Editor’s Note: The Islamic State's control of territory and zealous fighters vaulted it to the top ranks of the world's most formidable terrorist groups. Less noticed, but tremendously important to the group's success, were its impressive financial resources gained from its control of territory in Iraq and Syria. As the Islamic State has lost ground in both countries, however, its financial future is also in flux. Patrick Johnston and Colin Clarke of RAND present several scenarios for the Islamic State's future operations, finances, and overall sustainability.

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With operations against the Islamic State in Mosul continuing successfully, if slowly, much of the focus is shifting toward an impending assault on the city of Raqqa . The U.S.-led coalition has continued to reclaim territory from the Islamic State in Iraq and Syria, and the militant group’s finances have been weakened in the process.

After the Islamic State seized Mosul in summer 2014, it enjoyed the dubious honor of being the “richest terrorist group in the world.” But this distinction is gone: The United States and its allies have aggressively targeted the Islamic State’s finances and have made significant progress. Between late 2015 and the end of 2016, coalition aircraft struck 1,200 Islamic State oil tankers. A single raid destroyed 168 vehicles in December in Syria. A senior U.S. Treasury Department official stated that the Islamic State’s oil revenue was roughly halved, from an estimated $500 million in 2015 to an estimated $250 million in 2016.

The loss of territory and direct control over urban populations has shrunk the Islamic State's tax base and decreased extortion opportunities, which has also strained the organization financially. Reports trickling out of Mosul in January suggest that it may have stopped paying the salaries of its fighters altogether, sapping morale and triggering desertions . With finances tight, the Islamic State’s leadership is even closely monitoring utility usage throughout parts of western and northern Iraq.

When Abu Bakr al-Baghdadi declared a caliphate in June 2014, he sought to establish an Islamic State that would govern Muslims across vast territories, starting in Iraq and Syria, and expanding elsewhere throughout the Islamic world. His ambitions to state-build and fight a multifront jihad have required the group to spend a portion of its budget on administration, fighters’ salaries, basic services, and weapons and munitions. However, as captured financial ledgers show, Islamic State leaders carefully monitor the group’s spending and are unafraid to cut costs to maintain a balanced budget.

With finances tight, the Islamic State’s leadership is even closely monitoring utility usage throughout parts of western and northern Iraq.

Last June we were part of a research team that convened a workshop at the RAND Corporation to consider the Islamic State’s potential financial trajectories in the short- to medium-term and discuss the resulting policy implications. RAND brought together political scientists, economists, policy analysts, and former high-ranking military and intelligence community officials with decades of experience studying terrorism, counterterrorism, insurgency, and threat finance. The findings contributed to an assessment of how several potential scenarios in Iraq and Syria might impact the Islamic State’s finances, operations, and sustainability over the next six to 18 months.

A first possible scenario would be a continuation of the status quo. In this scenario, the United States would more-or-less continue with the counter-Islamic State approach that has prevailed to date. Coalition airstrikes and U.S. military support for Iraqi Security Forces and other partners would remain essentially business-as-usual, as would the actions (and in some cases, inactions) taken by the Iraqi and Syrian governments. Although maintaining the status quo would continue to put pressure on the Islamic State in areas of both Syria and Iraq, dislodging it from its unofficial capital in Raqqa, Syria, would be even more difficult than the liberation of Mosul has been—and the group would continue to control significant swaths of territory, particularly in Syria. In this scenario, in which airstrikes would continue to degrade the Islamic State’s oil revenue, the group could continue to bring in significant oil revenue and retain its ability to extract revenue through extortion and taxation in the areas it would continue to control. These are key factors in the group’s reported plan to fall back to Deir Ezzour if they cannot hold Raqqa. Combined with continued access to smuggling routes in and around the territory it controls, the organization would maintain the capabilities necessary to conduct large-scale attacks both locally and worldwide. This means that under the first scenario, the threat from the Islamic State would largely remain static—hit-and-run attacks, the use of snipers and ambushes and waves of suicide attacks exacerbated by the almost industrial-scale manufacture of vehicle-borne improvised explosive devices in Iraq and Syria. What the new administration has revealed so far about its strategy appears broadly similar to this scenario.

The second possible scenario could involve a negotiated settlement in Syria and movement toward Sunni-Shiite political reconciliation in Iraq. In this scenario, Syrian President Bashar al-Assad would likely be removed from power and replaced by a new ruler or coalition. A successful multilateral agreement must include a ceasefire among all parties involved, with the exception of the Islamic State and Jabhat Fatah al-Sham (previously Jabhat al-Nusra, al-Qaeda’s Syrian affiliate), which have always disavowed any negotiated settlement as un-Islamic. Even with a ceasefire, the Islamic State would likely continue to control pockets of territory throughout central and eastern Syria, but would be far more isolated and vulnerable than it is today amid the chaos of the Syrian civil war. This second scenario could mean that the Islamic State will be forced to spend more of its time and energy on operational security, leaving it with less flexibility in terms of planning and executing local military operations. Those entities conducting counterterrorism missions in Syria, not just the United States but also the Assad regime, Russia, Turkey, and others, would have fewer enemies to be concerned about and could dedicate focused firepower on the Islamic State and its supporters, further reducing their ability to maneuver. Also under this scenario, as part of the reconciliation in Iraq, Kurdish parties and what is left of the Sunni political establishment would agree to cooperate with the central government, which, in turn, is more solicitous of their demands. Having achieved their goal of removing Assad, Syrian armed groups could focus on coordinating their efforts to defeat the Islamic State, and would likely be able to leverage such cooperation to starve the group of much of the oil revenue it continues to make via its control of oil-rich areas and smuggling routes in eastern Syria.

A third possible scenario examines the consequences of a strategy reliant almost exclusively on military action against the Islamic State. This military action would involve escalation from the status quo and form the cornerstone of far more aggressive approach to combating the group. This could include the deployment of substantial numbers of U.S. ground troops, acting in a capacity beyond training, advising, and assisting. In this scenario, the Islamic State would be expelled from Mosul and Raqqa, but the Assad regime would remain in power in Syria due to the coalition’s prioritization of counterterrorism over removing Assad as its top strategic objective in Syria. In Iraq, despite successful military operations against the Islamic State by the Iraqi Security Forces, advised and assisted by U.S forces, the Iraqi government would remain fractured, ineffective, and sectarian. However, even effective military operations that would reassert Iraqi control over key population centers could result in remnants of the group relocating to the desert or going underground and continuing to extort substantial amounts of money from businesses, traders, and civilians. In this scenario, the Islamic State would remain capable of conducting terrorist attacks despite its inability to control territory . In addition to retaining the ability to launch attacks, it could use this time to rest, recuperate, and rearm, essentially lying in wait for the next opportunity to resuscitate its organization and reclaim areas it had previously controlled on and off over the past decade and a half.

[A]lthough coalition and partner efforts to degrade Islamic State finances have and are likely to continue to limit its ability to govern large swaths of territory and major population centers like Mosul and Raqqa, it will likely still retain sufficient funding to persist for years as an insurgency in Iraq and Syria...

Which path are we most likely to see? A combination of the first and third scenarios seems the most likely bet. Our recently released study on the Islamic State’s financing summarizes the workshop and concludes that although coalition and partner efforts to degrade Islamic State finances have and are likely to continue to limit its ability to govern large swaths of territory and major population centers like Mosul and Raqqa, it will likely still retain sufficient funding to persist for years as an insurgency in Iraq and Syria, much like the Taliban has in Afghanistan and various al-Qaeda offshoots in places like North Africa, Yemen, and elsewhere. As long as it does, it will remain a premiere terrorist threat to the rest of the world.