Politics

Wars require money, in some form. Combatants have to buy weapons, ammunition, food, vehicles, fuel, spare parts, lay down bribes for intelligence and suborning various people, and medical supplies, along with just simple tools…and that’s before we talk about whether they actually pay their fightersd.

In the shadowy realm of contemporary warfare, the most destructive conflicts are increasingly those where the combatants get their war chests filled by distant, foreign capitals. From Ukraine’s defense against Russian aggression to Yemen’s devastating civil war, proxy conflicts have become the preferred method of great power competition — offering what military strategists euphemistically call “quick, relatively cheap and low-risk options for the continuation of policy aims“.

Proxy warfare has evolved from Cold War-era confrontations into a sophisticated financial enterprise that operates through complex networks of state sponsors, shell companies, and illicit economic activities. As Foreign Policy columnist Emma Ashford observed, proxy wars have become a preferred method of great power competition, allowing major powers to exert influence while maintaining plausible deniability. Understanding the financial mechanisms that sustain these conflicts is crucial for comprehending modern geopolitical dynamics and developing effective countermeasures.

Yet behind every proxy war lies a complex economic ecosystem that determines not just who fights, but how long they can sustain the violence. Understanding these financial networks reveals uncomfortable truths about modern warfare: conflicts are increasingly about economic endurance rather than battlefield tactics, and the nations writing the checks often have more control over outcomes than the soldiers pulling triggers.

The State Funding Model: Direct Government Support

The most straightforward financing mechanism involves direct state funding of proxy forces. President Vladimir Putin’s extraordinary admission in June 2023 revealed that “the financing of the entire Wagner group was fully ensured by the State,” with the Russian Defense Ministry pouring nearly $1 billion into Wagner operations from May 2022 to May 2023. This disclosure shattered decades of Kremlin denials and provided unprecedented insight into how major powers fund their proxy operations.

No nation has perfected the economics of proxy warfare quite like Iran. Tehran’s “Axis of Resistance” represents perhaps history’s most sophisticated proxy financing operation, with the Islamic Revolutionary Guard Corps-Quds Force managing an estimated budget exceeding $1 billion annually for terrorist financing. This staggering sum supports between 140,000 and 185,000 proxy fighters across Afghanistan, Gaza, Lebanon, Pakistan, Syria, and Yemen.

Iran represents perhaps the most systematic state-sponsored proxy financing network. The U.S. State Department estimated that Iran spent more than $16 billion supporting the Assad regime and its proxies between 2012 and 2020. In 2020 alone, Iran funneled more than $700 million to Hezbollah, while providing more than $100 million annually to Hamas and Palestinian Islamic Jihad. These massive transfers occur through Iran’s Islamic Revolutionary Guard Corps-Quds Force (IRGC-QF), which serves as Tehran’s primary mechanism for financing proxy operations across the Middle East.

The scale of Iran’s investment becomes clear when examining individual recipients. Hezbollah alone receives more than $700 million annually from Tehran, a sum that dwarfs the entire defense budgets of many small nations. As Hezbollah Secretary General Hassan Nasrallah candidly admitted in 2016: “Hezbollah’s budget, everything it eats and drinks, its weapons and rockets, comes from the Islamic Republic of Iran.”

Iran’s proxy economics operate on multiple levels simultaneously. Beyond direct cash transfers, Tehran provides weapons manufacturing capabilities, enabling proxies to achieve self-sufficiency while maintaining plausible deniability. In Syria, Iran helped organize, train, and fund over 100,000 Shia fighters, demonstrating how proxy economics can scale to conventional warfare levels when strategic interests demand it.

The sophistication of Iran’s financial network became apparent in 2016 when Hezbollah leader Hassan Nasrallah publicly announced that “all of his organization’s funding comes directly from Iran,” emphasizing that “the budget of Hizbullah, its salaries, its expenses, its food, its drink, its weapons, and its missiles come from the Islamic Republic of Iran“. This funding bypasses traditional banking systems, with Nasrallah confirming that transfers occur directly, “not through banks and other financial institutions”.

The Iranian model reveals a crucial economic principle: proxy wars succeed when sponsors can provide “stable and ample funding” while maintaining political control over their assets. Tehran achieves this through what former CIA analyst Norman Roule describes as controlling “their weaponry, their funding and significant political relationships with their key leaders”.

Economic Integration and Development Funding

China has pioneered a more sophisticated approach through its Belt and Road Initiative (BRI), which launched in 2013 with the Silk Road Fund’s $40 billion initial capital. While ostensibly focused on infrastructure development, analysts worry that the BRI could be a Trojan horse for China-led regional development and military expansion. The program’s dual-use potential becomes apparent through [debt-trap diplomacy, where China allegedly uses unsustainable loans to gain leverage over debtor governments.

A 2021 study analyzed over one hundred debt financing contracts China signed with foreign governments and found that the contracts often contain clauses that restrict restructuring with the Paris Club, providing Beijing with significant leverage over partner nations. This economic influence can be converted into military access, as demonstrated by China’s naval base in Djibouti, which many observers see as the first of many potential military expansions.

The Technology Transfer Economy

Modern proxy warfare increasingly revolves around technology transfer rather than simple arms sales. The Iran-North Korea weapons pipeline exemplifies this evolution, with both nations sharing ballistic missile technology, submarine designs, and nuclear expertise. Iran’s Shahab-3 missile closely resembles North Korea’s Hawasong-14, while satellite imagery suggests Iranian technical expertise contributed to North Korean missile silo construction.

This technological cooperation creates self-sustaining proxy economies. Rather than remaining dependent on foreign suppliers, proxies gradually develop indigenous capabilities. Iran has mastered this approach, transferring not just weapons but “the means of production and modification to enable independent manufacturing” to its proxy network.

The economic advantages are compelling. Technology transfer builds redundancy of supply, reduces shipping risks, enhances deniability, and creates local employment that strengthens proxy loyalty. For sponsors, it represents a long-term investment strategy that pays dividends far beyond any single conflict.

The Ukrainian Counter-Model: Coalition Economics

Ukraine’s defense against Russian invasion illustrates a different proxy economic model—multilateral coalition funding. Rather than relying on a single sponsor, Ukraine has assembled a diverse funding coalition including the United States, European Union, individual NATO members, and unexpected participants like Japan and South Korea.

This approach offers both advantages and vulnerabilities. Coalition funding can provide massive resource flows — U.S. assistance alone has exceeded $350 billion according to various estimates. However, it also creates dependency on multiple political systems with different priorities and election cycles. As U.S. support becomes uncertain under changing administrations, the sustainability of coalition-funded proxy warfare faces its ultimate test.

Japan and South Korea’s involvement demonstrates how proxy economics extend beyond traditional security partnerships. Both nations provide substantial non-lethal aid while “replenishing U.S. weapons stocks, supplying the United States with artillery shells and thereby freeing up Washington’s ability to send shells to Ukraine.” This creates layered economic relationships where allies subsidize great power proxy warfare indirectly.

The Russian Adaptation: Sanctions and Substitution

Russia’s proxy economic strategy has evolved dramatically under international sanctions pressure. Traditional funding mechanisms disrupted, Moscow has increasingly relied on partnerships with China, Iran, and North Korea to sustain both its direct war effort and proxy relationships. China provides crucial economic support that enables Russia to withstand Western sanctions, while Iran supplies drones and North Korea provides ammunition and even troops.

This adaptation reveals how proxy economics adjust to pressure. When conventional funding channels close, sponsors develop alternative networks. Russia’s use of Wagner Group mercenaries represented an attempt to privatize proxy relationships, creating plausible deniability while maintaining operational control. The Wagner model failed primarily due to political rather than economic factors, but its brief success demonstrated the potential for corporate proxy structures.

Escalation Economics

Perhaps most concerning is how proxy war economics influence conflict escalation. Traditional deterrence theory assumes rational actors will avoid escalation due to increasing costs. However, proxy warfare inverts this logic. As former CIA analyst Norman Roule observes, Iran operates as “an arsonist that then subcontracts out to other arsonists”, empowering proxies with resources while maintaining strategic distance.

This creates moral hazard problems where proxies may escalate beyond their sponsor’s intentions, confident that economic support will continue. The October 7, 2023 Hamas attack on Israel exemplifies this dynamic—Iran provided the economic foundation enabling Hamas capability, but the timing and scale caught Tehran off-guard, demonstrating how proxy economics can enable conflicts that spiral beyond original parameters.

Resource Extraction and Illicit Trade

Proxy groups increasingly finance their operations through control of natural resources and illicit trade networks. The U.S. Treasury Department revealed in 2023 that Wagner Group entities in the Central African Republic, United Arab Emirates, and Russia engaged in illicit gold dealings to fund Wagner operations. These operations involve sophisticated shell company networks, with Wagner using companies like Midas and Diamville to convert CAR-origin gold into U.S. dollars.

The U.S. Treasury Department exposed a convoluted Iranian illicit financing scheme in 2018 where Hezbollah officials, working with Iranian operatives and Russian companies, facilitated shipment of millions of barrels of Iranian oil to the Assad regime. The Assad regime would then transfer hundreds of millions of U.S. dollars to the IRGC-QF, which distributed funds to Hamas and Hezbollah. In one documented transaction, a Hezbollah official confirmed receipt of $63 million as part of this oil-for-terror scheme.

The Sustainability Question

Ultimately, proxy war economics succeed or fail based on sustainability. Iran’s model works because oil revenues provide consistent funding streams relatively insulated from international pressure. Coalition models like Ukraine’s support depend on sustained political will across multiple democracies—a more fragile foundation.

The economic lessons are clear: modern conflicts are won by whichever side can maintain funding longest, not necessarily whichever side fights best. This reality transforms strategy from tactical to economic, making treasury departments as important as defense ministries in determining conflict outcomes. As proxy wars become the dominant form of great power competition, understanding their economic foundations becomes essential for anticipating tomorrow’s conflicts—and their likely victors.

Private Sector and Diaspora Financing

Proxy organizations also tap into private funding sources and diaspora communities. Hezbollah has relied on funding from the Shi’ite Lebanese Diaspora in West Africa, the United States, and the Triple Frontier region along the junction of Paraguay, Argentina, and Brazil. These networks often operate through legitimate businesses and charities that serve as fronts for money laundering operations.

The United States has sanctioned numerous charities and front companies for providing financial support to proxy groups, including the Holy Land Foundation, which was designated in 2001 for providing millions of dollars annually to Hamas. These sanctions have had limited effectiveness, as current U.S. sanctions have not significantly impacted Iran’s relationships with its proxies.

Banking and Financial System Exploitation

Modern proxy financing relies heavily on exploiting legitimate financial institutions. A C4ADS report on leaked Wagner documents showed that without legitimate financial institutions such as JP Morgan Chase and HSBC as intermediaries, the Wagner Group would not have been able to establish a foothold in Africa. In 2017, the Sudanese Mining company Meroe Gold, acting as a shell company for Wagner, used JP Morgan Chase to process payments to sellers in China.

Iran has developed sophisticated methods to circumvent banking sanctions. The U.S. designated Bank Saderat in 2006 for facilitating transfers of hundreds of millions of dollars annually to Hezbollah, Hamas, and Palestinian Islamic Jihad. However, new financial networks continuously emerge to replace sanctioned institutions.

Government-to-Government Contracts

Some proxy financing occurs through legitimate government contracts that provide plausible cover for military support. Putin revealed that Wagner received contracts worth billions of rubles, including payments from governments who hired Wagner services, such as the Malian government, which reportedly paid Wagner more than $10 million each month. These arrangements allow both parties to maintain the fiction that the services being provided are purely commercial rather than military.

A Brave, New World

The financing of proxy warfare presents significant challenges for international security and governance. As noted by RAND Corporation analysts, geopolitical drivers of proxy warfare can often be self-reinforcing, with states able to develop proxy warfare capabilities very quickly, within a couple of years. The financial networks supporting these capabilities are equally adaptable, evolving new methods to circumvent sanctions and detection.

Recent developments suggest that proxy warfare financing will continue to evolve with the global financial system. Cryptocurrency, digital payment systems, and new forms of economic integration provide both opportunities and challenges for states seeking to fund proxy operations while maintaining deniability.

The complexity of modern proxy war financing reflects the broader evolution of international conflict, where economic warfare, information operations, and traditional military action converge in ways that challenge conventional approaches to conflict resolution and accountability. Understanding these financial mechanisms is essential for policymakers seeking to address the root causes of contemporary global instability.

…Money makes the world go ’round – it also helps to burn it.