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How the Economic Model of ISIS Evolves Post-Caliphate

Due to U.S.-led military operations to counter its finances, the so-called Islamic State is not only changing its military tactics but also adapting its economic practices, writes Chatham House fellow Haid Haid.

Written by Haid Haid Published on Read time Approx. 4 minutes
Syria conflict oil
Syria's damaged Arak gas field, 20 miles (35km) northeast of the ancient city of Palmyra, last month, a few weeks after it was retaken by government forces from the hands of jihadists of the so-called Islamic State group.AFP

The U.S.-led anti-ISIS campaign has largely succeeded in conquering the group militarily, which has made it difficult for the so-called Islamic State to operate as a conventional state. As a result of losing most of its urban centers in both Syria and Iraq, the ISIS governance model of controlling and administering territories also seems to be collapsing. Experts, consequently, seem to be focusing on how ISIS is changing its military tactics to guerrilla warfare or hit-and-run tactics as it goes underground again. But not much attention is being paid to how ISIS’ economic practices are evolving to adapt to the group’s significant financial losses.

ISIS has been described as the world’s “richest” terrorist organization, due to its ability to generate more revenue than any other terrorist group. Reports indicate that group’s main income resources rely on oil sales, internal taxation, extortion, war spoils, the sale of antiquities, human trafficking, ransoms from kidnapping and foreign donations. IHS, an analysis and consultancy firm, assessed in December 2015 that ISIS’s monthly revenue stood at around $80 million dollars. Of this $80 million, IHS estimated that around 50 percent had come from taxes, and around 43 percent had come from oil revenue. ISIS also generates revenue from confiscating assets from areas under its control either because people are perceived to be enemies of the Caliphate or simply because they do not live there anymore.

The dependence on state-like tactics significantly shaped the initial economic war against the group. The group’s financial practices were largely focused on generating money from the territories they controlled as indicated in the IHS report. The group, therefore, was more vulnerable to the U.S.-led military operations to counter ISIS’s finances.

Since October 2014, U.S. warplanes have stepped up attacks on ISIS-controlled oil infrastructure, refineries and oil pumps in Syria. Airstrikes also destroyed the group’s bulk cash storage facilities, which contributed to limiting its financial capacity. Additionally, the U.S. eliminated some of the group’s high-ranking financial planners and operatives such as Haji Imam, the finance minister. Nonetheless, the main economic warfare tactic of the U.S. remains to be recapturing the territory held by the group in order to completely stop it from exploiting the populations and economies under its control.

But territorial losses does not only jeopardize the group’s financial resources, it also provides new opportunities and relieves the group from its main state-like financial responsibilities. ISIS may have been able to generate more revenue than any other terrorist organization, but it also incurs costs that are unprecedented for such groups. ISIS’s ambition to sustain the apparatus of a state, over a large area and at a time of war, is expensive. The group, as a result of both its substantial financial responsibilities and the war against it, was facing a constant, and increasingly desperate, struggle to raise money. Therefore, the loss of administrative territory allows the group to evolve its financial practices to ensure its survival and ability to come back.

According to Renad Mansour and Hisham al-Hashimi, Iraq experts, ISIS is adopting a new tactic which is based on creating legitimate businesses (such as services companies, properties, food and beverage industries etc.) via profit-driven third parties. ISIS has cash reserves but cannot invest it directly due to the counterterrorism laws, as well-known ISIS members will always be monitored which limits their ability to maneuver. But the group can overcome this problem by paying a third party to purchase various businesses in order to maintain liquidity and relevance in the war economy. “The new approach centers on its ability to launder its massive cash reserves, plundered from major cities such as Mosul, in a manner that will allow it to continue to draw upon them without intervention from hostile powers.”

The middlemen are usually of mixed sects and backgrounds who mostly only share economic interests with the group and might not even know about the money source. “We highly suspect that ISIS is using the same tactic in Syria, but not much is done to study it. The priority for everyone remains to defeat the group militarily,” said a senior Western diplomat under the Chatham House rule, which prevents me from revealing his identity or affiliation.

ISIS is also dependent on alternative value transfer systems commonly known as the Hawala, which is an unofficial method of transferring money without necessarily moving cash, based on a relationship of trust between different money traders in different locations. Hawala networks‘ ability to avoid electronic transfer methods, make it difficult to track and disrupt. But it is important to highlight that this system in not only used by ISIS, as many legitimate businessmen are also part of this system. “The only way to receive and send money in all areas outside the regime’s control is through Hawala. Many people in regime-held areas also use it. We do not know who is in charge, but we know that it is the only option we have,” said Mustafa Abdullah, a Syrian activist in northern Syria.

Likewise, the group seems to also be investing more in other types of fluid businesses like currency exchange shops. “There is reliable evidence that ISIS involvement in the black economy, such as currency exchange, is significantly growing, which allows it to convert its Syrian currency to Western currencies and transfer it outside the country,” added the senior Western diplomat.

Central to sustaining the U.S.-led anti-ISIS achievements is disturbing the group’s financial networks, which aims to ensure its survival while waiting for another opportunity to re-emerge. Therefore, understanding ISIS’s evolving financial practices in both formal and informal economies should become a priority.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Syria Deeply.

This article was originally published by the Atlantic Council and is reprinted here with permission.

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