October 6, 2014

TSG IntelBrief: The Bomb-Proof Finances of the Islamic State

• Attacking the finances of the so-called Islamic State (IS) with limited collateral damage will be orders of magnitude more difficult than attacking its military factions

• The group has thoroughly embedded itself into local and regional economies in Syria and Iraq, and damaging its finances while not devastating civilian populations will be as difficult as it is necessary

• IS oil revenues might be the easiest to disrupt but such action comes with significant collateral economic damage, while taxes, tolls, extortion, and food sales generate more income while remaining highly resistant to external forces

• In the areas under its control, IS has been providing social services as well as delivering levels of fuel, electricity, and food to populations utterly without recourse, meaning the group needs to be replaced and not simply removed.


Coalition air strikes against the group calling itself the Islamic State (IS) will have a detrimental effect on its military capabilities, even if progress will be haltingly frustrated. But IS’s biggest weapons are immune to airstrikes: after all, one can’t bomb sales of wheat, electricity, fuel, and other vital goods.

In the areas under its control, IS has become a de facto state, however illegitimate and backwards, and to that end it has thoroughly embedded itself in local and regional economies across Syria and Iraq. Dismantling the group’s financial weapons without devastating local economies will make airstrikes in chaotic and shifting battle spaces seem relatively uncomplicated. It comes down to the difference between removing IS and replacing IS.

Last week’s report by the United Nations that IS controls over 40% of Iraq’s wheat crop (the importance of which to the country is difficult to overstate) is another indication of the increasingly symbiotic if still twisted connection between IS and the areas under its control. It is a categorical error to dismiss the group as a terrorist toxin that is completely alien to its host; the group remains in control in part because there is no capable replacement and the group is providing a modicum of badly needed services to desperate populations. Controlling stockpiles of wheat, along with compensating farmers for a portion of what they seize gives IS additional leverage over vulnerable populations, and the longer IS can act like a state the harder it will be to dislodge it.

It’s not just wheat sales. IS has been in relative control over areas in Syria and Iraq for so long that it has assumed the functional duties of a government. It prefers to call its extortion by another name, ‘taxes,’ but as long as there is no viable replacement and the group provides basic services, then the price remains bearable. The group simply makes money from so many different activites that it is impossible to sanction it, or to cut off its funding entirely. The group makes money when the locals make money, and therefore hurting IS financially means hurting the civilian population the coalition intends to help.

For example, IS brings in revenue by ‘taxing’ electricity production and distribution centers that sell power to businesses and residents, and by protecting cell phone towers that provide the only telecommunications in the area. Blowing up the cell phone towers to deprive IS of the tax wealth also deprives the local companies of badly needed revenue and jobs and deprives the population of access and contact with others. The same logic applies to blowing up IS-controlled oil facilities. Syria and Iraq need oil and fuel regardless of who delivers it, and the short-term goal of depriving IS of its oil revenues might not balance out the long-term damage to the society and economy that need the oil. Economic pain might pull a desperate population closer to IS instead of pushing it away.

IS has set up social services in the provinces it controls, delivering wheat (even if they seized it in the first place), food, fuel, power, and water. It is highlighting these efforts across social media, propagating images of the group erecting new cell and electric towers, rebuilding damaged infrastructure, and handing out food. IS has successfully held control in disputed areas not solely by force of arms (though primarily) but by the paucity of alternatives. Removing IS in many areas means removing social services, since the Iraqi and Syrian governments have proven completely unable or unwilling to provide for these populations.

This speaks to the need to replace IS with something more positive and hopefully more capable, instead of simply removing it. A power vacuum is scarcely better than IS brutality. Airstrikes will stop IS advances and make it less mobile but they won’t do anything to blunt its financial advantage—a real problem for the coalition. The more damage airstrikes do to the population, the more IS can create an ‘us versus them’ dynamic that is the opposite of what the coalition intends. Figuring out tactics that enable the strategy of impoverishing IS while sustaining the population will require more effort than selecting targets for airstrikes, and will take much longer.


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