Is Islamic State's 'Looting Economy' in Trouble?

 / Updated  / Source: CNBC.com

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As ISIS faces increasing military pressure from Iraqi government troops and Iranian-backed militias, it may be feeling rising financial pressure from a shaky financial model based on terror.

The militant Islamist group has taken over swathes of Iraq and Syria, proclaiming a "caliphate" – an Islamic state ruled by one leader. To help its turbulent and bloody rise it has built up various and illicit sources of revenue.

From the selling "poor-quality oil" stolen from captured fields and refineries and "donations" from wealthy benefactors in the Gulf, to smuggling, stolen harvests and selling cultural antiquities on the black market, ISIS' economy is far from standardized.

Because its revenues come largely from criminal activity, its finances are notoriously opaque. According to research published in February by inter-governmental body, the Financial Action Task Force (FATF), as well as extortion, the group also received donations from wealthy benefactors in the Gulf and from fundraising through "modern communication networks."

"I think ISIS will face massive problems this year which will soon begin to materialize."

Also, the theft of cash held at seized banks gave ISIS access to an estimated $500 million in late 2014, a "significant portion of its wealth from controlling (these) bank branches," the FATF believed.

Ransom demands vary from victim to victim. The Islamic State of Iraq and Syria (also known as ISIL) demanded $200 million for two Japanese hostages believed to be later murdered by the group but one woman from the Kurdish Yazidis ethnic group was freed after her family agreed to pay a ransom of $3,000, the FATF reported.

Is ISIS' economy vulnerable?

But because its "economy" is largely based on terror, it is vulnerable and unsustainable. As such, there is mounting speculation that ISIS is coming under increasing financial strain.

Several media reports say that ISIS has cut the salaries of its fighters, and slashed fuel and bread subsidies that had helped to gain some support among local people.

"I think ISIS will face massive problems this year which will soon begin to materialize," Eckart Woertz, a senior researcher at the Barcelona Centre for International Affairs (CIDOB) and Middle East specialist, told CNBC.

"ISIS revenue base is not sustainable and we will see cracks appearing. I would suspect these to increase over the year and for ISIS to have economic problems over this year. Its economy is based on looting —which is great if you have geographic expansion -- but, if anything, ISIS is on the retreat and you can hardly continue this business model in territory you've already looted."

Despite ISIS questionable sources of funding, the group has serious ambitions. After all, the clue is in the name 'Islamic State,' Woertz said. "ISIS is not a terrorist group –- certainly they use terrorist means -- but they want to be a state. With these revenues, however, ISIS would be a very rich terrorist organization but it would be a poor state. Like it is, it's not sustainable," he added.

Increasing financial demands on ISIS could weigh on the group, the FATF said in its report on the group's finances, stating that its "need for vast funds to meet organisational and governance requirements represents a vulnerability to ISIL's infrastructure."

"ISIL also reportedly pays its fighters on average $350 - 500 per month. With an estimated 20,000 to 30,000 fighters in its employ, this alone would represent a $10 million drain on ISIL's treasury every month."

In order to maintain its financial management and expenditures in areas where it operates, the group would have "to be able to seize additional territory in order to exploit resources. It is unclear if ISIL's revenue collection through the illicit proceeds it earns from occupation of territory, including extortion and theft, will be sustainable over time," the FATF said.

"Cutting off these vast revenue streams is both a challenge and opportunity for the global community to defeat this terrorist organisation."

More like the Mafia than a state

Against this backdrop of extortion, kidnapping and looting, ISIS was more like a mafia organization than a state, Woertz said. "There were estimates made last year that ISIS-controlled oil fields in Iraq and Syria were producing around 30,000 and 50,000 barrels of oil a day, respectively. That's actually not a lot of oil and that was before military action and air strikes were increased against ISIS. Also the price of oil has come down and theirs is not of a good quality."

Forecasts that ISIS' oil revenues would fall have also come from the Pentagon, which said in February that illicit oil sales were no longer the group's main source of revenue. And looting and selling off antiquities does not guarantee any longevity in its economic plan.

"Looting has been an important source of income but it's a one-off source - once you've looted and sold antiquities or property you can't do it again. They've also looted harvests in order to lower the wheat price – probably to win over locals – but once you've done that and farmers leave, what will they do when the wheat runs out?"

High-profile kidnappings of westerners by the group have prompted serious concerns among global governments. While some, like the U.S. and U.K. say they will not negotiate ransoms for hostages, other western European governments are believed to have paid between $3 million and $5 million for hostages, Woertz said. The FATF report estimates that ISIS had earned between $20 and $45 million from ransom payments, in total.

But with a number of high-profile murders of western hostages apparently at the hands of ISIS making global headlines, the numbers of westerners in the region is likely to fall; meaning that "the pipeline of western hostages is likely to had dried up for IS," Woertz said.

Still have 'ample means'

Not everyone is convinced that ISIS is running short on cash, however.

Aymenn Jawad Al-Tamimi, an Oxford University graduate and leading analyst of jihadist groups, told CNBC that he wasn't convinced the group's revenues were dwindling, telling CNBC: "They still have ample means to collect revenue such as taxing locals in Mosul for sanitation services. That said, quality of life particularly in the Iraq territories IS controls has deteriorated severely."

Another Middle East analyst believed the organization "never expected to set up an economy immediately" and, in terms of caliphate building, was in it for the long haul.

"They're not even after a sophisticated economy," Firas Abi Ali, senior manager of MENA at IHS Global Insight told CNBC. "They don't want GAP stores, after all."

"They're not after a state based on individualism and choice and they're probably pretty happy to have a primitive economy –they would see that as pure and clean," Abi Ali said. "They're not after a sophisticated economy."

The group was not yet in a situation where they're financing had been cut off, Abi Ali said, warning that even if airstrikes by coalition forces against IS succeeded, other groups would be ready to fill the vacuum and continue the mission to form a caliphate.

"If they get defeated, will there be other group's to take their place? Yes. Will the ideology behind the group die? No, it will evolve and develop."

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