Highlights

• Territorial and Economic Expansion: From 2014 to 2019, ISIS solidified its control in Iraq and Syria, creating instability globally through a shadow economy based on illegal activities like oil smuggling, extortion, and trafficking.
• Financial Operations and Illicit Economies: ISIS’s economy relied on both illegal activities (kidnapping, arms trafficking) and shadow markets (unregulated oil sales, artifact trafficking), vital for funding its operations and territorial expansion.
• NATO’s Economic Counterterrorism Efforts: NATO countered ISIS by targeting its financial networks, freezing assets, and disrupting its revenue sources, especially oil infrastructure, through military and economic strategies.
• Global and European Economic Impact: ISIS’s control of oil production destabilized global oil prices, affecting European economies and fueling migration. Additionally, its trafficking of cultural artifacts undermined legal markets, impacting NATO member states economically and culturally.

Key Terms

• ISIS: A designated terrorist organization that operated primarily in Iraq and Syria between 2014 and 2019, known for its violent tactics, territorial control, and the establishment of a self-proclaimed caliphate.
• Shadow Economy: Refers to the definition provided by Schneider and Enste (2000, 2004). They define the shadow economy as encompassing all economic activities that occur beyond the reach of the state and tax authorities. These activities are unregistered, allowing them to evade taxation, government regulations, and social protection measures. In other words, the shadow economy includes all economic operations that intentionally avoid government oversight and taxation.
• Illicit Activities: Actions that are prohibited by law, including but not limited to smuggling, extortion, arms trafficking, and drug trade, often used by criminal organizations or terrorist groups to generate income and finance their operations.
• Counterterrorism: A range of strategies, policies, and actions undertaken by governments and international organizations to prevent, disrupt, and respond to terrorism. This includes military operations, intelligence efforts, sanctions, and economic measures designed to dismantle terrorist networks.
• Global Security: The collective efforts of international actors, including nations and organizations like NATO, to safeguard global stability by addressing threats such as terrorism, political conflicts, and economic vulnerabilities, ensuring the safety and security of populations worldwide.

Introduction

Between the years of 2014 and 2019 the designated Islamic State (ISIS), consolidated its presence and power in the Middle East. This armed group expanded across Iraq and Syria and posed a major challenge to international relations by becoming an integral challenge to regional and global stability due to its threat to political security, the spread of religious fundamentalism, transnational radicalization, and the severe humanitarian implications arising from its territorial control. The study’s preliminary hypothesis suggests that ISIS’s economy was largely driven by a variety of illicit activities, including the exploitation of natural resources, and the smuggling and extortion of various commodities. These commodities ranged from oil and gas to cultural artifacts, weapons, human beings, and narcotics. This shadow economy relied heavily on illegal sales and marketing techniques, enabling ISIS to continue its operations in defiance of international efforts. The significance of these activities lies in their crucial role in ensuring a continuous stream of revenue for ISIS, which allowed the group to sustain itself and resist the international community’s attempts to disrupt its financial networks. Moreover, this steady flow of illicit funds not only empowered ISIS to maintain its military and administrative operations but also contributed to its resilience in the face of global opposition.

Also, it is essential to make a clear distinction between the elements of illegality and the shadow economy within the ISIS economy, as they represent different aspects of its financial operations. Elements of illegality encompass overtly unlawful activities such as territorial seizures, arms trafficking, kidnapping, and extortion—acts that violate international law and the national laws of the countries involved. These illegal activities are often conducted with blatant disregard for legal norms and are universally condemned. On the other hand, the shadow economy involves unregulated and semi-clandestine activities like the sale of oil and gas, trafficking of antiquities and arms, taxation within the controlled territories, and the establishment of a monetary system that functions outside the established legal frameworks. While these activities operate in a legal gray area, often avoiding direct violations of international law, they nonetheless contribute significantly to ISIS’s ability to sustain itself financially. Understanding the distinction between these two components is critical for analyzing the complexities of ISIS’s financial networks and the broader implications for global security and economic stability. For this purpose, the text has as its spatial and geographical delimitation the current states of Iraq and Syria. The delimitation is supported by the fact that these two countries played a fundamental role as central theaters of operations for ISIS and served as the core of its self-proclaimed caliphate. These regions witnessed the implementation of crucial economic strategies by the organization, as well as the exploitation of various resources, which enabled its financial and operational sustainability.

Likewise, the article focuses on the period between 2014 and 2019. The starting point responds to the declaration of a caliphate^[i] in Mosul’s al-Nuri Mosque by Abu Bakr al-Baghdadi, which led to the territorial expansion of the group and the establishment of a shadow economy to support its activities. The final year of study, on the other hand, is considered crucial in the fight against international terrorism due to the extrajudicial execution of one of the founders of ISIS, Abu Bakr al-Baghdadi. From the major international offensives led by Russia, the United States (US) and other nations, which began in 2015 but became more relevant from 2017, as well as the growing opposition of the local population, especially Kurdish men and women, a decline in this organization and fissures in its economy became evident. In 2019, the presence of these offensives was so strong and potent that it allowed al-Assad’s loyalist forces in Syria to retake territorial control of the country.

I- From Ancient Empires to ISIS: The Turbulent History of Iraq and Syria.

The recent history of Syria and Iraq has been marked by the rise of armed fundamentalist groups, particularly al-Qaeda in Iraq (AQI) and its successor ISIS. This originated with the US military intervention in Iraq in 2003, which exacerbated ethnic and religious tensions and facilitated the rise of figures such as Abu Musab al-Zarqawi, the leader of AQI, whose sectarian^[ii] strategy sowed further chaos in the region.

On the one hand, since 2011, Syria has been the scene of a series of violent events that profoundly influenced its political and socioeconomic dynamics. In terms of natural resources, Syria has significant oil and gas deposits. The country’s oil production was 2.5 billion barrels of crude oil at the end of 2010^[iii] (BP, 2011, p. 6) , and its natural gas production in the same year was 7.8 million m3 for reserves of 300 million m3 (BP, 2011, pp. 20-22). These resources constituted an important part of the Syrian economy, contributing to export revenues. On the other hand, since 2003, Iraq has witnessed major political, economic, and social transformations. The country’s natural resources, in particular its vast oil reserves, which were estimated at 112 billion barrels in 2003^[iv] (Deutsche Welle, 2003), played a key role in the post-Saddam Hussein reconstruction.

On the historical level, let us recall that the US intervention in Iraq in 2003 was based on the premise that Saddam Hussein’s regime possessed weapons of mass destruction^[v] (WMD), and alleged links with armed groups^[vi] which led to the fall of the Iraqi state. However, an additional reason behind the invasion of Iraq in 2003 lay in the fact that the US relied heavily on oil imports, producing only 40% of what it consumed^[vii]. This situation led the US government to intervene as part of its strategy to secure access to energy sources vital to its economy and geopolitical position. Likewise, the official US objective was to overthrow the Iraqi government and attack Iraq with the intention of changing the political leadership, imposing itself militarily at any cost^[viii]. However, the unintended consequences of the intervention in Iraq were further revealed through the words of President Obama^[ix]. There, he suggested that the military involvement generated unintended consequences, contributing to the rise of fundamentalist groups such as ISIS.

One of the most significant phenomena in post-2003 Iraq was the emergence of AQI, under the leadership of Abu Musab al-Zarqawi^[x], a turning point that left a profound mark on the region. He announced to the world in October 2004 his obsession with a caliphate in Iraq^[xi] and officially affiliated his group, Jama’at al-Tawhid wal-Jihad, with al-Qaeda in Iraq, consolidating his leadership of the movement. However, according to Hosken: “evidence strongly suggests that both groups had different priorities and strategies.” (2015, p. 38). That disagreement was in particular with the targets to attack but also with the idea of a caliphate establishment for ISIS as opposed to the creation of an Islamic state governed by Islamic law under its interpretation by al-Qaeda. Furthermore, on June 7, 2006, US forces managed to locate al-Zarqawi in Diyala province, and an airstrike was conducted, resulting in his death^[xii]. Following his death, Abu Ayyub al-Masri assumed leadership and reorganized AQI as the Islamic State in Iraq (Hosken, 2015, pp. 122-4), marking an evolution in the group’s strategy and identity and laying the groundwork for its future expansion and consolidation^[xiii].

Likewise, Ibrahim Awwad Ibrahim al-Badri, better known by his pseudonym Abu Bakr al-Baghdadi, was born in 1971 to a middle-class Iraqi Sunni family (Filipec, 2020, p. 75) in the Sunni Triangle region of Iraq^[xiv]. In 2004, al-Baghdadi was imprisoned by US forces and held at Camp Bucca, a US prison in southern Iraq (Hosken, 2015, p. 161)^[xv]. Subsequently, al-Baghdadi continued to consolidate his leadership, implementing strategies to strengthen his presence and expand his influence, even though he was no longer under the banner of al-Qaeda in Iraq, but led his own group, the Islamic State in Iraq^[xvi]. Although, ideologically, al-Qaeda and the Islamic State in Iraq shared a fundamentalist agenda, they diverged in terms of interpretation of religious doctrine and tactical objectives (Hosken, 2015, pp. 117-26). While al-Qaeda focused on attacking specific targets, such as the US and France, and establishing a global network of affiliates, the Islamic State in Iraq was more interested in establishing an Islamic caliphate in controlled territories with the immediate implementation of Islamic law under its interpretation^[xvii].

Returning to the Syrian context, in the midst of the civil war^[xviii], the government led by Bashar al-Assad was forced to concentrate its military resources to quell internal revolts and confront the rebels. This situation left a power vacuum in vast areas of the country, especially in peripheral and less controlled areas, allowing the Islamic State in Iraq to seize the opportunity to expand^[xix]. Moreover, its brutality, entangled in Syria’s political complexity, turned the country into a crucial epicenter of its history, with immediate and global impact.

In April 2013, al-Baghdadi announced the merger of Jabhat al-Nusra with the al-Qaeda-affiliated Islamic State in Iraq (Filipec, 2020, p. 60) to form the Islamic State in Iraq and the Levant (ISIL)^[xx]. Also, in January 2014, ISIL captured the Iraqi city of Fallujah, marking a major shift in its expansion strategy. In June 2014, Abu Bakr al-Baghdadi proclaimed the creation of a “caliphate” in the Great Mosul Mosque (IEEE Magazine, 2019, p. 60) that encompassed conquered territories in Iraq and Syria, changing the organization’s name to Islamic State in Iraq and Syria (ISIS). This bold declaration reflected the territorial ambitions of IS and reinforced its legitimacy among its supporters, which allowed the armed group to establish operational bases and recruitment centers in Syria.

II- Debating the Classification and Characteristics of Shadow Economy: Insights from ISIS Economic Activities

The emergence and dominance of ISIS over territories in Iraq and Syria between 2014 and 2019 sparked a great deal of interest in academia, particularly regarding the nature of its economy and sources of funding. Some authors categorized its economy as shadow, while others proposed a different understanding. In the following, we will look at the arguments against and in favor. It is important to understand that the shadow economy encompasses economic operations outside of the state and, therefore, outside of the tax authorities. This phenomenon is common in contexts where armed groups are involved, regulation is weak, or corruption is widespread, allowing parallel economies to flourish and operate outside the reach of central power.

First of all, it is important to analyze the arguments of some authors who refute the notion of a shadow economy in the case of ISIS. For example, a report by the Centre d’Analyse du Terrorisme (CAT) argued that its financial system was reduced to “the conquest of territories to control and exploit the resources that will fuel the war effort and the administration of populations.” (CAT, 2016, p. 5). According to this source, territorial possessions manifested the financial self-sufficiency of ISIS.

Likewise, authors such as Mendelsohn highlighted that the fundamentalist group exhibited three fundamental attributes in its financial structure:

• Appropriation of the existing economic infrastructures in the territories under their dominion, suggesting that it was not based on a parallel economy (Mendelsohn, 2016, pp. 17-25).
• Exploitation of the available structures to generate income and consolidate their control over the population (2016, pp. 17-25).
• Indirect insertion into the global economy through their sales on the black market to secure income and resources.

Likewise, studies carried out by Butter reinforced the arguments of CAT and Mendelsohn by emphasizing that the fundamentalist collective demonstrated two essential characteristics in its economic structure:

• They took advantage of pre-existing economic infrastructures, such as irrigation systems and distribution networks, as tools to sustain a certain level of governmental authority and dominance in the areas under its control (Butter quoted in Montgomery, 2014; and quoted in Hackett, 2016).
• They focused on expanding their area of control by seizing natural resources, rather than relying on a shadow economy. In the author’s words, “ISIS focused on expanding its area of control by seizing natural resources and commercial centers, as well as tens of thousands of tons of weapons and ammunition.” (Butter quoted in Bajekal, 2014).

Previous arguments describe how ISIS targeted territorial expansion and control of natural resources and areas of commercial exchange rather than establishing new economic dynamics. Finally, they suggest that ISIS only used the state economic structures and resources available in the territories it controlled to sustain and expand.

Secondly, for other authors, ISIS did develop a shadow economy in the understanding that although they used state natural resources, they operated independently of the formal economic system, autonomously, and in parallel to the Syrian and Iraqi states. This clandestine model emerged as a fundamental tool for the financing and sustainability of the self-proclaimed caliphate through a variety of illicit activities and financial strategies. For example, Cockburn (2015), Filipec (2020), Hosken (2015) ,and Gerges (2016) outlined three characteristics that contribute to the argument for the existence of a shadow economy in the case of ISIS:

• ISIS was never able to completely take over the capitals of both countries.
• The Syrian and Iraqi states subsisted, thus creating two simultaneous political entities and thus two parallel economies.
• Local resistance, international intervention, and the commitment of local governments in the fight against integration were decisive factors in preserving the sovereignty of the capitals of Iraq and Syria.

In addition, Gerges reinforced the arguments outlined above by arguing that ISIS operated outside the established governmental framework, challenging the authority of the state and undermining the stability of the region through economic activities other than the central power economy. In this sense, the author explained the dynamics of these activities as follows:

According to multiple reports by local activists who resided in the territories of the caliphate, the Islamic State built a lucrative and diverse criminalized war economy to finance its war making and state building, which included oil sales, taxes, drug trafficking, kidnapping, theft, and sale of small religious and cultural artifacts (2015, p. 280).

At first sight, these tactics were instrumental in establishing a war economy characterized by the illegal appropriation of territory and resources, which would be nothing different from the first arguments. However, this economy evolved into a shadow economy, where illegal sales techniques and the use of trade networks allowed ISIS to continue its illicit activities in a more sophisticated and covert manner. Thus, this points to a parallel and adaptable economic structure.

Furthermore, ISIS employed smuggling routes for the illegal shipment and sale of goods and resources, operating outside both the states and governments of Iraq and Syria and international trade rules. This illegal activity not only challenged the authority of local states, but also undermined the principles of fair and legal international trade.

In addition to its involvement in illegal trade across borders, ISIS was involved in illegal activities such as the raiding of financial institutions, including banks and other financial institutions. These attacks were not only aimed at illicit monetary gain, but also at destabilizing the economy and undermining confidence in financial institutions. For example, the European Parliament mentioned ISIS’s ability to operate without relying on third parties by stating that this group: “it has implemented a system allowing it to do so without depending on outside actors” (2017, p. 8). This economic autonomy suggested that ISIS did not simply rely on pre-existing resources but built a parallel economic network to develop an amalgam of activities. In the same vein, three additional arguments were identified that merit special attention:

• The Diwan offices of the Islamic State promoted the idea that their economy operated underground, as this statement allowed them to legitimize their hidden financial activities and evade the supervision and regulation of conventional states.
• The fabrication and trading of captagon, a stimulant drug, suggests that their economy is shadowy and diversified, as they resorted to illicit activities to finance their operations. This drug production and distribution provided them with a significant source of income and allowed them to operate outside the reach of the law and international scrutiny.
• The taxes imposed by ISIS in the form of Zakat indicated an attempt to legitimize its financial activities within a religious framework. Not to mention that by imposing these taxes coercively, ISIS revealed its reliance on parallel resources, characteristic of a shadow economy that operated outside of legal and governmental institutions.

While this is an open discussion, the research proposal of this text is to opt for the second position, according to which the ISIS economy cannot be considered simply as an appropriation of the formal economic model of the Iraqi and Syrian states but was in fact characterized as a parallel and distinct shadow economy.

Finally, the development of a shadow economy by ISIS was based on the transition from a simple appropriation of territories and natural resources to a more sophisticated structure distinct from the economy of the Syrian and Iraqi central powers, which allowed the fundamentalist group to maintain its economic activity and finance its operations in an autonomous and sustained manner. It is rather a shadowy and complex economy, closely integrated with its political, military, and ideological activities. In fact, unlike simple traditional economic structures, the ISIS economy is designed to serve its objectives of territorial dominance, recruitment, and maintenance of power.

III- NATO’s Perspective on ISIS and Its Economic Activities

a) NATO’s Strategic Approach to Economic Stability and Counterterrorism

NATO’s commitment to economic stability and security is deeply intertwined with its core mission of ensuring the collective defense and stability of its member states. The alliance recognizes that economic security is a fundamental component of national security, understanding that economic instability can create fertile ground for spreading fundamentalism and terrorism. In its strategic framework, NATO emphasizes the importance of promoting and maintaining economic stability as a key strategy for conflict prevention and resolution. The alliance is particularly aware that groups like ISIS often exploit economic hardships—such as poverty, unemployment, and lack of opportunity—to finance their operations and recruit new members, thereby posing a significant threat to global security.

Following NATO’s strategic framework on economic stability, the alliance has increasingly recognized the resurgence of economic security as a vital priority, particularly in response to the assertive economic actions of state actors like Russia and China. This emphasis on economic security is now integrated into the broader defense strategies of NATO member states, including the U.K., Germany, and the U.S., as well as within NATO’s collaborations with international bodies like the EU. For NATO, strengthening its approach to economic security is crucial. The alliance is called upon to reestablish high-level consultations focused on economic issues, rebuild its economic security infrastructure, and enhance global partnerships, especially with the EU and Indo-Pacific nations. NATO’s ability to synchronize economic security with military defense is seen as essential for deterring adversaries and safeguarding critical infrastructure. Thus, a coordinated trans-Atlantic economic security strategy is indispensable for countering economic leverage by rivals and bolstering collective resilience. This integrated approach is particularly relevant in countering non-state actors like ISIS, who exploit economic vulnerabilities to finance their activities and undermine global security. (Dowd and Jankowski, 2024)

Despite recognizing the significance of economic security, NATO has not yet developed a tool similar to the EU’s anti-coercion instrument or invoked Article 5 in response to economic coercion, reflecting its current view that such coercion, like cyberattacks, does not constitute a direct attack on a member state’s territory. This stance limits NATO’s role to traditional defense and deterrence, which could be problematic as hybrid warfare tactics increasingly blend conventional, cyber, and economic strategies. The ongoing debate about creating an “economic NATO,” supported by figures like former British Prime Minister Liz Truss, underscores this evolving security landscape. While the G7 currently serves as the closest model to such a structure, its focus may not fully address economic security from a transatlantic perspective, suggesting that NATO may need to expand its approach to effectively safeguard its member states against both traditional and emerging threats (CSIS, 2024).

NATO’s counter-terrorism strategies have encompassed a multifaceted approach to addressing the economic threats posed by ISIS, integrating economic, military, and diplomatic measures into a cohesive framework. Recognizing the centrality of ISIS’s financial networks to its operational capabilities, recruitment, and territorial control, NATO collaborated with international partners such as the United Nations and the European Union to implement a comprehensive set of targeted economic measures. Central to this strategy were sanctions designed to freeze ISIS’s assets and sever its access to the global financial system. By engaging with financial institutions and leveraging international regulatory frameworks, NATO and its allies were able to track and block transactions linked to ISIS, thereby curbing the group’s financial mobility and operational support. Concurrently, NATO supported military efforts that aimed to dismantle ISIS’s economic infrastructure, including the targeted destruction of oil facilities and transportation networks under the group’s control. These sites were vital revenue sources for ISIS, and their disruption significantly impaired the group’s ability to fund its activities and expand its influence. The synergy between economic sanctions and military interventions has been crucial in undermining ISIS’s financial base. Among NATO “NATO is fully committed to fighting terrorism with determination, resolve, and in solidarity, and its role in countering terrorism adds value to Allies’ national efforts and capacity to prevent, mitigate, respond to, and be resilient against acts of terrorism” (NATO, 2024). The coordinated efforts of NATO and its partners have played a pivotal role in diminishing ISIS’s operational capabilities and advancing the broader objective of destabilizing and dismantling ISIS as a formidable terrorist organization.
Furthermore, among NATO’s strategic objectives in counterterrorism, it is crucial to note the alliance’s commitment to supporting broader international efforts. In fact, NATO’s own “Policy Guidelines on Counterterrorism,” approved during the Chicago summit in May 2012, clearly delineates its role within the global framework. The guidelines emphasize NATO’s support for the “broad, UN-led international effort to combat terrorism,” while also acknowledging that “most counter-terrorism tools remain primarily with national civilian and judicial authorities.” This highlights that “individual NATO members have primary responsibility for the protection of their populations and territories against terrorism.” NATO’s coordinated efforts have significantly contributed to diminishing ISIS’s operational capabilities, thereby advancing the broader objective of destabilizing and dismantling the group as a formidable terrorist organization.
Following the successful diminishment of ISIS’s operational capabilities, it is essential for NATO to deepen its understanding of the underlying philosophies and ideologies that drive various violent extremist organizations. The rate of radicalization and the likelihood of blowback appear to differ significantly depending on the specific extremist group involved. Therefore, a nuanced comprehension of these ideologies is critical for tailoring counter-terrorism strategies that are more effective in preventing the resurgence of such threats (Army War College, 2015, p. 59).

b) NATO’s View on ISIS and Its Economy

NATO has long recognized the significant threat posed by ISIS, not just through its violent acts but also through the sophisticated financial mechanisms that have allowed it to sustain and expand its operations. The alliance views ISIS’s economy as a crucial pillar of the group’s power, enabling it to fund terrorism, recruit fighters, and destabilize regions. To effectively combat ISIS, NATO has engaged in several targeted initiatives aimed at disrupting the group’s financial networks. This includes not only direct military actions but also intelligence-sharing, sanctions, and capacity-building efforts with local forces to weaken ISIS’s economic foundation and ensure long-term stability in affected areas. These multifaceted approaches reflect NATO’s comprehensive strategy to undermine ISIS from both a military and economic standpoint.
Between 2004 and 2011, NATO provided essential support to Iraq, focusing on training, mentoring, and assisting the Iraqi Security Forces. This mission was pivotal in helping Iraq build effective and accountable security institutions, which are crucial for maintaining stability and preventing terrorist groups like ISIS from gaining ground. At the 2004 Istanbul Summit, NATO members committed to supporting the international effort to establish robust Iraqi security forces. Recognizing the evolving threat of ISIS, NATO has been a member of the Global Coalition to Defeat ISIS since 2017. In response to a request from the Iraqi government and the Coalition, NATO launched NATO Mission Iraq (NMI) in February 2018. This non-combat advisory and capacity-building mission aims to strengthen Iraqi security forces and institutions, enabling them to combat terrorism, prevent the resurgence of ISIS, and stabilize the country (NATO 2023 and 2024 counter terrorism).

The efforts of NATO in Iraq are conducted with the full consent of the Iraqi government, respecting Iraq’s sovereignty and territorial integrity. NATO’s focus has been on enhancing the capabilities of Iraqi institutions to not only defeat ISIS on the battlefield but also dismantle the financial structures that sustain the group. By cutting off ISIS’s access to funds, NATO and its partners aim to weaken the group’s ability to operate and carry out terrorist activities.

Finally, NATO’s view on ISIS encompasses not only the need to combat its physical presence but also to disrupt its economic base, which is vital for sustaining its operations. Recognizing that financial networks and resource flows are the lifeblood of ISIS’s activities, NATO has focused on dismantling these economic structures through a multi-faceted approach. By integrating training, advising, and capacity-building initiatives with these efforts, NATO has contributed significantly to the global mission to weaken ISIS’s economic foundations and stabilize regions vulnerable to its influence. This comprehensive strategy underscores NATO’s commitment to long-term peace and security by ensuring that ISIS cannot regain its foothold through financial means.

c) The Impact of ISIS’s Economic Activities on NATO Member States

ISIS has not only been a formidable military threat but also an economic menace, with its activities directly impacting NATO member states, particularly through its financial networks and the broader economic destabilization it fosters. The group’s ability to fund its operations through various illicit means, such as oil smuggling and the sale of looted artifacts, has had far-reaching consequences, including indirect effects on European economies.

One of the most significant ways ISIS’s economic activities have impacted NATO member states is through the disruption of global oil markets. At its peak, ISIS controlled a substantial portion of Syria’s oil production and had significant influence over oil resources in Iraq. By diverting these resources, ISIS not only deprived legitimate governments of revenue but also contributed to global oil price volatility. The resulting economic instability has had a ripple effect on European economies, where energy security is a critical concern. The loss of oil revenue also meant reduced economic stability in affected regions, leading to higher migration flows, which NATO countries have had to address.

Additionally, the group’s involvement in the black-market trade of stolen artifacts has created a shadow economy that extends into Europe. Stolen cultural heritage items from Iraq and Syria have surfaced in markets across the continent, including in high-end London antique shops. This illegal trade not only funds terrorism but also undermines legal markets and the integrity of cultural institutions in Europe. The implications for NATO countries are twofold: the direct challenge of combatting illegal trafficking networks and the broader cultural loss that weakens social cohesion and historical ties.

Furthermore, the psychological impact of terrorism, fueled by ISIS’s ability to conduct or inspire attacks in Europe, cannot be overlooked. The RAND Europe and European Parliament report highlights how terrorism has cost the EU €180 million between 2004 and 2016, not just in direct damages but also in terms of the broader economic fallout from heightened anxiety and fear among European citizens (Ward, 2018). This psychological toll has economic consequences, including reduced consumer spending and lower tourism revenues, which further strain NATO economies.

The drop in tourism, particularly in countries like France, Belgium, and Germany, following ISIS-linked attacks, has had a tangible impact on GDP. Similar to the situation in the Middle East, where tourism has plummeted due to the constant threat of terrorism, European nations have seen declines in tourism revenues, which are vital to their economies. The loss of tourist dollars has broader implications for employment and business stability in these regions, further demonstrating how ISIS’s activities, though geographically distant, have direct and indirect effects on NATO member states.

Finally, ISIS’s economic activities have had a profound impact on NATO member states, extending beyond the battlefield to influence global oil markets, illegal trade networks, and the psychological and economic stability of European nations. NATO’s counterterrorism strategies must therefore continue to address not only the military aspects of the threat but also the economic dimensions, to effectively safeguard the security and prosperity of its member states.

Conclusion

The rise of ISIS between 2014 and 2019 generated considerable academic interest, particularly concerning its economic structure. Scholars have debated the nature of ISIS’s economy, with some asserting that it was rooted in territorial control and the exploitation of existing infrastructures rather than being a shadow economy. Conversely, other experts, including Cockburn (2015), Filipec (2020), Hosken (2015), and Gerges (2016), argue that ISIS crafted a complex shadow economy. This economy was characterized by illicit activities, such as smuggling, black market dealings, and informal transactions, which allowed ISIS to function independently of the formal economic systems of Iraq and Syria. By maintaining this shadow economy, ISIS was able to sustain its operations autonomously while intricately linking its economic endeavors with its political, military, and ideological goals. The ability to operate outside conventional economic frameworks provided ISIS with the financial independence needed to support its broader strategic objectives.

Given the sophisticated economic mechanisms that ISIS employs to fund its operations, NATO’s focus on economic security is vital. Policymakers must integrate economic counter-terrorism strategies into broader defense frameworks, recognizing that disrupting financial networks is as crucial as military efforts. By weakening the economic foundations that sustain such groups, we can limit their ability to recruit, procure arms, and execute attacks. NATO should expand its capabilities to address economic coercion and consider developing tools similar to the EU’s anti-coercion instrument to respond to hybrid threats. This also entails bolstering intelligence-sharing efforts among member states and beyond, ensuring that emerging financial threats are identified and mitigated swiftly. Strengthening global partnerships and enhancing coordination with financial institutions will be essential in safeguarding against economic vulnerabilities that non-state actors like ISIS exploit, thereby reinforcing the stability and security of NATO member nations and their allies.

Furthermore, future research should delve into the changing financial strategies of terrorist organizations, especially focusing on how these groups modify their operations in response to economic sanctions, military interventions, and shifting global financial landscapes. By examining these adaptations, policymakers can develop more nuanced and effective countermeasures that anticipate and disrupt terrorist financing. Moreover, NATO and other international bodies could gain significant advantages by expanding their investments in intelligence-gathering specifically targeted at tracking illicit financial flows. Strengthening partnerships with international regulatory agencies will be crucial in closing down the channels through which terrorists move and launder money. Additionally, it is essential to investigate the broader economic impacts of terrorism, particularly how prolonged instability in affected regions contributes to long-term financial distress. This understanding will inform the creation of more resilient economic and security policies that not only address immediate threats but also promote sustained economic stability in regions vulnerable to terrorist activities. Finally, fostering a comprehensive approach that integrates these findings into global counterterrorism strategies will be vital in ensuring a proactive stance against the evolving financial tactics of terrorist organizations.

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End Notes

^[i] ‘the hopes of Khilafah became an undeniable reality, one that allowed no room for anyone claiming any excuse to resist the authority of the imam except to be dealt with by the decisive law of Allah.’ (Islamic State, 2014, p. 40).

^[ii] It refers to conflicts or tensions between different religious sects, especially in the context of Islam, such as the Sunni-Shia division (Gerges, 2016).

^[iii] This was equivalent to reserves of 383,000 barrels per day or 61,200 m3 per day (International Monetary Fund, 2010, p. 17).

^[iv] The country also has one of the largest oil reserves in the world, ranking fifth in global reserves with 148.8 billion barrels of proven oil reserves at the end of 2020 (CIA World Factbook, 2020).

^[v] The absence of WMD after the invasion revealed the unfounded nature of the initial accusations, fueling resentment among the Iraqi population and providing fertile ground for fundamentalism, and also generated controversy over the legitimacy of the intervention.

^[vi] The absence of WMD after the invasion revealed the unfounded nature of the initial accusations, fueling resentment among the Iraqi population and providing fertile ground for fundamentalism, and also generated controversy over the legitimacy of the intervention.

^[vii] Its natural gas reserves were gradually declining, which limited its ability to accumulate energy reserves which prompted the United States to seek influence in regions rich in energy resources (Gonzalez, 2019).

^[viii] Bush stated in his 2003 State of the Union address: “our mission is clear, to disarm Iraq of weapons of mass destruction, to end Saddam Hussein’s support for terrorism, and to free the Iraqi people.” (The White House George W. Bush, 2003).

^[ix] “ISIS is a direct outgrowth of al-Qaeda in Iraq that grew out of our invasion. Which is an example of unintended consequences.” (Heather, 2015).

^[x] Originally from Jordan, he gained notoriety after the US invasion of Iraq in 2003. Linked to al-Qaeda since the early 2000s, his role expanded considerably after the US invasion.

^[xi] His words were, “There will be a caliphate that follows the guidance of Prophethood remaining with you for as long as God wills it to remain,” (Hosken, 2015, p. 39).

^[xii] The death of al-Zarqawi destabilized AQI’s structure by creating leadership vacuums, resulting in disorganization and fragmentation within the group, which temporarily weakened its operational capacity.

^[xiii] It is important to note that Osama bin Laden disagreed with al-Zarqawi because of his extremely violent approach to Shiites and innocent civilians.

^[xiv] After the US invasion of Iraq in 2003, al-Baghdadi became radicalized and joined the ranks of Sunni insurgents who opposed the foreign occupation.

^[xv] He was released later that year, considered a low-threat detainee. However, it was a key moment in his radicalization, where he is said to have consolidated his contacts with other militant Islamist fundamentalists.

^[xvi] Extreme violence became one of al-Baghdadi’s hallmarks, with attacks carried out in spectacular fashion to attract attention and spread terror.

^[xvii] This split led IS to proclaim itself an independent group and to distance itself from the influence of al-Qaeda.

^[xviii] The analysis of the situation in Syria is often overshadowed by the influence of Iraq’s history on the development of the armed group. For a more complete understanding of the Syrian conflict, the reader is recommended to delve into the following readings: Gerges (2016) and Hosken (2015).

^[xix] The fundamentalist group unleashed guerrilla and terror tactics to sow chaos, thus relentlessly consolidating its power.

^[xx] This decision caused tensions within the rebel movement with desires to dismantle IS, but also symbolized IS’s desire to expand beyond Iraq’s borders (IEEE Magazine, 2019, p. 50).

Lucas Meunier - Research Intern

Lucas Meunier, Research Intern

Lucas Andrés Meunier is a dynamic Master's student in International Affairs with a diversified background in linguistics, holding a BA in Applied Foreign Languages (AFL). Currently, he is working as a project leader within the “Fédération pour la Diplomatie et les Nations Unies” (FDNU), where he fosters professional development. Lucas is pursuing his Master's degree in International Studies at Pontificia Universidad Javeriana (2023-2024) and previously completed his Bachelor's degree at Université Jean Monnet (2019-2022), specializing in French, English, and Spanish.

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