The Islamic State might be the best-funded radical Islamist group, perhaps in history, but the coalition air campaign that’s targeting its oil-refining operations and military assets has begun to damage its ability to earn.
And by denying the group additional territorial expansion, the airstrikes have limited the opportunities for it to profit from capturing new infrastructure and banks, according to a recent report by a money-laundering watchdog group, as well as U.S. officials and residents of Islamic State territory.
The Islamic State, a self-styled modern caliphate that controls much of northern and western Iraq and eastern Syria, turned itself into perhaps the richest and best-equipped military non-state actor last June after seizing tremendous amounts of money and equipment from the Iraqi government as it swept through Mosul and to the western and northern outskirts of Baghdad while the Iraqi army collapsed.
The Islamic State is thought to have at least 30,000 combatants and 5 million to 6 million people under its control, leaving a huge economy to be taxed and extorted.
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Thousands of armored vehicles and thousands of tons of military equipment, much of it modern weaponry supplied to Iraq by the United States, were seized in the rout last June, along with cash reserves from government banks, mostly in local currency, of at least $500 million, according to the Financial Action Task Force, an international money-laundering body that examined the group’s complex financial operations in a report released in late February.
That windfall came as the group was already making millions of dollars a day pumping and refining oil and petroleum products from previously captured oil fields, mostly in eastern Syria, where the group has wrested control of at least 50,000 barrels per day of oil and refined petroleum output, according to the task force’s report, a number widely supported by reports from the area.
Although the task force notes recent efforts by Turkish and Kurdish officials to limit the Islamic State’s ability to export these products by smuggling, not all the exporting has been stopped. Even the group’s rudimentary oil-refining ability – a process commonly targeted by coalition airstrikes – while damaged, is probably sufficient to at least support the group’s huge military operation and provide some income stream.
The Islamic State “has reportedly sold oil near the wellhead for 20-35 USD per barrel (bbl) where middlemen can then sell petroleum or petroleum products onwards at 60-100 USD/bbl in local and nearby markets, creating significant arbitrage opportunities,” according to the report, which cites local smugglers and industry experts. “A representative truck carrying approximately 150 barrels of crude oil earns roughly 3,000 to 5,000 USD, depending on the degree of refinement of the crude oil.”
But the targeting of these operations has hurt the Islamic State’s finances. Residents of Mosul contacted by phone say that not only is electrical service from the city’s oil-fired electrical plants at an all-time low, but the prices of heating oil and consumer gasoline products also have greatly increased since the coalition bombing campaign began last September.
“When you can find benzene, it’s very expensive and of very low quality. It’s too dangerous to use much of it in your car,” said Abu Ahmad, a resident who refused to be fully identified for fear of being killed by the group. “If you want benzene you can use in a car, you have to spend three or four times the normal price.”
Residents of Mosul and the group’s main city in Syria, Raqqa, describe a decimated economy. Residents, along with data supplied by the Financial Action Task Force, indicate that as the economy collapses in Islamic State-held areas, less revenue is produced to be taxed, which pushes the group to find new tax revenues, which further weakens the local economy.
“Every month the taxes and types of taxes rise as the group runs out of money,” according to Abu Mohammed, a Mosul businessman who lives in Irbil, in the Kurdistan region, but maintains several businesses run by family members in Mosul.
“It started as normal taxes,” he said. “And even before Mosul fell, many business were paying protection money to the Islamic State. They would protect you from crime and the central government.
“But now nobody has any money because there’s no trade between Mosul and Baghdad or Irbil. So now everything is taxed: schools, cooking oil. Stores are told that they must pay a monthly tax. Government employees who receive a salary from the central government must give half to Daash,” the Arabic acronym for the group.
Residents and the Financial Action Task Force say that when Mosul and other major cities fell to the Islamic State, the group seized assets in the government banks but left the commercial banks alone, at least at first. Now, according to the task force and confirmed by multiple sources in Islamic State areas, withdrawals from commercial bank accounts are taxed anywhere from 5 to 25 percent, crippling normal commerce.
“When they came, they talked about Islamic law and justice and protection for the Sunnis from the Shiites in Baghdad and Iran,” said Abu Mohammed. “Now all they talk about is crusaders and money, money and more money. Mosul has been squeezed dry as a rock.”
Government employees – and the central government is by far the largest employer in Iraq – are forced to go to Kurdish-held Kirkuk to receive their salaries. Those lucky enough to get through Islamic State and Kurdish checkpoints – the Kurds have mostly closed the crossings to prevent oil smuggling – find that the tax for returning to Mosul with their salaries is at least 50 percent.
“I wouldn’t go at all, but it’s the only way to feed my family. The trip is so dangerous and you have to pay bribes and taxes to everyone, so very little is left,” according to Abu Ayyad, a government employee in Mosul, who’s made the trip to collect his salary only three times since June.