The Islamic State, development and economic trajectories

Introduction
“The Islamic State governance is rather like a mafia 
who hands out small carrots from his left hand 
while waving a sledgehammer in his right.”
1
The world was shocked when the Islamic State in Iraq and al-Shām (ISIS)
released the first videos of beheadings and brutal assassinations, and for quite some time
the international community stood there, petrified and confused, speculating on how
that could happen, who IS was and where it came from. In the meanwhile, ISIS was
gaining territories across Syria and Iraq, sizing entire provinces and important urban
centres, infiltrating the legitimate Syrian revolution and exacerbating the Sunni-Shia
civil strife in Iraq. When all eyes were turned to the Hollywood-style propaganda
videos, ISIS was after the money: it was piling up enormous economic resources from
international donations, oil and gas smuggling, and all sorts of illegal activities. Born as
a spin-off of al-Qaeda, it had become a structured organizations who had taken control
of a territory of the size of Great Britain and richer than any other terrorist organization
in the world. But the questions remain: how could that happen? Where were the UN and
the international community when ISIS was bulldozing down the borders between Syria
and Iraq and establishing a Caliphate?
The Islamic State (IS) organization has expanded in a favourable economic and
political context, characterized by the lack of economic regulatory frameworks and the
dissolution of state control and social cohesion. In Syria and Iraq, the war economy
situation and the political vacuum created a perfect storm for IS to take advantage of,
but is IS actually able to pursue its vision of Caliphate on the long run? Are its
economic and political trajectories sustainable on the long term? 
The purpose of this work is to partly answer such questions from a political
economic perspective and trying to identify what IS future developments may be, taking
into consideration its economic resources, expenditures, governance structure and
1 C. R. Lister, The Syrian Jihad: al-Qaeda, the Islamic State and the Evolution of an Insurgency, Hurst
& Company, London, 2015, p. 274.
military strategy.
  IS is not merely a terrorist organization, in fact it displays some very specific
features that are not found in common terrorist organizations. First, IS has shown to be
able to effectively exploit long-established transnational smuggling routes and gray
markets as well as to manage a complex and widespread racket system in controlled
areas: IS strategies mirrors a mafia-like organization with tentacles intruding in many
aspects of political and economic life of occupied territories. Secondly, IS deploys its
military forces with impressive strategic planning: its recruits are trained to be
professional soldiers with notions of guerrilla-style operations and tactical
manoeuvrings. IS also controls an intelligence apparatus with the purpose of collecting
and processing viable information. Third, IS has formalized its organizational structure
to resemble a state-entity, it has established pervasive governance structures in the
occupied territories and it is attempting to manage those areas offering service
provision, law and order, education and operating industrial facilities. A fourth crucial
element is its propaganda machine: IS effectively employs social media and IT
resources to communicate with its associates, to advertise its achievements as well as
for more complex purposes such as receiving funds, administrating controlled areas and
keeping records
2
. 
In order to cover all the aspects of IS development, the work is divided into four
chapters. 
The first chapter is focused on IS origins and first developments, from being an
al-Qaeda franchise in the Levant until it severed its ties and established an independent
Caliphate. This chapter is a functional background introduction to the entire work, as I
think it is not possible to understand IS present and future development without
highlighting some crucial passages of IS history: the methodological and ideological
dispute with al-Qaeda, the influence of ex-Ba‘athist officials, the impact of the
discriminatory Shia government in Iraq, the complicity of the Syrian regime toward
jihadist groups, all have contributed to what IS is today.
The second chapter offers a detailed overview of IS finances: I have first studied
the figures from a general perspective, and then I have isolated each financial source
and examined its percentage share and its mutation over the years. The majority of IS
2 H. Hassan, M. Weiss, ISIS: Inside the Army of Terror, Regan Arts, New York, 2015, p. 10.
2
resources are extractive, from natural assets (oil, gas, phosphates, etc.), from the
economic infrastructure (bank looting, antiquities smuggling, etc.) and from human
activities (taxes, confiscation, racketing, etc.): the overview shows the creation of a
wide network of illicit and illegal activities, based on customary smuggling routes, and
successfully infiltrated by IS. The chapter is closed by an analysis centred on the war
economy, its impact on the Syrian population and the far-reaching consequences of the
destruction of the entire economic productive system of the country. 
The third chapter focuses on IS governance structure and balance-sheet:
focusing on budgetary requirements and expenditure trends, helps to define future
economic trajectories, it provides an insight on IS actual governance ability and exposes
IS vulnerabilities. In order to anchor the data to real life situation, I have presented two
case studies as practical examples of IS governance structure and economic
administration: the case of al-Raqqah, the de-facto capital of the Caliphate and the case
of Wilāyat al-Khayr, the administrative division corresponding to Dayr al-Zūr province.
Both cases are unique for the kind of first-hand information we have about them and
because they are exemplary of IS policies and development trends.
The conclusive chapter covers three topics: a qualitative examination of IS
critical capabilities, requirements and vulnerabilities, in order to define IS future
trajectory, including its weaknesses and strengths; a comparison between actual states
features and IS structure, for the sake of rising awareness about the fact that IS is not a
state, but it might slowly become a real threat to the international system; an overview
of IS global strategy, because the future of IS depends on its core heartlands as well as
on the activities that IS affiliates are carrying out in other countries.
An issue that generates concern, for a work that is based on external and
extracted data and figures, is the reliability and accountability of the sources and the
fluidity of the situations described: on the one hand, reports may report partly
conflicting information, mostly due to different methods used to collect elements and
figures, but also because many reports are based on witnesses' accounts, second-hand
materials and may have their own objectives and interests to pursue; on the other hand,
these surveys and data collections are limited to a certain time span, the situations on the
ground change daily and it is not always possible to rely on updated information. A
related problem is that estimation work is largely used by all the institutions I have
3
consulted and these processes sometimes lead to different results. As I am aware of this
methodological problem, figures and data are always followed by a time reference and
the direct source, where two sources give conflicting numbers on the same topic, I have
reported both of them with the respective accounts. 
Despite the fact that I have considered reports and data published by several
internationally-recognized organizations and authors, with the objective of keeping the
concern of this study far from unreliable sources and sensationalistic statements, I need
to acknowledge the problematic nature of these accounts, even though this does not
mean questioning the accuracy and authenticity of the indicated records. For
transparency and accountability reasons, we are listing below the main sources used in
this work along with a brief presentation:
− The Financial Action Task Force (FATF) and its report, dated February 2015, on
the Islamic state financing and funders
3
. The FAFT is an inter-governmental
organization whose objectives are “to set standards and promote effective
implementation of legal, regulatory and operational measures for combating
money laundering, terrorist financing and other related threats to the integrity of
the international financial system.  The FATF is therefore a “policy-making
body” which works to generate the necessary political will to bring about
national legislative and regulatory reforms in these areas”
4
. The FAFT issues
reports and recommendation papers and can be consulted by governments and
international organizations on the matters of its competence. The FAFT report on
IS financing represents an accurate and exhaustive analysis on donors, financing
trends, assets and possible actions to take to disrupt IS flow of economic
resources. 
− The London School of Economics and Political Sciences (LSE) and the reports
on IS and JAN exploitation of the war economy in Syria, by Rim Turkmani, Ali
A. K. Ali, Mary Kaldor and Vesna Bojicic-Dzelilovic. LSE is a world-leading
research centre and a recognized consultant of the UK government
5
. The reports
are based on empirical research and interviews with respondents living in IS
held areas in Syria and their objective is to explain how the collapse of the state
3 FAFT, Financing of the Terrorist Organisation Islamic State in Iraq and the Levant, February 2015.
4 For more info about FAFT, consult the website http://www.fatf-gafi.org/.
5 http://www.lse.ac.uk/researchAndExpertise/researchHome.aspx.
4
and the spread of the war economy enable IS expansion and growth
6
.
− IHS Conflict Analysis Monitor and Research & Analysis unit. IHS provides
information and analysis to support the decision-making process of businesses
and governments, it is a consulting partner for several International Institutions.
Even though most of their reports are protected by copyright and therefore are
not available on-line, IHS new releases section offers weekly updated headlines
on IS financial situation
7
.
− Norwegian Peacebuilding Resource Center (NOREF) and Omar Abdulaziz
Hallaj's report on criminal revenues and warlords in Syria. NOREF is an
independent foundation and resource centre on the topics of peace-building,
humanitarian policies and conflict prevention, it handles consulting tasks for
Norwegian Ministry of Foreign Affairs
8
. The report supports the idea that greed
and profits from the war economy are fuelling and shaping the nature of the
conflict in Syria.
9
− Thomson Reuters sponsored report on IS economic resources management.
Thomson Reuters is a risk management enterprise that offers risk avoidance
solutions to companies worldwide
10
. The report by Jean-Charles Brisard and
Damien Martinez focuses on the diversification of IS economic resources and
how this constitutes a key to IS economic success
11
.
− The Institute for the Study of War (ISW) and its numerous databases, analyses
and reports. ISW is a public policy research organization mainly focused on US
security issues and strategic objectives
12
. Their analyses contain invaluable
information of IS service-oriented strategies and governance structure and the
case study of al-Raqqah provides useful insight on daily expenditure for services
6 Rim Turkmani, Isil, Jan and the war economy in Syria, LSE, July 2015 and Rim Turkmani, Ali A. K.
Ali, Mary Kaldor, Vesna Bojicic-Dzelilovic, Countering the logic of war economy in Syria: evidence
from three local areas. LSE, July 2015.
7 IHS, http://press.ihs.com/news-releases
8 http://www.peacebuilding.no/
9 Omar Abdulaziz Hallaj, The balance-sheet of conflict: criminal revenues and warlords in Syria,
NOREF, May 2015.
10 https://risk.thomsonreuters.com/
11 Jean-Charles Brisard, Damien Martinez, Islamic State: the economy-based terrorist funding, Thomas
Reuters Accelus, October 2014.
12 http://www.understandingwar.org/
5
and administrative tasks
13
.
− Jihadology.net: articles, reports, analysis and first-hand documents. Jihadology is
a web project for the research of jihad-connected primary source material,
original analysis, and translation service. The project was founded by Aaron Y.
Zelin, Fellow at the Washington Institute for Near East Policy and at the
International Centre for the Study of Radicalisation and Political Violence
14
. 
− Brookings Institution, Doha Centre analysis papers. Brookings institution is an
American think-tank; the Doha Centre, based in Qatar, undertakes independent,
policy-oriented research on socio-economic and geopolitical issues facing
Muslim-majority states and communities
15
. 
− Clarion Project and their commentaries and backgrounder on the issues of  IS
propaganda magazine, Dābiq
16
. Clarion Project is non-profit organization
dedicated to exposing the dangers of Islamist extremism while providing a
platform for the voices of moderation and promoting grass-roots activism. 
− RAND corporation, The RAND Corporation is a non-profit institution that offers
counselling for policy and decision-making through research and analysis
17
. The
report on AQI financial assets in Iraq has offered contextualized data analysis to
understand IS record-keeping and operational budgeting
18
.  
− Middle East Forum (MEF) and its publication The Middle East Quarterly. MEF
is an independent non-profit organization that promotes American interests in
the Middle East
19
.  
Economic data, reports and updates have also been collected from a research on
relevant newspapers and magazines, such as The Economist, Financial Times, The
Washington Post.
13 Charles C. Caris and Samuel Reynolds, ISIS governance in Syria, Middle East Security Report 22,
Institute for the Study of War. July 2014.
14 Jihadology, http://jihadology.net/
15 Brookings Institution, Doha Centre, http://www.brookings.edu/about/centers/doha
16 http://www.clarionproject.org/news/islamic-state-isis-isil-propaganda-magazine-dabiq
17 RAND corporation, http://www.rand.org/
18 Benjamin Bahney, Howard J. Shatz, Carroll Ganier, Renny McPherson, Barbara Sude, An Economic
Analysis of the Financial Records of al-Qa’ida in Iraq, National Defense Research Institute, The
RAND corporation, 2010. 
19 http://www.meforum.org/
6
Chapter 1
The origins of the Islamic State
The Islamic State organization is the last development of a long-running dispute
among different factions in the international jihadist world: the dispute involved the
fundamentals and the doctrine, as well as logistic organization and economic project. In
order to fully understand how the organization of the Islamic State reached such
economic and logistic success we need to have a look at its origins as a spin-off of al-
Qaeda and the reasons behind the contrasts between these two organizations. In this
section we will examine the early steps of IS, as well as some of the main characters and
leaders who helped to build IS as we know it today. We will look at the broad flows of
funds, resources and combatants among the borders of Pakistan, Afghanistan, Iraq and
Syria. Although a short introduction as such is required to contextualize the economic
topics to come, this is not meant to be a detailed history of IS, on the matter there are
many renowned and elaborate materials we have listed in our bibliography.
1.1 From Afghanistan to Iraq
Two conflicting ideas of Jihād have long co-existed in al-Qaeda: one calling for
Jihād against non-Muslim enemies, either far enemies such as western countries or near
enemies such as Arab governments supporting western interests, the other idea calling
for a total Jihād also against fellow Muslims considered hypocrites and not true
believers. This last view displays a rigid application of the concept of takfīr, the
accusation of apostasy against fellow Muslims. But despite the fact that the different
opinions could seem a merely doctrinal dispute, there were money, funds and politic
influence involved. Two key figures of early al-Qaeda history are ‘Abdu’llāh ‘Azzām
and Ayman al-Ẓawāhirī: the first strongly opposed killing fellow Muslims while the
second called for the rigid application of takfīr. The two were mostly competing for the
attention and the money of Osama Bin Laden. When ‘Azzām died in an alleged car
7