The Business of Insurgency

The Business of Insurgency

Mini Teaser: In Iraq, crime does pay. The insurgency is about more than just politics or ethnicity.

by Author(s): Robert E. Looney

Media attention on the insurgency in Iraq has tended to focus on dramatic incidents or horrific acts of violence. At the same time, policymakers in the United States and other coalition countries have often viewed the insurgency in largely political terms. Yet, particularly worrisome is the convergence of large segments of the Iraqi insurgency with elements of organized crime. Unfortunately, improved anti-terrorism effectiveness has resulted in increased criminal activity by several significant groups within the insurgency.

So while the political and military aspects of the insurgency have received most of the world's attention, the insurgency's subtle shift toward increased reliance on criminal activity has implications that are just as important for the Iraqi economy. Increased criminal activity is effectively stifling attempts to expand the formal sector. This, in turn, presents a major challenge to the newly elected government: how to stop and reverse the insurgent-led deterioration of the economy and the vicious cycle it has created. It is safe to say that a successful attack on criminal activity in Iraq is as important in determining the country's future as the outcome of the current anti-insurgency campaign. One might even venture to say they are largely one and the same.

Organized Crime, Iraqi-Style

Insidious criminal activity is not new to Iraq. In fact, as recent revelations coming out of the United Nations Oil for Food scandal show, criminal activity has long been pervasive in all areas of Iraqi society, from the highest levels of official power to the lowly smuggler trying to eke out an existence during the period of sanctions in the 1990s. Under Saddam, Iraq became what Iraqi sociologist Faleh Abdel Jabar calls the family-party state, dominated by close family members and tribal associates.

In this environment, the Ba'athi regime became more an organized crime syndicate than a political organization. Those who ran the family-party state, having lost their political and economic prerogatives after the war, organized the initial uprising through exploiting the extensive infrastructure used for sanctions-busting under the old regime.

In time, looters, ex-convicts and nihilistic, jobless youths began coalescing into gangs, realizing that banding together gave them a collective power to mug, rob and otherwise get a Darwinian foothold in the local economy of a leaderless land. And at the same time, the tribes that dominate much of society outside Baghdad include clans that specialize in thievery and are trafficking in much of the artillery and heavier weapons left behind by the collapsed Iraqi army. Ironically, the sheer profitability of criminal activity in Iraq may be negating the effectiveness of standard political solutions to the insurgency, such as increasing Sunni representation in the government or neutralizing foreign fighters.

With segments of the insurgency's financial needs matching or in some cases overriding its political motivations, an increasing amount of time and effort of these groups is devoted to creating "in house" criminal capabilities. This shift in insurgent activity demands greater anti-crime capabilities on the part of the Iraqi government. Unfortunately, the Iraqi police infrastructure suffered greatly from damage and looting in the aftermath of the war. Although significant progress was made by the Coalition Provisional Authority (CPA) in rebuilding and reopening police stations, as well as in providing basic training and a limited amount of equipment, much more remains to be done, particularly in developing specialized capabilities to tackle organized crime and drug trafficking.

Complicating matters is the near impossibility of establishing effective anti-crime programs in an environment of rampant corruption. The prestigious Transparency International Corporation ranks Iraq as the most corrupt country in the Middle East. The country's current ranking is 129th out of 145 nations worldwide, with the country's corruption actually worsening between 2003 and 2004.

Instability, high unemployment and corruption have created a volatile mix that is ideal for organized crime. Police and border security capabilities are unlikely to be focused intensively on criminal activity while the insurgency continues to disrupt police activities and divert resources. Even more ominous are signs of the development of a kleptocratic state in Iraq where ruling elites' principal motive for entering the government is to rob the state of resources. In this environment, Western intelligence agencies are becoming increasingly worried about the systematic strengthening of ties between terrorists and organized crime.

The profit motive appears to be the driving force for many of the groups currently operating in the country. Resistance and organized crime groups such as the Ba'athi underground, local resistance, jihadists, Al-Qaeda, Kurdish factions and radical Shi'a are competing for power in Iraq through looting and attacks on pipelines and petroleum plants. In turn, the economic components of their criminal acts, undertaken largely to fund their terrorist activities (many of the young foot soldiers of the insurgency are paid anywhere from $100 to $2,000 for various attacks), include black market arbitrage, smuggling and kidnappings for ransom.

The Gasoline Scam

Despite the CPA's attempts at free market reforms, a substantial part of market transactions are still carried out at administratively determined and heavily distorted prices. Of particular interest in the current context is the price control system covering all major oil products such as gasoline, diesel fuel, kerosene, heating oil and cooking gas (propane). Paradoxically for a country so rich in oil, toward the end of 2004 it became incredibly difficult for average Iraqis to buy the fuels they needed. Despite rationing, queues at gasoline stations were often days long. Diesel for generators and kerosene for heaters were in short supply, leaving many parts of Baghdad in complete darkness.

Conspiracy theories abound: Many believe the shortages are a form of punishment inflicted by the government. Another popular theory is that the shortages stem from coalition forces' plundering of Iraq's oil reserves. In actuality, most of the problem can be found by simply examining the country's petroleum distribution network. Carefully targeted insurgent attacks on pipelines and truck convoys have crippled Iraq's oil infrastructure and have largely isolated the capital. Oil wells have been shut in while pipelines are repaired; oil derivatives sit in storage tanks in Umm Qasr while truckers spurn the long, dangerous drive to Baghdad.

There is plenty of blame to go around. Oil Minister Thamir Al-Ghadhban summed up the present situation by noting: "We do not have a fuel crisis as much as we have a crisis of honesty." In a speech to Iraq's interim parliament, Deputy Prime Minister Barham Salih blamed "sabotage" of the country's main pipelines and "administrative corruption." An official from Iraq's state oil company said insurgents had managed to hit pipelines bringing fuel to Baghdad's main refinery as well as the distribution grid for refined products. However, an inspector for the capital's oil distribution company said the crisis was "manufactured" rather than real--storage depots were full, but oil ministry officials and station owners were collaborating in selling wholesale to smugglers.

An economic explanation for much of the crisis starts with the fact that the insurgent attacks have created a possibility whereby unscrupulous Iraqi officials and oil traders, together with organized criminals, have the opportunity to make huge profits buying gasoline at the official price and then selling it on the black market. According to an Oil Ministry report leaked to the Baghdad paper Al-Furat, a gas station owner selling a tanker-load of gasoline at the official price could expect to make about $340 in profit, while selling the same gas on the black market would net more than $4,800.

The government has already begun to clamp down on those officials and gas station owners who are allowing gasoline to leak into the black market. The distribution director in Al-Amarah (south of Baghdad) has been arrested for selling most of the governorate's gasoline on the black market, three managing directors in the Oil Ministry have been suspended, and several government-owned gas stations have been closed pending investigation.

However, the insurgents continue to thrive, largely outside the government's reach. They control many of the distribution routes in the country. Leveraging this advantage, they have been able to profit from the differential between the official subsidized price and the international market price for gasoline by smuggling the fuel out of the country. This not only allows insurgents to raise huge amounts of money to fund their operations but also helps them to inflame popular opposition to the occupation. To add insult to injury, the insurgents often simply sell, through various front organizations, the gasoline back to the government to begin another cycle.

While no hard data exists on the profits earned by the insurgency through black market arbitrage, a safe guess is that it is likely to be in the high millions of dollars. The cost to the government stemming from providing subsidized gasoline amounts to $5 billion in lost revenues, or about $200 per Iraqi. The effect on the country's stability is two-pronged. With rising reconstruction and security costs, the government's ability to fight the insurgency declines, at the same time effectively subsidizing insurgent activities. Outright theft and smuggling compound the losses to the country stemming from black market arbitrage. CPA officials estimated in early 2004 that smugglers were able to steal up to $200,000 of oil a day.

Essay Types: Essay