Income from Syria

The Islamic State’s alternative when Mosul falls

20 October 2016


Even before the operation to oust the Islamic State terrorist group (ISIS) and liberate Mosul, one of its last financial and military strongholds in Iraq, the group suffered a blow to its income resources following the destruction of prominent financial infrastructure - oil fields and banks it controls - causing major financial losses to the group.

If the operation in Mosul, which is expected to last some weeks, succeeds in ousting the terrorist group from Iraqi territory for good, its financial capacity will be at its worst ever, with just a few remaining assets in Syria. That will give the group motivation to rebuild its administrative and economic capacities again within the territory it holds in Syria, which will probably push it to attempt two things: try to seize control over oil fields controlled by its Syrian rivals, and diversify its income streams.

Undermining finances

Months before launching the Mosul military operation, the international coalition forces in coordination with Iraqi forces and the Kurdish Peshmerga launched a series of strikes against ISIS positions in Mosul, the group’s financial and military stronghold, which it has occupied since August 2014. In that context, international and Iraqi forces targeted the group’s economic institutions in the city. In February 2016, coalition forces destroyed a branch of the Iraqi central bank in the city, along with two other banks - branches of the Real Estate Bank and the Al-Rashid Bank - and an office belonging to ISIS’s Zakat authority, a tax collection office. This precise military operation cost the group an average loss of $800 million, according to General Peter Gersten, Deputy Commander for Operations and Intelligence in the coalition against ISIS.

As Peshmerga and Popular Mobilization fighters have advanced to other cities in northern Iraq, ISIS has lost most of the oil fields it once controlled in the region, primarily Al-Qayyarah, Al-Najma, Balad and Hamrin, which until recently produced, together, approximately 10,000 barrels of crude oil per day.

After the recent ousting of ISIS from Al-Shirqat and Al-Qayyara in northern Iraq, it lost, for good, any effective means of producing or smuggling oil into its Iraqi territories - apart from some limited production from the wells around Al-Najma, according to reports from the Iraqi Oil Ministry at the end of September. This meant the group was unable to generate new revenue from oil as it had done in the past, except a few wells under its controls in Syria.

Impact of losing Mosul

So far, it is impossible to predict the outcome of the battle for Mosul or its duration, but in light of initial indicators and the fact that Iraqi forces have already seized back several villages close to the city, it is possible to speculate that the group’s defeat in Mosul would have the following impacts:

1. Eliminating its oil revenues. The liberation of Mosul and other cities in northern Iraq from ISIS is a good opportunity to undermine trust in the group’s financial model that is based on oil since 2014. Oil revenues used to provide the group with a daily budget ranging between $1-3 million. By defeating ISIS in this battle, Iraqi forces will be able to retract the remainder of the country’s oil fields near the city under ISIS control.

During the early stages of the battle, the Iraqi Federal Police have been able to reclaim 56 oil wells the group controlled, as well as a sulfur plant in Al-Mishraq, south of the city. Seizing these assets from ISIS would, ultimately, seriously undermine its financial base. Financial implications aside, once Mosul is liberated, measures to fully secure the northern oil fields will be an urgent priority for the government to prevent a counter attack from ISIS.

2. Loss of other assets. As well as oil, the battle for Mosul will target the group’s other economic institutions including banks and Zakat offices, which hold major financial and cash assets that ISIS seized in 2014 such as the Central Bank’s Mosul branch and banks in Nineveh province.

Also, the areas that the group seized in three Iraqi provinces - Nineveh, Salahuddin, and Anbar - used to provide it with 40 per cent of its barley and 53 per cent of its wheat. The income from its harvests brought ISIS a steady stream of income, estimated at $140 million, plus royalties of $20 million on agricultural activities. With the loss of all the areas it controls in Iraq, the group will lose additional sources of income on top of its strategic revenues from oil, theft, and ransoms.

3. Losing a significant water weapon. By losing Mosul, the group will also lose one of its most prominent non-conventional weapons as it threatened to blow up the Mosul dam during the battle with Iraqi forces, flooding towns and villages around the city. These threats intensified after the group took control of the dam in August 2014, losing it shortly afterward to the Kurdish Peshmerga in the same month.

Undoubtedly, any real threat to the dam could have caused another humanitarian disaster, as the dam provides - according to some estimates - 45 per cent of Iraq’s electricity supply and a significant portion of the water supply to the Kurdish region and southern Iraq.

An alternative strategy

If and when Iraqi and international forces succeed in defeating ISIS, ousting it from Iraq and thereby eliminating its income resources within the country, the group is be expected to adopt alternative strategies to seek to fund, on the lines of the following:

1. Relocation. The Mosul operation will likely force many ISIS fighters to withdraw towards Syria, representing a turning point regarding where the group concentrates its efforts in the Middle East. This new geographic focus could mean that that the group relocates its administrative, military and financial centers of influence to the Syrian regions of Raqqa, Al-Hasakah and elsewhere.

In parallel, ISIS  militias may begin to use alternative military strategies that combine repeated, sudden attacks with extended military operations to broaden its influence or recapture parts of the Syrian or Iraqi territory it has lost. On the other hand, international forces may have the opportunity to launch more precise strikes against its positions in Syria.

2. Seeking additional resources. It appears that the financial pressures that ISIS will soon face will force it to look for an additional source of income other than oil. It is likely that it will take swift steps to impose new taxes in the areas it controls in Syria to compensate its losses. Some estimates have put the total revenue the group earned from royalties and taxes at $360 million in 2014, rising to $800 million in 2015 as revenues from oil dropped; royalties and taxes formed a third of the group’s income as opposed to just 10 percent previously.

3. Competing with rivals. Under pressure after the loss of its economic assets, ISIS may seek to launch coordinated attacks against its rivals in Syria in order to weaken them and seize new economic assets in Syria. That will mean it will attempt to increase its efforts to seize oil and gas installations, as well as agricultural land and other valuable assets from other groups.

The most prominent possible targets the group may seek to seize as part of its strategy of expansion in Syria will include oil fields currently controlled by the Kurdish Peoples’ Protection Units (YPG) in Hassakeh (Al-Rumaileh, Al-Suwaida’ and Karachok), which are capable of producing together 15,000 barrels of oil per day. ISIS may also try to take over facilities controlled by the Syrian regime in the oil fields of Homs and Hama, as well as oil wells in Deir Ezzor, which currently produce about 10,000 barrels per day.

In conclusion, the liberation of Mosul may not definitively undermine the sources of financial income ISIS enjoys in Iraq and Syria. Eliminating the group’s income will depend on the outcomes of possible battles between ISIS, on one side, and several Syrian rebel groups on the other.