Vast and global “black markets”—what national-security practitioners call shadow economies—are no longer peripheral nuisances but core strategic terrain. Trade executed outside regulatory, taxation, and enforcement frameworks prolongs wars, defangs sanctions, frays alliances, and helps rogue governments and groups survive and thrive. These flows have long been treated as problems for law enforcement, but military and defense policymakers and planners must increase their efforts to account for and stem them.
Shadow trade enables regimes and insurgent groups to survive extreme pressure. Iran’s illicit oil exports help sustain the regime amid punishing sanctions. North Korea endures through complex illicit portfolios: counterfeit currency, arms smuggling, cyber theft, and forced labor. Russia earns billions by evading sanctions on oil, gas, and gold exports. Oil-smuggling states create front companies and “dark fleets” of tankers—Russia alone has more than 600—that swap oil at sea to evade sanctions. Shadow insurers and financiers based in Russia, India, other Asian countries, and the Middle East have replaced Western underwriters, generating billions of dollars for the Kremlin’s war machine.
Shadow economies blunt the efforts of countries and international organizations to coerce behavior, both in the near and long term. In the near term, revenue lost to sanctions can be made up by illicit trade. In the longer term, rogue states create new systems of patronage to replace formal systems of trade and finance—for example, Russian elites cut off from Western financial systems learn to profit from smuggling and offshore schemes. Shifting influence from formal institutions grants states the operational deniability and adaptability needed to evade economic warfare. There are risks—illicit actors may be empowered to pursue divergent interests—but the benefits are usually worth the costs. And all this erodes deterrence, for why should a regime fear sanctions they can evade?
Shadow economies also strain alliance cohesion. Certain countries—“permissive jurisdictions”—are willing to turn a blind eye or even lend a helping hand to sanctions circumventors. Among them are India, Turkey, UAE, Iran, certain African states, and flag-of-convenience registries.
And shadow economies lengthen wars. Russia’s illicit exports have helped the country defy predictions that it could not sustain immense expenditures on its war on Ukraine. Opium revenues helped the Taliban prevail in Afghanistan.
In the wake of Russia’s 2022 invasion of Ukraine, the shadow economy has expanded and evolved. Moscow has expanded its insurance substitutes in Asia and the Middle East. Iran has intensified illicit oil exports through shadow shipping companies. China’s Belt and Road Initiative obscures illicit finance connected to strategic resource competition. African gold increasingly flows through Russia’s Wagner Group, funding Kremlin-backed mercenary campaigns while undermining global financial integrity. Southeast Asia’s narcotics and cyber-crime hubs have expanded along with geopolitical competition in the Indo-Pacific.
The intersection of shadow economies and cybercrime has intensified as rogue states and criminal groups engage in ransomware, theft, and fraud against private and public institutions, laundering proceeds through increasingly sophisticated cryptocurrency mixers and exchanges in permissive jurisdictions. These cyber-enabled revenues exacerbate the difficulty in tracing funds and enforcing sanctions.
This all has implications for strategic stability and economic statecraft. Sanctions can no longer be considered silver bullets. Policymakers must anticipate leakage through illicit markets. Illicit revenue streams lengthen conflicts, necessitating long-term strategic preparedness for protracted war.
Here are some steps to take:
- Apply our resources and expertise in mapping terrorist-finance networks to broader shadow economies. Use or create intelligence-fusion centers that can identify actors, flows, and chokepoints using data from financial, maritime, cyber, and law enforcement sources.
- Include intelligence and assumptions about shadow economies in training, modeling, wargaming, forecasting, and planning.
- Strengthen U.S. partners’ ability to enforce trade laws and regulations. Because sanctions evaders seek pathways through countries with weaker enforcement, the United States must strengthen customs, financial oversight, and regulatory capacities in frontline states through training, resource sharing, joint operations, and interoperable sanctions enforcement frameworks.
- Make it harder for banks, insurers, shipping companies, and logistics firms to unwittingly enable shadow trade by providing incentives for them to use secure information-sharing platforms, create industry blacklists of shell firms, and increase due-diligence standards.
- More precisely target sanctions. Instead of driving large swaths of economic activity underground, take aim at known channels of illicit activity: maritime insurance providers, logistical corridors, key financial rails, and so on.
- Dissuade “permissive jurisdiction” governments from enabling shadow trade through diplomatic engagement, economic incentives, and multilateral pressure.
- Fight cyber-enabled illicit finance by integrating cybersecurity and financial intelligence efforts, regulating cryptocurrency, improving cross-border cooperation, and hardening critical infrastructure.
Maj. Benjamin Backsmeier is an infantry officer assigned to the INDOPACOM Army Reserve Element. His research focuses on how illicit financial networks interact with national-security interests. The views expressed are those of the author and do not reflect the official position of the Department of the Army or Department of Defense.
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