Grandma told you: Don't do sanctions. You didn't listen.
"A self-described Russian smuggler in China received a request from the manufacturer of the legendary AK-47 rifle.
Russia's largest maker of small arms, Kalashnikov Concern, needed electrical parts for drones that have been among the most effective weapons against Ukrainian armor.
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," 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.
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 said it processed in its most recent financial year.
For Russia, 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 dollar-denominated stablecoins like tether. Last week, the department blacklisted a Moscow company that had partnered with a Russian bank under sanctions to provide tether-based payments.
Tether's privately held issuer, Tether Holdings -- registered in the British Virgin Islands -- 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. The company said in December it had begun a voluntary policy to freeze digital wallets used to transfer its tokens that were connected with entities under sanction.
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.
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, on which the U.S. first imposed sanctions 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."
Zverev saw few prospects in Russia while studying 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.
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 was using tether to charge Russian customers.
Zverev preferred tether over traditional banks because it was anonymous, he told customers. The Tether Foundation rarely froze digital wallets because of 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 cash exchangers inside Russia and abroad that allow customers to swap rubles for tether and then into foreign currency.
When events in Ukraine started, Zverev wrote 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.
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.
In April 2023, Sergey Mendeleev, 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. Mendeleev told the group he was launching his own payment firm, Exved, to help importers pay foreign suppliers within hours via tether.
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 Exved handled hundreds of millions of dollars of Russian foreign-trade payments in tether monthly just after starting operations.
He declined to comment.
Zverev advertised his services in a separate Telegram group, mentioning: "Kalashnikov Concern is purchasing from China for its drone project, bypassing sanctions through me."
After events in Ukraine started, Zverev had begun orchestrating the transport of electronics to Russia from China under a program introduced to import products Russia needed without the original manufacturers' consent.
Electronics he purchased were loaded onto trucks and dispatched to Russia through Kyrgyzstan and Kazakhstan.
Zverev continued to use Garantex and other intermediary firms, to convert customers' rubles into tether. He swapped the tether for yuan 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.
In December 2022, Zverev said a Kalashnikov subsidiary sent him the bill of materials that the Journal later reviewed.
The document lists 248 types of electronic parts.
Zverev took the order to Kynix, the Hong Kong distributor, which priced the order at about 70 million yuan, just under $10 million.
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." [1]
1. Russia Uses Crypto to Sidestep Sanctions, Smuggle Arms Parts. Berwick, Angus; Foldy, Ben. Wall Street Journal, Eastern edition; New York, N.Y.. 02 Apr 2024: A.1.
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