Wars and Military Conflicts

Could Islamic State's 'looting economy' face defeat?

Where Islamic State gets its money
Where Islamic State gets its money

The terrorist group "Islamic State of Iraq and Syria" (ISIS) has rarely been out of the headlines in the past year for its capture of crucial territory in Iraq and Syria, together with its execution of several western hostages, but could financial pressures undermine its ambitions -- and existence?

Also known as Islamic State, ISIL or just IS, the militant Islamist group has taken over swathes of Iraq and Syria, proclaiming a "caliphate" – an Islamic state ruled by one leader. To help its turbulent and bloody rise it has built up various and illicit sources of revenue.

From the selling "poor-quality oil" stolen from captured fields and refineries and "donations" from wealthy benefactors in the Gulf, to smuggling, stolen harvests and selling cultural antiquities on the black market, the IS economy is far from standardized.

Because IS' revenues come largely from criminal activity, its finances are notoriously opaque. According to research published in February by inter-governmental body, the Financial Action Task Force (FATF), as well as extortion, the group also received donations from wealthy benefactors in the Gulf and from fundraising through "modern communication networks."

On top of this, the theft of cash held at seized banks gave ISIS access to an estimated half a $500 million in late 2014, a "significant portion of its wealth from controlling (these) bank branches," the FATF believed.

Ransom demands vary from victim to victim. IS demanded $200 million for two Japanese hostages believed to be later murdered by the group but one woman from the Kurdish Yazidis ethnic group was freed after her family agreed to pay a ransom of $3,000, the FATF reported.

An Islamic State militant

But because its "economy" is largely based on terror, it is vulnerable and unsustainable. As such, there is mounting speculation that ISIS is coming under increasing financial strain.

Several media reports state that ISIS has cut the salaries of its fighters, as well as fuel and bread subsidies, that had helped to gain some support among local people.

"I think ISIS will face massive problems this year which will soon begin to materialize," Eckart Woertz, a senior researcher at the Barcelona Centre for International Affairs (CIDOB) and Middle East specialist, told CNBC.

"ISIS revenue base is not sustainable and we will see cracks appearing. I would suspect these to increase over the year and for ISIS to have economic problems over this year. Its economy is based on looting —which is great if you have geographic expansion -- but, if anything, ISIS is on the retreat and you can hardly continue this business model in territory you've already looted."

ISIS needs 'vast funds'

Despite IS' questionable sources of funding, the group has serious ambitions. After all, the clue is in the name 'Islamic State,' Woertz said.

"ISIS is not a terrorist group – certainly they use terrorist means -- but they want to be a state. With these revenues, however, ISIS would be a very rich terrorist organization but it would be a poor state. Like it is, it's not sustainable," he added.

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But increasing financial demands on IS could weigh on the group, the FATF said in its report on the group's finances, stating that its "need for vast funds to meet organisational and governance requirements represents a vulnerability to ISIL's infrastructure."

"ISIL also reportedly pays its fighters on average $350 - 500 per month. With an estimated 20,000 to 30,000 fighters in its employ, this alone would represent a $10 million drain on ISIL's treasury every month."

In order to maintain its financial management and expenditures in areas where it operates, the group would have "to be able to seize additional territory in order to exploit resources. It is unclear if ISIL's revenue collection through the illicit proceeds it earns from occupation of territory, including extortion and theft, will be sustainable over time," the FATF said.

"Cutting off these vast revenue streams is both a challenge and opportunity for the global community to defeat this terrorist organisation."

'Like the Mafia'

Against this backdrop of extortion, kidnapping and looting, ISIS was more like a mafia organization than a state, Woertz said.

"There were estimates made last year that ISIS-controlled oil fields in Iraq and Syria were producing around 30,000 and 50,000 barrels of oil a day, respectively. That's actually not a lot of oil and that was before military action and air strikes were increased against ISIS. Also the price of oil has come down and theirs is not of a good quality."

Forecasts that ISIS' oil revenues would fall have also come from the Pentagon, which said in February that illicit oil sales were no longer the group's main source of revenue. And looting and selling off antiquities does not guarantee any longevity in its economic plan.

"Looting has been an important source of income but it's a one-off source - once you've looted and sold antiquities or property you can't do it again. They've also looted harvests in order to lower the wheat price – probably to win over locals – but once you've done that and farmers leave, what will they do when the wheat runs out?"

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High-profile kidnappings of westerners by the group have prompted serious concerns among global governments. While some, like the U.S. and U.K. say they will not negotiate ransoms for hostages, other western European governments are believed to have paid between $3 million and $5 million for hostages, Woertz said. The FATF report estimates that IS had earned between $20 and $45 million from ransom payments, in total.

But with a number of high-profile murders of western hostages apparently at the hands of IS making global headlines, the numbers of westerners in the region is likely to fall; meaning that "the pipeline of western hostages is likely to had dried up for IS," Woertz said.

IS 'not stupid'… and not broke

Cutting off IS' revenues could be one way to defeat the terrorist group but not everyone is convinced that Islamic State will be going anywhere soon. And even if it was destroyed, another group would fill the vacuum, experts warned.

Aymenn Jawad Al-Tamimi, an Oxford University graduate and leading analyst of jihadist groups, told CNBC that he wasn't convinced the group's revenues were dwindling, telling CNBC: "They still have ample means to collect revenue such as taxing locals in Mosul for sanitation services. That said, quality of life particularly in the Iraq territories IS controls has deteriorated severely."

Another Middle East analyst believed the organization "never expected to set up an economy immediately" and, in terms of caliphate building, was in it for the long haul.

"They're not even after a sophisticated economy," Firas Abi Ali, senior manager of MENA at IHS Global Insight told CNBC. "They don't want GAP stores, after all."

"They're not after a state based on individualism and choice and they're probably pretty happy to have a primitive economy –they would see that as pure and clean," Abi Ali said. "They're not after a sophisticated economy."

The group was not yet in a situation where they're financing had been cut off, Abi Ali said, warning that even if airstrikes by coalition forces against IS succeeded, other groups would be ready to fill the vacuum and continue the mission to form a caliphate.

"If they get defeated, will there be other group's to take their place? Yes. Will the ideology behind the group die? No, it will evolve and develop."

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow us on Twitter @CNBCWorld.