The Fight Against Islamic State Oil Operations and Natural Resources-Based Terror Finance

Modern terrorism is, like practically everything else in the world, a slave to money. While most of us tend to instinctively think of terrorism in terms of the fear it inspires and the devastation it causes, the physical toll it takes would not be achievable without the supply of money that serves as its lifeline. The study and analysis of terror finance, while no longer in its infancy, is still relatively new to many governments around the world, which is partly why it is taking so long to gain anything even approaching a handle on it. Given this, while it is important to look at the more acute ways the underlying structure of specific terror finance mechanisms can be torn asunder, it is also important to consider terror finance in the larger context in which it flourishes…namely, the failing/failed state reality that continues to consume greater portions of the globe. While the success realized by the Islamic State in turning black gold into black market cash is due in no small way to its clear mastery at developing an impressive underground oil network, it is important to remain mindful of the role played by the growing number of at-risk states in providing fertile ground for the takeover of their various natural resources by terror groups, including the Islamic State.  

The White House recently crowed about the efforts of the United States and its regional partners to strike at…literally…the various supply channels for black market oil in the Middle East, oil that has, in the belief of analysts, come to represent the source of roughly one-half of the money used by the Islamic State (IS) to operate in the region. The latest, most dedicated (apparently) effort has come in the form of Operation Tidal Wave II, which began last fall and is a refocusing of previous, “like” efforts on IS operations in Syria, this time around specifically targeting assets that cannot be replaced or repaired quickly by the terror group. According to recent comments by White House spokesman Josh Earnest, the effort has dealt a “significant setback” to Islamic State operations in the region, and his boss, addressing the Central Intelligence Agency at the same time, similarly said that the airstrikes have “reduced their oil production and their oil revenue.” What these comments mean, exactly, in terms of the impact to IS oil operations is, at present, unclear – this particular subject will be addressed more directly later in this piece.  

The penetration of oil’s black market is but one of many sources of terror financing, but it has become significant in Islamic State’s efforts over recent years. For those new to the topic, there are essentially four main source categories of money for terror: state sponsorship, popular support, legal activities, and illegal activities, with the capture and monetization of a country’s natural resources by a non-state group representing, perhaps, the most lucrative form of its illegal ones.  

The Symbiosis of State Fragility and the Good Health of Islamic State Oil Operations

As might be expected, the ability of a terror group to exploit select natural resources for its own benefit is generally correlated with the degree of nation-state stability in the region(s) in which it operates. That is, the stronger the governance in an area, to include rigid oversight of its natural resources, the more limited, generally, the ability of a terror group to commandeer said natural resources for its own benefit. In cases where governance is weak, there is profoundly greater opportunity for terror groups to thrive on the back of natural resources, and that has proven to be the case with Islamic State and oil, wherein it has managed to maintain highly-lucrative oil operations in Syria and Iraq. Serving as the backdrop to the obvious military violence and upheaval observers know all too well is the definable, overall instability of each country – Syria and Iraq are presently ranked nos. 8 and 12, respectively, on the list of world’s most fragile states compiled by the Fragile States Index. It is difficult for people who have known only stable governance throughout their lifetimes, particularly that characteristic of Western-style democracy, to appreciate the degree to which a “badlands” type of human environment persists in those parts of the world where an adherence to a high-functioning form of government rooted in the Westphalian ideal simply does not exist.

A report by the Financial Action Task Force (FATF), Emerging Terrorist Financing Risks, dated October 2015, further clarifies the range of natural resources at risk of cooption by terror groups, one that includes (besides oil) gas, timber, precious metals, charcoal, and even wildlife, in the form of activities like ivory trading. The same report points out that in addition to the revenue derived by a terror group from the control of a given natural resource, the group necessarily comes to enjoy control over the geographical territory in which the resource is located, as well. This is sometimes an element of natural resource-based terror finance that is not always considered, and one that sets it apart from the other kinds of activities engaged for the purpose of generating revenue.

It is, flatly, the marginal existences of the nation-states from which the Islamic State has sought to develop an operational platform that affords the group the opportunity to initially assert enough influence over the territories in which the oil and oil assets are located…influence that, shortly thereafter, permits it to reach “tipping points” in those locations that result in the control they seek.

Islamic State Oil Advances

Islamic State’s aggressive efforts to capture oil resources and assets began in earnest in 2014, and the first, real blush of success came with the takeover of several producing oilfields in Northern Iraq. Additionally, according to a December 6, 2015 Los Angeles Times article, in 2014 the Islamic State “secured” Dair Alzour, an eastern province of Syria, a victory that has reportedly resulted in the terror group controlling about two-thirds of the entire oil production capacity of that country.  

While oil production from Islamic State-controlled oilfields is about 10% of what it was when the nations in which it is operating were (relatively) functional, what they do generate represents a massive, regular benefit to the group. Estimates of just how much money IS sees from its oil operations can vary widely, but there is general agreement on a figure of about $1 million per day, presently. Now that the White House is claiming that substantial inroads have recently been made in knocking out the terror group’s oil assets, it will be important to learn if that number evidences signs of significant deterioration from this point forward. As will be noted in just a bit, some key data available up through just a few months ago suggests no such noticeable effect has yet been achieved.

It is important to underline just how unique a resource like oil is in terms of its value to a terror group. For example, the noted Los Angeles Times article mentions that a sizable portion of the oil cultivated by the Islamic State remains inside of Syria for use within regions of the country under the group’s control, a declaration substantiated by the FATF’s Emerging Terrorist Financing Risks Report, which points out that “ISIL benefits mostly from using the petroleum and petroleum products it controls or by earning revenue from sales of these resources to local customers.” Again, this is a feature of oil and gas products that distinguishes them from, really, every other natural resource hijacked by a terror group.

As for where the oil does end up when it is sent off beyond the borders of Iraq and Syria…Iran, Turkey, and Jordan are generally considered to be the primary beneficial recipients of the smuggling activities. It is, in fact, the allegedly very-willing participation of Turkey as a recipient of Islamic State-controlled oil that is partly responsible for putting the success of IS oil efforts on steroids. While analysts have, for some time, thought Turkey to be an active participant in the oil exchange with the Islamic State, Russia has gone as far as to directly and boldly accuse Turkey and Turkish president, Recep Tayyip Erdogan, personally, of knowingly consuming IS-controlled oil from Iraq and Syria. An aggressive round of charges to that effect came from among the highest levels of Russian military leadership back at the beginning of December 2015, with Anatoly Antonov, a Russian deputy defense minister, saying:

“Turkey is the main consumer of the oil stolen from its rightful owners, Syria and Iraq. According to information we've received, the senior political leadership of the country – President Erdogan and his family – are involved in this criminal business. In the West, no one has asked questions about the fact that the Turkish president's son heads one of the biggest energy companies, or that his son has been appointed energy minister. What a marvelous family business!”

Although Erdogan very publicly responded that he would resign if the allegations could be proven true, the noted Los Angeles Times article reported that many observers simply do not feel it is possible for the oil smuggling activity known to take place into Turkey from the Islamic State to exist at the significant level it apparently does without the sanction of the government. The article quoted Salman Khalaf, head of a Syrian energy commission, who said flatly, “The only borders open with Daesh (Islamic State) are the ones with Turkey,” and also quoted former Iraqi national security advisor Mowaffak Rubaie, who said, “No insurgent group, whether it's the Islamic State or not, can survive without a neighboring country either directly supporting it or turning a blind eye to it. The Turks have to come clean and be on the side of counter-terrorism in the region, full stop.” For his part, and quoted in the same article, Iraqi Oil Ministry spokesman Asim Jihad simply asked, rhetorically, “How do tens of trucks with Iraqi and Syrian oil leave the area? Where is this oil going? Who is dealing with it?” Wherever it is going, someone is clearly buying it, and on a large enough scale that it is not plausible to believe that the transactions are happening without the sanction, at some level, of the states to which the oil is traveling.

In light of the most recent White House pronouncements, however, the issue is raised as to whether the Islamic State and its collaborators enjoying the fruits of freewheeling days in the outlaw oil business may be nearing an end. There is evidence that the fortunes of the Islamic State’s relatively unchecked oil operations began to take a substantial shift with the neutralization by U.S. Special Forces of IS’s number one in its oil operations, Aby Sayyaf (real name: Fathi ben Awn ben Jildi Murad al-Tunisi), in May 2015. While the death of Abu Sayyaf, along with the capture of intelligence resources during the raid, represented, perhaps, the first, real, useful step in the singular war against Islamic State’s foothold in oil, there is much to be done before a point is reached where oil revenues can be said to make up no more than a sliver of the IS revenue pie.  

The Wall Street Journal, in an article dated April 24, 2016, says that the complex network of oil operatives, at all levels, that Sayyaf built and maintained was responsible for about 72% of the $289.5 million in total revenue generated from natural resources controlled by the Islamic State during the six-month period that ended late February 2015. These numbers translate to daily revenues that averaged more than $1.1 million for that period. While Defense Secretary Ash Carter hailed the raid that killed Sayyaf last May as a “significant blow” to the fortunes of the Islamic State, it remains to be seen if the stepped-up military efforts against IS oil assets…again, many of which have been facilitated by the intelligence uncovered during that raid…will materially diminish IS oil operations. The Wall Street Journal article indicates that in the 11 months since the raid that killed Sayyaf, roughly 30% of the IS’s “oil infrastructure” has been wiped out, according to U.S. officials, and that taxation…another standard money-maker for terror organizations…has replaced oil as the group’s biggest revenue generator. Nevertheless, with estimates that the Islamic State’s oil operations are still generating around $1 million per day, it is difficult to reconcile that number with White House shouting about the effectiveness of more recent, and more surgical, strikes against Islamic State oil assets.

The Way Forward

The FATF’s Emerging Terrorist Financing Risks report broadly details the array of efforts that can be applied to curtail the commandeering of natural resources by terror groups. In particular, the report notes that the detailed and carefully managed smuggling networks that extend beyond the national boundaries, such as they exist, of the countries in which the terror groups lord over natural resources…can really be suppressed only through effective collaboration among a variety of entities in both the public and private sectors, including some that fall outside of the traditional anti-money laundering and counter-terrorist financing regime.  The report also makes explicit mention of the importance of enhancing, overall, “legislative and regulatory frameworks;” more about the inherent challenge of legal remedies in just a bit.

In his journal article “The Sources of Terrorist Financing: Theory and Typology,” Michael Freeman addresses the importance of applying a holistic approach to countering terrorist finance, pointing out that not only will no one strategy have universal applicability to defeating the variety of terror funding strategies in use, but that, additionally, strategies will have to be altered to address the differences among the inherent natures of the groups themselves. He goes on in his article to make the excellent point that while states are now much better equipped to track and suppress the movement of money derived from terror group efforts, they still struggle with securing the sources of the cash, and a big reason for that lies with the scarcity of resources available to actually secure those sources, with all that involves. Ultimately, says Freeman (quite succinctly), states must create an environment wherein the efforts at acquiring funds, for a terror group, must be made “illegitimate, dangerous, unreliable, distracting, and complicated.”

The most relevant (to the singular issue of exploitation of natural resources)of Freeman’s suggestions to the issue of slowing the flow of oil from Islamic State-controlled regions out of Iraq and Syria to neighboring countries allegedly complicit in receiving the product…is to bring international pressure to bear on the guilty nations. Such an effort, in addition to a dogged adherence to an ongoing regimen of air strikes and other military attacks against IS oil assets, is perhaps the best available method by which to significantly reduce the amount of money earned by the Islamic State. This said, Freeman acknowledges that such measures can often yield a poor result in seeking to stop other nations from supporting terrorism…in this case, by buying terrorist oil. This is a particularly relevant problem when the “smoking gun” level of proof of complicity on the part of alleged state-level black market oil recipients, like Turkey, continues to elude the U.S. and its allies.

Like the FATF’s Emerging Terrorist Financing Risks report, Freeman suggests the option of pursuing legal redress, as well, in dealing with terror finance. Again, though, while that can work more readily in state environments that remain reasonably functional, but not as much in more problematic ones. As for the issue at hand, the level of instability of the regimes in which the Islamic State operates the refineries it now possesses…suggests that there is little that the rule of law can accomplish, when the rule of law is itself largely MIA.

In the case of hugely unstable countries like Iraq and Syria, it is difficult to implement legal remedies in the way such might be implemented in more stable regimes, and so what remains, as far as readily-accessible tactics, are the more drastic measures that countries like the U.S. are forced to take in dealing with the commandeering of natural resources by non-state groups. This, then, brings the discussion back to the matter of military attacks against Islamic State oil assets, first and foremost. All told, the U.S. appears to be doing the right thing, and the best thing, under the circumstances and with what options are realistically available to it.  

Unfortunately, the effort, singularly, will prove to be insufficient in curbing the overall trend of terror finance. The money, and mechanisms by which it is raised, will remain functions of the fertile territory provided by failing and failed state environments. As perilous as failing states, in general, are to world security in what has become, sadly an era of social, indeed human, devolution, those failing states rich in natural resources pose even greater threats, for clearly evident reasons. Ultimately, then, it is only by the comprehensive, holistic approach…both suggested by Freeman and others in terms of terror finance, specifically, and by others in terms of transnational insurgency, more generally… that the metastatic dangers posed by failing regimes…which lead, in turn, to failing regions…may be kept in check; and like cancer of the body, it may well be that the relentlessness of this disease demands a new outlook…one that finds “victory” in the form of containment, even management, rather than outright threat eradication. While many remain unnerved by the thought of embracing genuine and chronic threat management as a best-case global security paradigm, it increasingly appears to be the most positive scenario that can be realistically achieved in the era of the failing state.

The information contained here is for general information purposes only. The Financial Writer blog and Bob Yetman disclaim responsibility for any liability or loss incurred as a consequence of the use or application, either directly or indirectly, of any information presented herein. Nothing contained in this article, or any other article featured at this blog, should be construed as a solicitation or recommendation to engage in any financial transaction. You should seek the advice of a qualified professional before making any changes to your personal financial profile.

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