Update on Economic Issues of ISIS

Germany’s largest weekly Die Zeit has run a feature on the lack of economic sustainability of ISIS that has also been translated into English. It quotes my earlier policy brief of October: How Long Will ISIS Last Economically? and shares its conclusion that the ISIS economy is based on looting and far from self-sustaining.

Meanwhile the UN has estimated that ISIS had revenues from ransoms of $35-45 million in 2013. Revenues from such ransoms have likely decreased as I have argued, as Western journalists and aid workers have been deterred from traveling to the region and local hostages fetch lower prices.

The Die Zeit feature in fact points out that hostage taking has increasingly targeted the local population. Prices for local hostages ($20k-50k) are considerably below those for western hostages ($3-5mn).

In October David Cohen, under secretary for terrorism and financial intelligence at the US Treasury Department, estimated the ISIS income from oil at $1mn per day with a declining tendency. He also saw the revenues from ransoms reduced at $20 mn in 2014.

Cracks of ISIS’ Ponzi scheme of looting have already started to appear. Prices for meat, eggs and vegetables have doubled and tripled in some cases.  Defections of senior ISIS officials have been partly attributed to economic problems of the organization.

ISIS tried a publicity stunt when it announced its intention to introduce its own currency based on gold, silver and copper (sic) coins. Even if it managed to loot enough precious metals to issue such a currency it would likely face Gresham’s Law and the challenges of maintaining realistic exchange rates within a bimetallic currency, not to mention a tri-metallic one.

Yet ISIS is not the only organization with economic problems in Iraq: The government in Baghdad faces severe funding shortages as oil prices have declined while it needs to ramp up expenditure to rebuild its military capacities (if they ever existed given 50k “ghost soldiers” who only existed on payrolls).

The Iraqi government also continuously grapples with corruption: The Grain board chief was sacked because of a spoiled rice shipment, only to be replaced by his predecessor who took kick backs in 2009.