Money, Iraq, ISIS and Power in the Middle East

How much hard currency is held in the Iraq Central Bank?  This is a very important question because the news is currently filled with stories about the dramatic takeover of large amounts of Iraqi territory by the Islamic State of Iraq and al-Sham, called ISIS.  There are pictures of mass executions and of the Iraqi army abandoning cities.  ISIS only came into existence three or four years ago.  Standard US policy is to fight extremist groups by a two-pronged approach.  One is to physically fight the groups (either directly with troops or indirectly by arming opponents).  The second approach is to starve the groups financially.   Knowing the amount of hard currency is important because if the Iraq Central bank has a lot of hard currency and ISIS can take it, then the approach of starving the group financially will not work and the only option is a military one.

When ISIS stormed the Iraqi city of Mosul on June 10, 2014 they were able to break into the branch office of the Iraqi Central Bank.  The bank’s head office is located in Baghdad, but it has four branches in Basrah, Mosul, Sulaimaniyah and Erbil.  News reports state that they were able to take “500 billion Iraqi dinars” which is worth about U.S. $425 million.   In addition ISIS is reported to have taken millions more from other banks across Mosul, as well as a “large quantity of gold bullion.”

I believe that money is the key to power in the Middle East.  It is impossible to wage war without having enough cash to feed, pay and arm soldiers.  Moreover, victory is easy when you can afford to bribe officials or to pay off potential rivals.  After ISIS broke into the branch office of the central bank, the International Business Times called ISIS the “World’s Richest Terror Force.”

However,  this is not true.  ISIS stole Iraqi dinars.  The dinar is a fiat currency which only has value if individuals and companies accept the money.  If Iraq falls, the dinar will become worthless.

Another way the 500 billion Iraqi dinars could become worthless is if Iraq replaces its currency.  Many countries have eliminated one currency and replaced it with another.  The most famous example is the Euro, which replaced the French Franc, German Mark, Italian Lira and many other European currencies, among the long list of replaced currencies.  Iraq went through this process in 2004 when money printed by Saddam Hussein was replaced with a new currency.  Replacing the currency would deprive ISIS of a financial lifeline.

A second (also costly) way would be to let the dinar float against other currencies.  The Central Bank, in an attempt to prevent inflation, has fixed the exchange rate at 1,166 Iraqi Dinars to one US dollar.  Letting the rate float would make the dinar less valuable to ISIS but would also boost the prices regular Iraqis pay for imported items.

My bigger concern is not the amount of money ISIS stole in Mosul but the amount of foreign cash held by Iraq’s Central Bank in Baghdad.  Dinars can be converted into worthless paper as I pointed out above.  However, breaking into the vaults in Baghdad would enrich ISIS with billions in Euros, Yen and US dollars.   Below is a graph that shows how much hard currency was sitting in the Central Bank’s vaults in Baghdad over the last two years.  ISIS is smart and sophisticated.  It took me only a half hour to determine these figures, and I don’t read Arabic so my guess is that ISIS knows these values too.

If ISIS attacks Baghdad and is able to hold onto the city just long enough to loot only the Central Bank, it could reap about U.S. $6.3 billion in hard currency  (Figures as of May 1, 2014).  While it is possible to introduce a new Iraqi currency to help defeat ISIS, it is not conceivable that Europe, the USA and Japan would be able or willing to replace their paper currencies.

Preventing these billions from falling into ISIS’s hands is imperative.  If they continue to seize territory in Iraq, this must become an international priority.  Destroying the vault cash or moving it to safety overseas is key to preventing this extremist group from gaining even more power than they already have.  $6.3 billion is a sum that alters power in the Middle East.  Protecting or eliminating this stockpile is one of the most important objectives for the USA if it wants to avoid putting “boots on the ground” again.

(Update:  On Sept. 8, 2014 the graph was extended to include the latest Iraqi data, which tracks reserves through the end of July.  The amount of foreign vault cash available for stealing at the end of July 2014 was $4.7 billion.  ISIS also has been renamed the Islamic State and is variously referred to as IS, ISIL or ISIS.)