Kong, then sent the money to his supplier via a local bank transfer.
A Garantex spokesperson said that the company only operates in Russia and has no knowledge of how Russian companies purchase Tether abroad through intermediaries.
Zverev said that in December 2022, a subsidiary of Kalashnikov (he did not identify which company) sent him a list of materials. The Wall Street Journal later saw the list.
The document lists 248 electronic parts, including various versions of a popular high-performance microcontroller, the STM32, made by a Swiss semiconductor manufacturer. According to a government database, the Ukrainian army found the STM32 in recovered drones produced by Kalashnikov subsidiary Zala Aero, including in its suicide Lancet drone. The database also lists a dozen other parts from Zverev files.
Zverev handed the order to Hong Kong distributor Kynix, which priced the order at about 70 million yuan, equivalent to nearly $10 million. Kynix was supplying Russian companies as early as 2018, including at least one other company that makes drones, according to records from data firm Import Genius. He said he delivered the order to Kalashnikov via Central Asia via his standard “grey” shipping route.
Zverev said that when making payments, he used Tether to sever ties with the two companies and make it harder for Western governments to trace the transactions. “Tether is a key step in the entire chain,” he said.
In December last year, the U.S. Treasury Department introduced new restrictions on foreign financial institutions, known as secondary sanctions, intensifying its crackdown on the Russian military industry.
Garantex founder Mendeleev said in January that Tether would prove useful for importers to circumvent secondary sanctions elsewhere. “If you are looking for a way to pay Iranians, you can easily pay them in Tether,” he told a conference in Moscow. “It’s absolutely fine,” he said.
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2024-04-01 07:25:00
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