Russia is using covert financial networks to fund its purchases of banned weapons technology, circumventing Western sanctions in the process, analysts have told Insider.They described in unusual detail how the schemes work.
Pavlo Verkhniatskyi, a member of the International Working Group on Russian Sanctions, gave Insider an exclusive insight into how Russia exploits the financial system.
He said it helps it buy microchips, special tools and other key components used to build the missiles and drones it launches into Ukraine every day.”Money is put into the financial system and becomes, you know, a driving force or fuel for these black operations,” Verkhniatskyi said, referring to Russia’s covert technology procurement programmes.
He called on the West to shift the focus of its sanctions regime and target the networks he described. Attempts so far have had mixed success, he said. The Russian embassy in Britain did not immediately respond to a request for comment.
Shady banks and suitcases full of cash and diamonds
Verkhniatskyi,citing Ukrainian government sources, described the financial channels used by Russia to fund its covert arms parts trade.He said a favoured tool is cash – usually the proceeds of the government’s oil and gas sales. This money, he said, is then placed in accounts in countries such as Turkey and the United Arab Emirates, where Western sanctions are not strictly enforced.
Under Western sanctions, banks have to investigate suspicious transactions to make sure they’re not being used to evade sanctions. So Russia is trying to disguise the real source of the money by using intermediary banks.
The purchases, Verkhniatskyi said, are brokered by networks of shell companies, often fronts for Russian intelligence, that typically buy the sanctioned goods in bulk from trading companies or retailers, he said.
Countries such as Kazakhstan and Armenia, with traditionally close ties to Russia and weaker business laws, are used as bases for the shell companies.Verkhniatskyi described the shell companies as “sleeping bears”, some of which were set up before the invasion and were ready to be activated as soon as Western sanctions began to bite.
Banks dealing in dollars, the world’s default currency, must in theory comply with American sanctions or face reprisals from the US government.
But Kremlin agents have other options that don’t involve bank transfers that could trigger such checks, Verkhniatskyi said.
Some shell company agents hand over suitcases full of cash or other valuables to suppliers.
“There is also information that Russians are using diamonds as a method of payment for sanctioned goods,” Verkhniatskyi said, citing Ukrainian government sources.
His claims are supported by a recent report by the UK’s Serious Organised Crime & Anti-Corruption Evidence group. It found that the Kremlin’s illicit cash flows not only fund its technology procurement programmes, but also disinformation campaigns and militant groups.
“Illicit finance is now an integral part of Russia’s foreign and security policy,” wrote Professor David Lewis of the University of Exeter in the study. “It is also critical to the Russian military and security services, enabling illicit defence supply chains, facilitating military deployments overseas and funding a growing number of parastatal military units.”
But Russia lacks the capacity to buy the large quantities of prohibited technology it needs through cash transfers alone, meaning it remains vulnerable to attempts to restrict the flow of Kremlin money through banks.
Blacklisting Russia
Verkhniatskyi said a crucial step would be to blacklist Russia with the Financial Action Task Force, an intergovernmental organisation designed to stop financial malpractice. The move effectively isolates a country from the world’s banking systems.
The FATF briefly suspended Russia after its invasion of Ukraine, a largely symbolic move that meant it was barred from participating at a senior level.
But it has so far been reluctant to take the more serious step of blacklisting Russia, fearing it would compromise the FATF’s neutrality and be ineffective.
Only three countries were blacklisted in October 2023: North Korea, Iran and Myanmar. A larger “grey list” of more than 25 countries also does not include Russia.
However, Verkhniatskyi dismissed these concerns, saying that not punishing Russia would further damage the institution’s credibility.
“I think that the authority of the FATF is undermined when it sits at the same table with the criminal state and goes on, you know, working as normal,” he said.
The FATF did not immediately respond to Insider’s request for comment.
