The Islamic State Is the Newest Petrostate

The Islamic State, the world's richest terror group, is reaping millions of dollars a day from selling stolen oil to shady businessmen across the Middle East.

The homicidal maniacs of the Islamic State, like many shady and not-so-shady groups before it, are apparently getting into the oil business. And it seems to suit them as they reportedly are making millions of dollars per day off of it.

The militants who have conquered broad swaths of Iraq and Syria are turning to good old-fashioned crime -- oil smuggling, in this case -- to underwrite its main line of work. The money it can earn from illicit oil sales further bolsters the group's status as one of the richest self-funded terrorist outfits in the world, dependent not on foreign governments for financial support but on the money its reaped from kidnappings and bank robberies. The group has also managed to steal expensive weaponry that the United States had left for the Iraqi military, freeing it from the need to spend its own money to buy such armaments.

But even the millions of dollars a day that the Islamic State seems to be raking in by trucking stolen oil across porous borders is not enough to meet the hefty obligations created by the group's own headlong expansion. Taking over big chunks of territory, as in eastern Syria and in northern Iraq, could also leave it forced to take on the sorts of expensive obligations -- such as paying salaries, collecting the trash, and keeping the lights on -- usually reserved for governments.

"They've gone from being the world's richest terrorist organization to the world's poorest state," said Michael Knights, a Middle East expert at the Washington Institute for Near East Policy.

As with much of what the Islamic State purportedly does, the group's actual role in trading illicit Syrian and Iraqi oil is hard to pin down. The Islamic State seemingly controls the majority of Syria's oil fields, especially in the country's east; human rights observers say 60 percent of Syrian oil fields are in the hands of militants or tribes. The Islamic State also seems to have control of several small oil fields in Iraq as well, though reports differ on whether most of those wells are capped or whether the Islamists are producing and shipping serious volumes of stolen Iraqi oil across the border.

In all, energy experts estimate that illicit production in Iraq and Syria -- largely by the Islamic State -- is north of 80,000 barrels a day. That's a tiny amount compared with stable oil-producing countries' output, but it is a lot of potentially valuable oil in the hands of a group that even al Qaeda considers beyond the pale.

If that oil fetched global market prices, it would be worth a small fortune: $8 million a day. But as the Sunni militant group's new neighbors in Iraqi Kurdistan have discovered, it's not easy to get top dollar for what many consider black-market oil. The Islamic State allegedly sells much of its production to middlemen in Syria, who then bring it to refineries in Turkey, Iran, or Kurdistan.

That oil is essentially fenced and likely fetches only about $10 to $22 a barrel, said Valérie Marcel, an oil expert at Chatham House in London. Crude trades just above $100 a barrel in New York and London.

In Iraq, the Islamic State apparently cut out middlemen and uses its own fleet of tankers, which means it can reap between $50 and $60 a barrel, Marcel said. Other reports put the terrorist group's Iraqi oil proceeds as low as $25 a barrel.

"They're taking a massive discount, and they're only achieving a small fraction of the value" of the oil, the Washington Institute's Knights said. Altogether, the group's oil smuggling could be generating on the order of $1 million to $2 million a day. Other analysts say the Islamic State's oil income could be as much as $3 million a day.

The United Nations is taking notice. On Monday, July 28, it warned countries against buying oil from militants in Iraq or Syria, saying that such purchases would violate U.N. sanctions on the terrorist group.

With the Islamic State at the helm, that oil boom certainly won't last forever. The old oil fields in Syria and Iraq need lots of care, such as injections to keep the pressure up and output reliable; the lack of trained technicians and the frequent turnover have been a nightmare for proper reservoir management and will ultimately lower future output at those fields, Marcel said.

Still, all else being equal, that kind of control over oil fields, oil revenues, and petroleum products would be a financial shot in the arm for any terrorist outfit. Control of oil products, from gas canisters needed for cooking to fuel needed for transport, gives the group additional local leverage. And the revenue bolsters the Islamic State's ability to recruit and pay fighters and to buy weapons.

However, that money is also desperately needed to cover the salaries of public workers in places the militants now occupy. Providing basic public services to show that they can do more than conquer and crucify, but can govern to a limited extent, also costs money. Serving as an unelected proxy for ousted or absent governments has long been a way for Islamist groups, from Hezbollah to Hamas, to broaden popular support.

"They need to keep their war machine going, but they also need to govern, and that's costing them money," said Daveed Gartenstein-Ross, a terrorism expert at the Foundation for Defense of Democracies. He estimates that most of the oil revenue is quickly spent pacifying restless tribal leaders, bribing coalition partners, and paying to keep functional the basic sinews of daily life.

"If they don't make happen the things that people are used to see happening, their rule is going to look really, really bad," he said.

Here's the thing about the Islamic State's newfound oil wealth: Big money is not unique among terrorist groups, and in this case, it's probably not enough.

Oil money is just one slice of an illicit pie funding the group. In Syria and Iraq, protection rackets, extortion, local taxes, and other forms of smuggling all pour millions of dollars into the Islamic State's coffers. Brett McGurk, the State Department's point man on Iraq, told Congress last week that even before the militants captured Mosul, Iraq's second-biggest city, the group was raking in $12 million a month from illicit activities there.

And in the pantheon of terrorist groups, none of which has conquered the world, top-line illicit revenues of a few hundred million dollars a year are not unusual. The U.S. government estimates that more than a score of the groups on its list of designated foreign terrorist organizations are deeply involved in transnational criminal activities.

The Taliban in Afghanistan, for example, raked in between $100 million and $200 million annually from the drug trade and smuggling timber and minerals. Al Qaeda in the Islamic Maghreb took home dozens of millions of dollars a year from ransom kidnappings; over a decade, the group possibly netted as much as $200 million. Hezbollah took a page from The Sopranos and made a fortune off stolen or counterfeit cigarettes. Al-Shabab fueled its fight with proceeds from human trafficking, while cocaine money kept Colombia's FARC in the field for decades.

More importantly, the Islamic State's access to some oil revenues pales in comparison with its obligations and points to the group's longer-term vulnerabilities.

Part of its illicit empire, such as extortion and shakedowns in towns across northern Iraq, is crumbling after Baghdad froze public salaries for those areas. That's a double blow to the group: No local incomes to extort, and now the Islamic State has to pay the payroll tab itself. At the same time, the group's barbarity, lack of outreach to even like-minded Salafi groups, and territorial overreach may have sown the seeds of its own downfall.

"They're overplaying their hand everywhere they have a hand, and that's going to come back and hurt them," Gartenstein-Ross said.

Moreover, control of a few small oil fields that translates into heavily discounted smuggling revenues won't be enough to give the Islamic State staying power.

"They can bring power, fear, and intimidation, and they can even bring unsophisticated social services," Knights said. "What they can't do is bring the resources of the Iraqi state," a $120 billion national budget underwritten by the nearly 3 million barrels of oil shipped daily out of southern Iraqi oil terminals.

"Without that oil from Basra, then ISIS are just Palestinians," Knights added.

Photo by Fabio Bucciarelli - AFP - Getty


Russia Stole Yukos and Owes $50 Billion, International Panel Rules

An arbitration panel in The Hague finds that Moscow dismembered Yukos for political purposes and awards record damages to former shareholders.

In the largest case of its kind, an international tribunal ruled that the Russian government stole the Yukos oil company a decade ago and ordered Moscow to pay $50 billion in damages to its former owners.

The tribunal's ruling comes amid escalating economic sanctions on Russia from the United States and Europe for Moscow's dismemberment of Ukraine, and it could add to the financial pressure already brought to bear on the reeling Russian economy.

After nearly 10 years of legal disputes, an international arbitration panel in The Hague unanimously ruled that the dismantling of Yukos beginning in 2003 was motivated by the Kremlin's desire to steal valuable assets and destroy a potential political rival.

"The primary objective of the Russian Federation was not to collect taxes but rather to bankrupt Yukos and appropriate its valuable assets," the arbitration panel found.

It awarded the claimants, shareholders of GML Ltd., the former majority shareholders of Yukos, less than the $100 billion they sought in compensation, partly because the tribunal said that Yukos was engaged in some questionable tax practices when it was battling with Russian authorities over control.

"This award is a major victory for us," said Tim Osborne, director of GML, in a statement. "After intense scrutiny, the tribunal confirmed what the claimants have been saying all along."

What comes next is unclear, as is GML's ability to collect the $50 billion. The claimants' lawyers said the award is "final and binding" and stressed their right under the 1958 New York Convention to seize assets owned by the Russian government nearly anywhere in the world, except for diplomatic and military assets. In theory, that opens the door to seizing assets belonging to state-owned energy firms such as Rosneft and Gazprom, in addition to other state-owned firms, including Aeroflot. In practice, though, recovering even part of the $50 billion through international seizures will likely be a long and difficult process.

Rosneft, today the world's largest oil company, acquired most of the Yukos assets when it was broken up. The company said in a statement that it did not expect the ruling to have an adverse effect its operations, according to Bloomberg.

Russian Foreign Minister Sergei Lavrov said Monday, July 28, that Russia would likely appeal the case and vowed to use all legal remedies to keep fighting. One possibility is to appeal the case on technical grounds through courts in the Netherlands, where The Hague is based.

The saga began in 2003 when Moscow targeted Yukos, at the time one of Russia's largest oil companies, headed by Mikhail Khodorkovsky, a multibillionaire with political ambitions. Claiming that the company had dodged taxes -- but rejecting every Yukos settlement offer -- the Russian government drove the firm into bankruptcy and imprisoned its top executives. Khodorkovsky spent nearly a decade in prison, including time in Siberia, before he was pardoned by President Vladimir Putin late last year. Khodorkovsky surrendered his stake in the company and, therefore, will see no part of the $50 billion settlement.

The arbitration case began in 2005. The panel in The Hague found that Putin and other top officials in the Russian government orchestrated the assault on Yukos in order to bolster state-owned energy firms. The panel cited Putin telling Khodorkovsky just before the tax harassment began that Rosneft had "insufficient reserves" of oil, while companies such as Yukos "have a surplus of reserves."

A parallel suit brought by other former Yukos shareholders is before the European Court of Human Rights, meaning another multibillion-dollar ruling could come this week.

The landmark arbitration ruling against Russia comes right as the United States and Europe are intensifying their economic pressure in the wake of Moscow's annexation of the Crimean peninsula and continued destabilization of eastern Ukraine. Washington stepped up sanctions on Russian banks and energy firms this month, and Europe this week could impose another round of sanctions, including closing capital markets to Russian firms and banning the export of key technology needed for the energy sector. Western sanctions are already hammering Russia's economy, driving down the value of the ruble, scaring off tens of billions of dollars in foreign capital, and sending bond yields soaring.

Lawyers for GML put Monday's ruling in the context of Russia's continued defiance of international norms.

"This is a great day for the rule of law: A superpower like the Russian Federation is held accountable for its violations of international law," said Emmanuel Gaillard, head of international arbitration at Shearman & Sterling law firm, which led the Yukos fight.

Photo by Sergei Supinsky - AFP - Getty