Obama, Putin Agree on One Thing: Bombing Islamic State’s Oil

(Bloomberg) -- When Vladimir Putin met with Barack Obama in Turkey on Sunday to discuss the terrorist attacks in Paris, he brought along some photos.

The satellite images showed rows of trucks laden with Islamic State oil stretching into the Syrian horizon, a person familiar with matter said. Putin’s point was that U.S. bombing alone can’t eliminate the vast smuggling network that provides much of the extremist group’s funding.

Obama was already well into a stepped-up campaign against the group’s oil resources and that night U.S. aircraft destroyed 116 tankers hauling crude from seized fields. The raid, the largest of its kind since U.S. military action in Syria started last year, happened to coincide with a new phase of Russia’s assault on the same nexus. While Obama has publicly refused Putin’s offer to coordinate, their actions have started to align since the downing of a Russian airliner in Egypt and the carnage in France, indicating movement toward a more robust alliance against terrorism.

“After the events in Paris and over the skies of Sinai, the EU and the U.S. are showing greater willingness to support Russia’s idea of forming a common front to fight Islamic State,” Russian Deputy Foreign Minister Sergei Ryabkov said on Thursday.

In Putin’s meeting with Obama, the Russian president “stressed the need” to step up the fight against Islamic State’s oil business, said his spokesman, Dmitry Peskov, without providing more details.

A united front would be bad news not just for the jihadists, but for everyone they do business with. The U.S. and Russia are both widening their target lists to include the middlemen who help the group make money off illicit oil sales.

While the U.S. has struck refineries and other oil targets held by Islamic State in Syria and Iraq more than 260 times since last summer, only now is it starting to hit links in the chain operated mainly by civilians, according to U.K. research group Chatham House and Washington-based Foreign Reports Inc.

“This is a major escalation,” Foreign Reports Vice President Matthew Reed said. “The big shift is that middlemen are now in the cross hairs. Those are people who are in it for the money, they aren’t true believers and could be scared away from the trade.”

'Galvanizing' Attacks

The U.S. is hoping the Paris bloodbath “will galvanize others to do even more” in the effort against terrorism, Defense Secretary Ash Carter said on Tuesday, according to the Pentagon.

Putin is doing just that. This week, Russian warplanes, backed by increased satellite capabilities, started to “free hunt” vehicles illegally transporting fuel in Islamic State areas. They destroyed around 500 trucks over several days, the Defense Ministry said in a statement, without saying exactly when the attacks occurred.

Russian Tu-22 long-range bombers carried out strikes on Thursday against oil infrastructure controlled by Islamic State in the provinces of Raqqa and Deir ez-Zor. The latter produces around two-thirds of the group’s oil revenue, according to the Pentagon. The planes destroyed three large refining complexes and a crude transport facility, Russia’s Defense Ministry said on its website.

While the ministry in Moscow declined to comment on whether the U.S. and Russia are cooperating on the ground, a Russian official said on condition of anonymity that some coordination has started at an operational level.

'Fundamental Shift'

The Pentagon on Wednesday said the U.S. military isn’t coordinating with the Russians in Syria and isn’t planning to, in part because some of its airstrikes have hit groups supported by the U.S. rather than Islamic State. On Thursday, Obama said Putin will have to make a “fundamental shift” in his allegiance to Syrian President Bashar al-Assad for any kind of joint action between the U.S. and Russia to work.

France, too, is preparing to escalate its assault on Islamic State, which has been concentrated on the group’s Syrian stronghold of Raqqa.

French President Francois Hollande said Wednesday that the aircraft carrier Charles de Gaulle had set off from the Mediterranean port of Toulon, boosting the number of jets available for strikes to 48 from 12. Hollande is due to meet his U.S. and Russian counterparts in Washington and Moscow next week to discuss coordinating actions.

The U.S. may have delayed attacking fuel convoys in the past because its initial priority was to destroy targets directly controlled by Islamic State and more central to the production process, according to Valerie Marcel, an associate fellow at Chatham House. It hit depots and makeshift refineries first, which forced the group to sell crude “directly at the wellhead” and ended most of its sales into Turkey’s lucrative black market, she said.

Targeting trucks is a “new element” of the war against the extremists and “a good strategy,” Marcel said. “Last year, they controlled the whole supply chain up to the border, but now the situation has changed dramatically.”

Terrorist Funding

What’s less clear is the impact the new offensive is having on the terrorist group’s ability to raise funds, which is largely a guessing game amid a civil war that has claimed a quarter-million lives and sparked Europe’s worst refugee crisis since World War II.

Islamic State could be earning $500 million a year from its oil trade, according to officials at the U.S. Department of the Treasury - five times as much as U.S. intelligence officials estimated last year.

Its oil facilities withstood last year’s strikes better than thought, returning to action after just a couple of days, U.S. Army Colonel Steve Warren said on Nov. 13. Still, the picture is cloudy: Chatham House estimates the group is pumping 40,000 barrels and making $300,000 a day, while the Brookings Doha Center argues production is much lower, covering just a fraction of the group’s own needs rather than providing extra income.

Underscoring the difficulty in ending the trade, the crude the group sells is often loaded onto trucks and even donkeys and smuggled into Iraq and Kurdistan, according to a report by Christina Schori Liang, a fellow at the Geneva Centre for Security Policy. 

Beyond oil, the self-declared caliphate is believed by U.S. officials to have assets including $500 million to $1 billion that it seized from Iraqi bank branches last year, untold “hundreds of millions” of dollars that U.S. officials say are extorted and taxed out of populations under the group’s control, and tens of millions of dollars more earned from looted antiquities and ransoms paid to free kidnap victims.

'Level Everything'

The U.S. and its allies continue to face a difficult balancing act, attempting to pinpoint airstrikes that will cripple refineries and other facilities for a year or more but not wipe them out because that would remove a critical resource for Syria’s postwar future.

“The war will end,” State Department deputy spokesman Mark Toner said. “We don’t want to completely and utterly destroy these facilities to where they’re irreparable.”

Russia’s Islamic State position is much less circumspect.

The new campaign targets the interests of all who were benefiting from Islamic State’s oil trade, including Turkey, Gulf states and even Assad’s own officials, Frants Klintsevich, deputy head of the Defense Committee in Russia’s upper house of parliament, said in an interview on Thursday.

“We’ll level everything there,” Klintsevich said. “We’ll get them no matter where they hide around the globe,” he said about terrorists.

--With assistance from Cam Simpson, Nicole Gaouette and Larry Liebert.

To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.net; Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net; Henry Meyer in Moscow at hmeyer4@bloomberg.net To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net Brad Cook, Torrey Clark