Coalition attacks on Isis oil installations may have cut revenues by 40%, but experts say Isis oil reliance overestimated

A collapse in oil revenues available to Islamic State is likely to have made it increasingly dependent on donations from wealthy Gulf states and profits from foreign exchange markets, the first UK inquiry into the terror group’s funding has heard.

Attacks by the US-led coalition on Isis’s oil installations and convoys are believed to have reduced its oil revenues by more than a third as the funding of the group becomes one of the central fronts in the battle to defeat it in Syria and Iraq.

The government is reluctant to cooperate with the Commons foreign affairs select committee inquiry and has barred the key Ministry of Defence official overseeing efforts to undermine Isis’s funding from giving evidence.

But the Foreign Office minister Tobias Ellwood said progress was being made, even though knowledge of the group’s opaque finances was sketchy and dependent on intelligence finds.

He asserted that the regime’s oil revenue was collapsing and even suggested the group’s Syrian headquarters in Raqqa could implode if and when the Iraqi army retakes Mosul.

But experts have told the committee the UK government may be vastly over-estimating the importance of oil revenue, and underestimating the extent to which Isis is reliant on foreign donors in the Gulf or its manipulation of the Iraqi banking system.



Luay al-Khatteeb from the Iraq Energy Institute claimed the cost of waging war for Isis must be so high, and its oil revenues now so limited, that it must be accessing large-scale donations.

In addition, the committee was told Isis may be making as much as $25m (£18m) a year from foreign exchange sales, a figure the Foreign Office disputes.

The UK government estimates 40% of Isis revenues were coming from oil, 40% from extortion, taxation and the local cash economy and the remaining 20% from sources including the sales of antiquities and donations. It claims oil revenue is now down 40%, representing a 20% decline in overall funding.

Al-Khatteeb told the select committee the UK government estimates may overstate the importance of oil. He suggested Isis may have secured substantial oil revenues for only a few months in 2014 when it was producing 70,000 barrels a day worth $500m annually.

The current figure would be closer to $200m as attacks on oil infrastructure, falling global oil prices and the low quality of Syrian oil means it is at best producing 20,000 to 30,000 barrels per day sold at as little as $10 each.

“That narrative of an oil-funded caliphate presumes both far higher oil production rates of 40,000 barrels a day or a far higher price for IS oil of around $30 a barrel,” al-Khatteeb told the committee. It was even possible, he suggested, Isis is now a net importer of oil to fuel the US-supplied Humvees and trucks it took from the Iraqi army.

The tax revenue and extortion from the 2 million people under its rule, most of whom earn as little as $110 a month, can also provide only so much cash, especially when the costs of governing its territory is taken into account.

Al-Khatteeb told the committee: “Either these fighters are happy to accept substantial pay cuts, as IS’s income diminishes, or another unaccounted-for source of funding is keeping them happy.

“That’s a reasonable conclusion, given the overestimation of IS’s oil finances, the small and shrinking tax base and the low price IS garners from its sale of antiquities on the black market.

“Some might wonder to what extent Gulf Arab financing has continued to subsidise the caliphate. Certainly, IS was able to draw on some other sources of income between January 2015, when Raqqa’s economy had reportedly collapsed, and mid-January 2016, when IS forces have been able to launch a major new Syrian offensive. The money is coming from somewhere.”

The UK government has effectively admitted that Gulf states did fund Isis in its early days, saying it is confident all such government funding has now stopped. But Dan Chugg, a Foreign Office expert, admitted to the select committee this reassurance had limited value.

Chugg said: “It is difficult with some of these countries to know exactly what is government funding and what is not when you are dealing with royal families, wealthy princes and those kind of things.”

A further possible source for Isis funding is playing the foreign exchange markets, where some of the $1bn grabbed from Iraqi bank vaults has been traded for profit.



David Butter, an associate fellow at the thinktank Chatham House, claimed Isis shuffles funds across borders, taking advantage of exchange rate fluctuations and an informal network of brokers known as “hawala”.

'Millions' in Isis cash destroyed in airstrike on storage site in Mosul Read more

Butter told the committee: “The Iraqi central bank foreign currency auction systems are an area that needs to be investigated very strongly.”

Isis members, Butter said, have moved money between banks in Iraq and Jordan to exploit the imbalances in currency markets.

“So when the Iraqi government does its regular foreign currency auctions, the Isis money is inserted into that system and they can make a margin on the differences between the various exchange rates there and send it back into their areas through hawala operatives,” Butter said. “This is the way money moves in the Middle East.”

The Foreign Office claimed such profits are unlikely for three reasons. Isis has used up the cash reserves primarily in Mosul and, since October, coalition airstrikes, including on the city’s central bank, have sent hundreds of millions of dollars up in smoke. Pressure on the Iraqi National Bank has also led to tighter regulation and the removal of agents who may have been acting on Isis’s behalf from US dollar auctions.

The hope that Isis will simply go bust is far-fetched, the inquiry heard, but a decline in resources may mean it changes from a standing army fighting a territorial war on two fronts into a looser al-Qaida-style franchise undertaking terrorist attacks in Baghdad and Damascus.