ISIS Is Facing a Cash Crunch in the Caliphate

When the Islamic State, better known as ISIS, announced in June 2014 the formation in large parts of Iraq and Syria of a new Islamic state, or caliphate, the group made a promise to the people it now ruled over. "It is the state for the Muslims—the oppressed of them, the orphans, the widows and the impoverished," said a spokesman for what now purported to be a government run on the precepts of Islamic law. "The people in the lands of the State move about for their livelihood and journeys, feeling safe regarding their lives and wealth."

Celebrations erupted in the streets of the Syrian city of Raqqa, the de facto capital of the new Islamic state. Now, almost 15 months later, ISIS has bumped into a reality painfully familiar to any newly empowered government: It is a lot harder to keep promises, especially economic ones, than to make them. "ISIS said, 'We know the poor, and will give them the money they need,'" says Sayf Saeed, a dental student who left the northern Iraqi city of Mosul for Baghdad in June because the Iraqi government would no longer recognize courses taught at the city's university. "But instead, they use the money to buy weapons."

A series of unforeseen events, including the fall in the price of oil and the intensification of U.S.-led airstrikes on oil facilities and fighters, has squeezed the group's revenues and led it to rely increasingly on heavily taxing the estimated 8 million people living in the caliphate, say experts and people living under ISIS's control. The steady departure of professionals and the group's restrictive laws on women in the workplace have also hobbled the ISIS-run economy. These factors have caused the income gap to widen between ISIS fighters and regular people in the lands the group controls. As inequality has grown, so too has the public's resentment.

"People are struggling to pay the taxes, especially the financial penalties," says a 30-year-old doctor who gave his name as Ahmed, speaking to Newsweek via email from Mosul, which ISIS seized from the Iraqi government on June 10, 2014. Ahmed (not his real name) uses a pseudonym because he now belongs to an anti-ISIS group called Mosulyoon and fears retribution. In Mosul, which had a population of around 2 million before ISIS took control, the cost of local government services—including health care, transport, water and electricity—has risen dramatically.

One source of revenue for ISIS was the tax it levied on the salaries of government employees still drawing wages from the central governments in Damascus and Baghdad. Experts estimate that the group, which imposes tax rates as high as 50 percent, may have earned hundreds of millions of dollars from taxing state salaries. In an apparent bid to stem this revenue stream, Iraq's Council of Ministers announced on August 6 that it was suspending payment of salaries to employees working in areas controlled by ISIS. A spokesman for the Iraqi prime minister's office confirmed this decision has already come into effect in Nineveh province, of which Mosul is the provincial capital. The Facebook page of the governor of neighboring Anbar province features a statement in which he says he is working with the Ministry of Finance to find a way to pay people their salaries without ISIS intercepting them. It is not clear whether salaries to Anbar, home to the ISIS-controlled cities of Ramadi and Fallujah, have yet been stopped.

As winter approaches, the millions of people living in ISIS-controlled territory face rising food and fuel prices and frequent power cuts. "Before ISIS came, 1 liter of fuel was 30 cents; now it is $2," says Saeed. "A container of cooking gas was $5; now it's $25." In accordance with Islamic teachings, ISIS has implemented zakat, a charitable tax of 2.5 percent of income that all Muslims are obliged to pay. Contrary to its promises, ISIS does not distribute that money to the needy, Saeed says. In Raqqa, ISIS also appears to be uninterested in looking after the poor. "The only relief kitchen is run by locals," says Abu Ibrahim al-Raqqawi, a former medical student and now founder of the activist group Raqqa Is Being Slaughtered Silently. Like Ahmed, he uses a pseudonym. Speaking to Newsweek via Skype from Raqqa, he says of the kitchen, "Every day there's a line round the block. They give out one meal a day to the starving."

As the caliphate's poor get poorer, the fighters—who are increasingly from other countries—continue to enjoy comparatively comfortable standards of living. "I can see there are two different lives in Raqqa," says al-Raqqawi. "The [foreign fighters] have become the residents, and the residents have become the foreigners." Ordinary people, he adds, cannot afford to use the city's fast-food joints, its restaurants or its Internet cafés. These places are almost exclusively used by ISIS fighters, who are not taxed on their salaries, according to al-Raqqawi.

"The foreign ISIS members are living in a luxurious Western lifestyle," says Ahmed, describing the situation in Mosul. "They're staying in the five-star Nineveh International Hotel or the villas of wealthy citizens who have fled. They are also supplied with free medical services and unlimited electricity while other citizens get electricity for two hours a day only."

Despite its decreasing revenues, ISIS continues to pay its fighters comparatively high salaries, peaking at $1,000 a month for some foreign fighters, according to the U.S. Treasury. Based on these figures, the cost of paying ISIS fighters may cost the group up to $360 million per year. To put this in perspective, the Rand Corporation, a nonprofit research organization based in California, estimated that in 2014 the group's total earnings were $1.2 billion. Of that total, $500 million was a one-time windfall in the form of deposits stolen from Iraq's state-owned banks.

ISIS's high expenditure on salaries comes as little surprise to Tom Keatinge, director of the Centre for Financial Crime and Security Studies at the Royal United Services Institute, a London-based defense and security think tank. "Supporting the ISIS machine is going to take priority," he says. "If there are shortages, the fighters and the core of the regime will come first." But, he adds, "they had plenty of money to start with, more than they needed, gathered from one-off seizures. The questions are: How much have they spent? How much do they earn now the one-offs have ceased? There's no doubt that they will have been eating into their surplus."

One group that could help the ISIS economy grow—the professional class—has been depleted. Many professionals in cities like Raqqa and Mosul have packed up their families and moved to other parts of Syria or have become refugees. "The caliphate has been hit by a 'brain drain,'" says Aymenn Jawad al-Tamimi, a fellow at the Middle East Forum, a Philadelphia-based organization that aims to promote U.S. interests in the Middle East. "Doctors have fled, and health services are very bad."

And then there's the impact of the extremists' strict rules about women and work. Studies conducted by the U.N. and the International Monetary Fund show that including women in the workforce contributes to economic growth. But in the caliphate, women are now only permitted to teach in girls' schools, treat female patients in medical settings and work in stores selling feminine products. The rest stay at home. "My sisters are unable to work," says al-Raqqawi. "It's very hard to see them imprisoned in the house." Plainly, this is not the state of equality and justice ISIS promised.

At times, the group's public financial pronouncements stretch credibility. At the start of the year, for example, ISIS announced a budget of $2 billion to be spent on, among other things, wages for the poor, disabled and orphaned. Figures from the Iraqi government last year put the cost of maintaining public services in the Iraqi provinces that ISIS controls at well over $2 billion alone. If both figures are accurate, that would leave ISIS with nothing budgeted for the territory it controls in Syria.

There are other signs ISIS may not have a particularly firm hand on its economy. On August 29, the group released an hour-long video announcing the launch of its own currency. Titled The Rise of the Khilafah: The Return of the Gold Dinar, the video promised a currency based on the market value of precious metals that would "break the U.S. capitalist financial system of enslavement." A month later, the group was still paying its salaries in U.S. dollars throughout the caliphate.

Do all of these challenges to the ISIS economic model guarantee the demise of the group or its system of government? Not necessarily, says Ben Bahney, an international policy analyst at Rand. "ISIS's expenditure is quite low; it's not really spending money on anything except for salaries. There's not really any infrastructure—there were only one-off social programs. ISIS is happy to run a state that's a lot like the Taliban's rule of Afghanistan in the 1990s. This is mostly about implementing its version of the rule of law, which requires bodies and guns much more than bricks and mortar."

Those living within the caliphate say they feel powerless, even as their resentment grows. "I don't think the people of Mosul will ever rise against ISIS," says Saeed. "What can they do? Western people should encourage their government to do more airstrikes to kill ISIS leadership. I want ground troops to come in and liberate Mosul."

Bahney and al-Tamimi agree that the only way to bring an end to the caliphate is to put boots on the ground, something that shows no sign of materializing. While Bahney says that this should be a slow, locally based movement of Kurdish and Iraqi forces, possibly backed by Syrian and Turkish troops, al-Tamimi thinks a Western or Pan-Arab force is needed. "But," he adds, "there is no will power for this with today's dysfunctional politics and the legacy of the Iraq and Afghan wars."

Cut off from the rest of the world, the residents of Mosul and Raqqa must prepare for a second hard winter under ISIS rule. The cold weather and the high prices of fuel and food will likely cause great misery. But while the group's economy may be intrinsically flawed and battered by forces it can't control, for the foreseeable future, the people most likely to feel the pain from the tax-and-spend jihadis are those who can least afford it.