top of page

The funding of Islamic State

“I’m convinced that this 69th session of the General Assembly could be the most consequential in a generation,” said Secretary-General of the United Nations, Ban Ki-Moon, during the official opening of the assembly in question in New York last September. Referring to the many humanitarian crises in the world today, he stated that the coming year must be a time for action and results. With the outbreak of Ebola, ongoing fights in Gaza, and the uproar in Ukraine — just to name a few of these crises — there’s indeed plenty of work to do, and that enumeration doesn’t even include the uprise of the widely criticised Sunni jihadist group Islamic State (IS) in Iraq and Syria. They too have been a frequent topic on almost all major news channels over the course of last year, and for good reason.

IS, perhaps best known for their frequent capturing and beheading of soldiers and journalists, is widely considered to be an extremist terrorist organisation, and has been designated as such by the world’s major forces. Its actions, authority, and theological interpretations have sparked fear and outrage across the world, prompting US military intervention as a result, as well as that of other countries more recently. But while the Western consensus on IS seems clear, many aspects of this group — its organisational structure, the way in which they operate, how they’re funded, and so on — remain unclear to many. The latter in particular could be of interest to many (future) economists, and as such, it should be insightful to explore it. Before we do that, though, let’s first delve a little bit deeper into the organisation’s relatively short history.

Rapid uprise

Originally founded in 1999 by Abu Musab al-Zarqawi, IS was the forerunner of al-Qaeda in Iraq (AQI). It took part in the Iraqi insurgency against US-led forces and their Iraqi allies following the 2003 invasion of Iraq. One year later, Zarqawi pledged allegiance to Osama bin Laden and formed AQI, which became a major force in the insurgency. After Zarqawi’s death in 2006, AQI joined other Sunni insurgent groups to form the Mujahideen Shura Council, which consolidated further into the Islamic State of Iraq (ISI). At its peak, ISI enjoyed a significant presence in several major Iraqi governorates, but it suffered a temporary decline when its violent methods led to a backlash against it in 2008. However, it has recently started to grow significantly again under the leadership of Abu Bakr al-Baghdadi (who was held prisoner by US forces from 2005 to 2009), gaining support in Iraq as a result of perceived economic and political discrimination against Iraqi Sunnis. Through entering the Syrian Civil War — which started out as an anti-government movement that turned violent — it also established a large presence in the Syrian governorates. It wasn’t long before US troops withdrew, while violence perpetrated by IS rose.

The group’s original aim was to establish a caliphate — a state ruled by a single political and religious leader according to Islamic law, i.e. Sharia — in the Sunni-majority regions of Iraq, but following its involvement in the Syrian Civil War, this expanded to include controlling Sunni-majority areas of Syria as well. IS claims religious authority over all Muslims worldwide and demands that all swear allegiance to its leader. It aims to bring most Muslim-inhabited regions in the world under its political control, starting with the Levant region, which approximately covers Cyprus, Israel, Jordan, Lebanon, Palestine, Syria, and small parts of southern Turkey. As of today, a total of eight million people are believed to be under IS-control.

At this point, you might be wondering whether — and if so, how — IS is capable of generating the income that’s required to finance its activities and expand on such a large scale, but make no mistake: it’s actually the richest terrorist organisation in history! With an estimated 2 billion dollars available for military operations, it’s nothing less than a very healthy organisation — at least financially speaking. That can be thought of as quite an achievement in itself, because after all, fighting out wars doesn’t come cheap. So, what exactly is the key to the group’s financial success?

No city is safe

As it makes its way through the Iraqi deserts, IS aims to capture entire cities, and it has been very successful in doing so. The group successfully invaded Tikrit and Mosul in June of this year, the latter of which many experts believe to be crucial for IS to be in control of. That makes sense, given the fact that it’s a large city in a central position, lying right in between Iran, Syria, and Turkey. Mosul not only provides the group with a solid base to operate from, it has also proven to be a highly valuable source of money for them, and it continues to be just that. They unhesitatingly looted the city’s banks upon capturing the place, giving them a whopping 430 million dollars (!) overnight. Furthermore, it secured the city’s water, flour, and hydrocarbon resources, leaving the local population dependent on them, and it seized control of the city’s roads and dams, allowing them to raise tolls. At the same time, it lowered the taxes that were raised under Assad’s regime, seeking to win over the hearts and minds of the locals. As a result, it got a bigger following — one that has shown to pay itself back in the form of donations anyway. This includes donations worth millions of dollars simply handed over in cash, particularly from its wealthy supporters from the Gulf states, although this has somewhat diminished since 2013.

Remember that even though IS is getting hold of these cities, that doesn’t mean that they’ll just sit there waiting to be attacked back. The group understands all too well that spreading out wherever possible reduces the chance of being attacked effectively, especially considering the fact that they know the direct environment like no-one else. At the same time, though, it has a large enough following to ensure that these important cities are protected by enough soldiers. According to military experts, the best way to hurt IS would therefore be to target their supply convoys and damage its infrastructure, rather than chase after its soldiers. The US should know all about this too by now, considering their experiences with warfare in recent decades.

Utmostly valuable oil

It’s equally important to note that IS is developing in one of the world’s most vital gas and oil areas, and you bet it’s taking advantage of it. As it moved from eastern Syria into Iraq over the course of 2014, its territorial reach increased significantly, and with it did its access to valuable oil fields and refineries. At least five oil fields were captured, and these are proving to be highly lucrative, with reports estimating a total turnover of 3 million dollars per day solely through selling this oil. The money is collected by smuggling the oil into Iraq and Turkey, where it’s sold on black markets, likely through intermediaries — so buyers are not necessarily aware of the origin. An estimated 9,000 barrels of oil are exported every day, at a price that lies significantly under the current international price of 100 dollars per barrel. With the prices so low, (rather ironically) both Islamic State and its enemies benefit greatly from the transaction. Some of the cash goes to domestic IS consumption, some of it goes to Kurdish middlemen up towards Turkey, and some of it goes to the Assad regime, which in turn sells weapons back to the group. Clearly, to understand how the Islamic State economy functions is to delve into a world where shady business dealings between murky middlemen are at the heart of everyday action.

Cruel kidnappings

Needless to say, IS isn’t as innocent as all of the aforementioned might make them sound — and that’s saying something. It has established a reputation for extreme brutality, carrying out a long list of brutal crimes. This list includes robbery, extortion, kidnapping, torture, execution, beheading, crucifixion, and mass murder — of guilty and innocent people alike. Women are also frequently raped and dumped into wells, sometimes even together with their babies. The group shamelessly publicises its actions through social media, something it has been doing since the terrorist attacks of 9/11. It says that it does these things in the name of Allah, adhering to an extreme interpretation of Sharia. Either way, taking people hostage does provide IS with substantial sums of money. It’s estimated to earn 8 million dollars per month by extorting people, more often than not very violently. However, even the most violent extortion doesn’t come close to the level of brutality displayed during some of the group’s kidnappings.

There’s a good chance that you first heard of IS through these kidnappings. It’s estimated to have made at least 125 million dollars from taking people hostage, with each and every foreign hostage valued at some 5 million dollars. The first foreign hostage story that went viral was that of James Foley, an American journalist who worked as a freelance war correspondent in the area. He was abducted as a response to American airstrikes in Iraq. As for most of its hostages, IS requested a ransom for Foley, but it demanded a significantly higher sum than usual: 125 million dollars for him alone. The US government refused to pay it. According to Foley’s family, that decision goes back to a long-standing American policy of not paying ransoms. The idea behind the policy is very simple: don’t fund terrorism. Instead, the US initiated a military rescue mission, but to no avail; Foley was beheaded soon after. In a reaction to his death, President Obama promised that the US would relentlessly pursue his cold-blooded killers to get justice for the Foley family.

Some small cracks?

It’s a measure of Baghdadi’s charisma and success that IS has become the group of choice for thousands of fighters, even if not all of them are fanatics. According to US officials representing the CIA, the group could have as many as 31,000 fighters, but only an estimated 30% of them are considered to be ideologues; the rest is thought to be obeying out of coercion or fear. Nevertheless, the pull of IS — a group that has outperformed all others in combat and put into place a slick media campaign in dozens of languages to attract young men and women to its cause — has proven to be highly successful, resulting in an extremely dedicated core of 10,000 fighters all willing to die for its so-called state. In every facet — be it organisational structure, media messaging, or fighting — IS is ahead of opposing factions operating in the region.

However, the group isn’t invincible, and some small cracks have already started to appear here and there. Interestingly, both al-Qaeda and its branch organisation al-Nusra cut all ties with the group in February of this year after an eight-month power struggle, citing its failure to consult and compromise. They had always had close links to IS until then, but even al-Qaeda leader Ayman al-Zawahiri, who disavowed the group over its actions in Syria, warned Zarqawi in 2005 that such brutality “loses Muslim hearts and minds”. Besides, it’s not just allies that are starting to rebel against their authority. Some early signs of protest and rebellion have already been reported in Mosul, the city that IS so desperately wants to remain in control of. In order to achieve that, it’s believed that it must not only possess the required resources to run an army, but also the knowledge and experience of forces with sufficient administrative and managerial skills. Some experts have predicted that the group’s lack thereof will settle its ultimate fate.

The future is uncertain

As we’ve seen, IS is self-financing; it can’t be isolated and cut off from the world so easily, since it’s intimately tied into regional stability in a way that benefits not only itself, but also the people that it fights. The larger question, then, is whether such an integral pillar of the region can be defeated at all. It seems unlikely without military intervention from the West, and even though Sunni tribes in Iraq are already pondering their allegiance to the group, they don’t have the firepower or finances to topple IS, and neither does the Iraqi army, nor its Syrian counterpart. Islamic State’s many fighters know fully well that there’s no way back from here. Recent attacks on Kobani, a city lying immediately south of the border with Turkey, illustrate precisely that IS doesn’t intend to stop forcing its brutal ways on other people anytime soon, even when facing increased criticism and resistance from the West. A successful seizure could well breathe new life into the group’s many aspirations, and it would undoubtedly provide them with yet another big bag of money, but the group also has to come up with an answer to the ever-increasing pressure from the West. While they continue to hold that the rest of the world seeks to destroy Islam, there’s no question that they’re doing tremendous amounts of damage to the world themselves. Only time will tell whether or not IS will collapse under its own gruesome violence, but one thing is for sure: they’ll need very broad shoulders indeed not to.


bottom of page