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Friday, October 24, 2014

Make Islamic State Go Broke


Among the many challenges that the terrorists of Islamic State pose is that they happen to be first-rate moneymen. David Cohen, a Treasury Department official, said in a speech yesterday that Islamic State "has amassed wealth at an unprecedented pace."

The Sunni extremist group, which has been murdering and raping its way across Syria and Iraq, now collects about $1 million a day from oil sales. It also earns cash though extortionransombank robberylooting and prostitution. And then there are the abundant wheat fieldsflour mills and water supplies it controls. All told, Cohen said, the group's revenue amounts to tens of millions of dollars per month.

Disrupting that cash flow won't be easy. Unlike al-Qaeda, from which it split several months ago, Islamic State isn't heavily dependent on wealthy foreign donors or the international financial system. It collects most of its money locally, in cash, making it much harder to track. 

But choking off its funding is essential to stabilizing the broader Middle East. The first step is slowing the group's illicit oil trade. Islamic State now controls about a dozen oil fields. It sells steeply discounted crude to traders -- mostly Kurdish and Turkish -- who then sell it to refiners at a markup. There's no shortage of demand for the resulting product: Even Bashar al-Assad, the Syrian dictator Islamic State is putatively trying to topple, is a customer.

The U.S. and its allies have been working to upset this economy, partly by bombing Islamic State's refining equipment. A longer-term solution will require getting Turkish and Kurdish leaders to crack down on long-tolerated smuggling routes. Cohen also announced an ambitious effort to identify the middlemen who receive Islamic State's oil. The goal is to pressure all the institutions they do business with -- insurance companies, banks, lenders, licensing agencies -- to cut them off. 

Ending Islamic State's other revenue streams may prove harder still. Disrupting its extortion rackets will require uprooting the group from its strongholds, which will in turn require both a persistent allied bombing campaign and a more competent effort from Iraqi security forces. Other countries should be pressured to stop paying ransoms to rescue their kidnapped citizens. And, perhaps most important, if Iraq's Shiite leadership gave Sunnis more of a say in the country's government, they'd have less of an incentive to tolerate Islamic State.

In the long term, there are two powerful factors working against Islamic State's expansive ambitions. First, its wealth isn't enough to sustain even basic services for the population it now rules (Cohen noted that the Iraqi government's budget for the territory the group controls is more than $2 billion a year). Second, operating an all-cash caliphate will only get harder, especially if the group hopes to expand internationally. 

Crushing Islamic State's novel business model may well require more "innovative strategies" from financial regulators, as Cohen said. It will also require a lot of old-fashioned persistence. 

To contact the senior editor responsible for Bloomberg View's editorials: David Shipley at

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