Behind Hamas’ Guns, a Serious Problem of Dough

The organization’s financial problems have left the Gaza economy in ruins. A desperate war with Israel might be the only way to solve them.

Reuters

In September 2012, the Hamas-controlled government in the Gaza Strip confiscated some 200 new cars and closed several small import agencies that refused to pay a new 25% tax on imported cars.

The special levy came on top of the 50% tax imposed by the Palestinian Authority, which is responsible for cars shipped through the Israeli port of Ashdod into the Gaza Strip via the Kerem Shalom border crossing. The vehicles are also subject to Israeli customs duties at the port of entry, Ashdod. The new Hamas levy brought the total tax rate on new cars in Gaza to between 120% and 130%.

Hamas, which has ruled the Gaza Strip since 2007, collects taxes not only on cars that are imported through official channels, at Kerem Shalom, but also ones smuggled from Egypt through tunnels. A new Hyundai that costs $20,000 in Egypt can go for $45,000 in the Gaza Strip, the Ma’an news agency reported.

“Although it gets money from abroad, Hamas’ economic base is collecting taxes on anything that moves,” says Eyal Ofer, an Israeli expert on the Gazan economy. “The owner of a falafel stand, for example, needs to pay Hamas for putting his cart on the street. Money changers on the street need to give Hamas a percentage. And, in contrast to democratic regimes, where the legislature can defeat taxes the government wants to impose, Gazans have no such defense mechanism.”

The list of new Hamas taxes includes levies on water, on store signs and on public transportation within Gaza City. In some places in the Strip, which has one of the worst water systems in the world, Hamas sells water through local governments as well as taxing it. Until Egypt destroyed many of them over the past year, some 1,200 tunnels under the border provided a major source of revenue to the Hamas government, in the form of the fees it levied on the goods that were smuggled through them from Egypt.

Taxing and spending

The all-encompassing tax regime goes a long way to explaining how Hamas has succeeded in maintaining its authority and providing at least of modicum of government services, while funding the manufacture of rockets targeting Israel and the construction of a sophisticated tunnel network under the Israeli border, designed for carrying out terror attacks and abductions within Israel.

Operation Protective Edge has revealed the extent of the tunnel network, a veritable underground city that not only runs under the borders with Egypt and with Israel but inside the Strip as well, where they can be used in emergencies to shelter the organization’s leaders and fighters.

According to some experts, the current round of fighting with Israel was in large part caused by Hamas’ economic woes. Since 2007, when Israel imposed a blockade on the Gaza Strip after Hamas came to power, exports have stopped and most other business activity has declined. The Gazan economy depends on Israel’s permitting the entry of a limited number of goods, complemented by what had been a brisk smuggling trade under the Egyptian border.

The first tunnels were dug when Israel was still in control of the enclave, for the purpose of smuggling in weapons. After the blockade was imposed, the smuggling tunnels became critical for bringing in goods that could not be imported any other way.

The tunnel closures were not the only financial problem faced by Hamas. Until 2011 Iran was Hamas’ “sugar daddy,” with an estimated 80% of the aid from Tehran going directly to the military wing of Hamas. Syria, another source of funds, cut off Hamas after the organization backed the Sunni forces fighting the Assad regime in that country’s civil war, as did Iran for the same reason. Qatar, the wealthiest country in the world in terms of per-capita gross domestic product, has taken up some of the slack, as has Turkey, which has spent $350 million on projects in Gaza. In contrast to the money from Qatar, it is clear that the Turkish funds have actually reached their intended recipients.

Not surprisingly, Hamas’ cease-fire demands include many economic concessions, including the construction of a seaport and an airport, the removal of the Israeli blockade and the reopening of the border crossings with Israel and with Egypt. To Hamas, they are a prerequisite for reviving Gaza’s economy and solidifying its own rule; to Israel and its allies, unfettered trade would be a license for Hamas to import weapons and export terrorism.

Operation Protective Edge may have severely damaged Hamas and shattered the Gaza Strip, but in the long run it could extract the organization from the economic and political dead end it has come up against after seven years in power. The end of the war will almost certainly bring in international aid money to rebuild the territory, which together with any Israeli concessions over the transfer of goods could only improve the enclave’s desperate economic situation.

In its 27-year history, Hamas has show as much expertise in finance as in fighting. In its early years, before it was designated a terrorist organization and banned from receiving funds, it raised most of its funding openly, from wealthy Muslims in Europe and the United States. That route has been closed, but money continues to enter Gaza in cash-filled suitcases, through the tunnels from Egypt. Hamas also engages in money laundering, with local businesses buying raw materials and other products to import legally through Israeli border crossings.

Everything moved through the tunnels under the border with Egypt: not only guns, rockets and other weapons but also food, medicine, cigarettes, livestock, cars and drugs. Some tunnels had rail tracks for conveying goods speedily, while others had pipes for delivering fuel. With Israel banning building materials from entering Gaza — concerned, as it turns out correctly, they would be used for building tunnels — lot of cement and other building materials also passed through the tunnels.

In the first six months of 2013, 310,000 tons of building materials entered Gaza through the tunnels every month, sources told TheMarker. This included 230,000 tons of gravel, 68,000 tons of cement and 11,000 tons of steel. The smugglers paid Hamas 20 shekels ($5.83) for each ton of cement, 10 shekels for every ton of gravel and 50 shekels for every ton of steel. The charges were based on how easy it was to move the goods as well as their value. These material alone netted Hamas up to 4.2 million shekels a month.

All told, Hamas is estimated to have collected some 50 million shekels a month from the tunnels — 600 million shekels a year, revenue it is sorely missing today. Egypt’s clampdown on the tunnels left Hamas with a $700 million deficit.

Fuel imports 
as profit center

One of the most profitable items for Hamas was fuel, because Egyptian energy prices are subsidized. Egyptian gasoline cost about 1.6 shekels a liter, compared with 7.5 shekels a liter in Israel. Hamas representatives would buy fuel on the Egyptian side of the border and smuggle it into the Gaza Strip, where people were forced to pay 3 shekels a liter just in taxes to Hamas. Still, it was cheap compared to the price in Israel. A small group of people with connections in Hamas got rich from the tunnels, enough to drive up real estate prices in the territory.

But Hamas’ financial needs outstripped its resources. When it came to power in 2007, Hamas’ annual budget was just $150 million; now it is estimated at around $900 million. The number of salaried Hamas members, both military and civilian, increased nine times, to 45,000, giving the organization a $500-million annual payroll.

The smuggling may have provide Hamas with tax revenues, but the cronyism and corruption it entailed has hurt the Gazan economy. The tunnels created a nouveau riche class in Gaza, led by the Hamas leadership.

Although Hamas has its own tunnels, most are privately owned. The private tunnels were built by people with connections to Hamas, digging from their own house or yard, or from a nearby mosque. Sometimes people would invest in a tunnel, putting up a few thousand dollars of their savings and getting a monthly return from profits. Sometimes there were Ponzi schemes involved, where someone took the money and promised to build the tunnel and then fled with the money.

“Hamas has taken control of the official and unofficial sides of imports. It simply became a source of income for the elites and those connected to Hamas,” says Yoav Stern, the former director of the business and economic department at the Peres Center for Peace. “It has seriously harmed the people who in the past traded regularly with Israel. That is how a sort of economic monopoly under the control of Hamas was created.”

It is difficult to estimate the personal wealth of Hamas’ leaders, but it is clear they enjoy a very high standard of living, especially the diaspora leadership living in Qatar. The head of the Hamas political bureau, Khaled Meshal, lives in a villa in Doha, the capital, paid for by the organization. Mashal travels in private planes and stays in luxury hotels when abroad, habits which earned him criticism last week on Egyptian television. The Hamas leadership living in Gaza lives in homes that are much more luxurious than the average Gazan, though it is hard to say they have all become millionaires.

The movement won over the Palestinian public a decade ago, winning the only free elections ever in Palestinian history, by being the antithesis of the corruption prevalent in the rival Fatah movement. It was viewed as a movement that takes care of the poor through its broad charitable works. Now, it is seen having distanced itself from the public that originally supported it.

Organizational corruption

“The corruption of Hamas is organizational corruption,” says Shlomi Eldar, the former correspondent for Channel 10 in Gaza and the author of a book on Hamas. Eldar says that while he cannot say he has evidence of senior Hamas leaders stealing money, they have made the Palestinians’ economic condition worse under their rule.

“They took Gaza’s money to build underground Gaza exclusively for the needs their organization — tunnels for attacks and to provide security for movement members. If they had invested one-10th of one percent of what they spent on the tunnels on the welfare of the population instead, then at least the problem of sewage in Gaza would have been solved,” asserts Eldar.

Public infrastructure is one of Gaza’s most fundamental problems. The water system is based to a large extent on some 4,000 wells. There is already a water shortage and the water that there is, from some 4,000 wells, is of poor quality. Unless an entirely new infrastructure is developed, the Gaza Strip will faces a severe water shortage within three years, warns a senior Israel Defense Forces officer. A large desalinization plant would help, too. “Israel supported the establishment of such a facility, but it seems Hamas was busy in recent years with other things, strengthening its rule or building tunnels,” says the officer, who spoke on condition of anonymity.

Electricity is another serious problem. Since Israel bombed the local power station in 2006 after the abduction of the soldier Gilad Shalit, the vast majority of Gaza’s population has electricity only for half the day. The 125 megawatts of power that come from Israel along with the 40 megawatts produced in Gaza are inadequate to meet the needs of the population. But in the areas where Hamas command centers are located there is electricity 24 hours a day, says the officer, as have Hamas rocket factories.