The rapid advance by Yemen’s Houthis down the country’s Red Sea coast has raised questions over whether the group could turn its territorial gains into new sources of revenue, adding to an already extensive war economy.

But the Houthis already had control of large sections of the Red Sea coast, including the major port city of Hodeidah, and the financial benefits associated with that. Their military gains over the past week do not necessarily change the restrictions they have to deal with as an internationally unrecognised governing authority.

Ahmed al-Shalafi, Al Jazeera’s Yemeni affairs editor,  said that the advance has been a “geographical and military gain” but not an economic one, as it doesn’t remove the international sanctions that have been placed on it, which severely restrict their ability to commercially exploit the new territory under its control through formal international channels.

But the Houthis already enjoy significant financial benefits from their long-time control of northwestern Yemen, the most populous part of the country.

Since the Houthis’ capture of the capital Sanaa in September 2014, the group has developed a centralised financial system to collect revenues through taxes, customs duties, zakat (religious alms), and other levies.

A July report by the Mokha Center for Strategic Studies described this as a “parallel economy”, estimating that the system generated direct and indirect financial resources and costs worth approximately $2.5bn annually.

Of that total, the report estimated that around $800m came from taxes and customs, $600m from additional feeds and levies, and $300m from cash and in-kind contributions to the war effort. It also counted about $100m linked to mobilisation events and another $700m in indirect costs borne by businesses through higher transport, service, and fee-related expenses.

The Houthi authorities have also revoked the licenses of 4,225 established commercial agencies – the legal local representatives for foreign companies – according to a July report by Sana’a Center for Strategic Studies, which said the move could pave the way for businesses affiliated with the group to take their place. For their part, the Houthis defended the move, claiming that the agencies had not renewed their registrations for three years.

But Houssam al-Saeedi, an economic researcher and the head of the Economic Studies Program at the Yemen and Gulf Center for Studies, told Al Jazeera that he viewed the restructuring as deliberate.

“It seizes companies belonging to existing merchants and manages them in favour of the [Houthis],” al-Saeedi noted. “What is happening is a network aimed primarily at bringing about a change or replacement of capital; so that even in the event of reaching a political settlement or a military victory, this group retains financial sources in the future.”

The Houthis reject the characterisation of their economic policies as simply an effort to tighten control over the private sector, saying measures introduced in recent years are intended to encourage domestic production, investment and small businesses, and simplify commercial regulation.

Reshaping the private sector

Houthi commercial activity has increasingly shifted towards sectors that offer the greatest potential for revenue collection and control.

The Mokha Center data showed that 26 percent of the nearly 68,000 commercial records analysed by the study were in general trade and imports, followed by food commodities at 18 percent.

“The Houthi group established a completely separate system, based on creating an internal economy parallel to the actual available economy first,” al-Saeedi explained to Al Jazeera.

He said the group uses state mechanisms to collect official taxes while simultaneously extracting non-state levies.

“There are various, long, and large collection operations under the name of ‘supporting the war effort’ and others, and these are not taken through government mechanisms.”

Energy trade and smuggling networks

Beyond revenues raised inside Yemen, the US government says illicit oil trading has become one of the Houthis’ most important sources of external financing.

The US Treasury Department alleged in January that the Houthis generate more than $2bn annually through illicit oil sales. It said Iran sells and provides oil to the group, including free monthly shipments, using Iranian-owned or affiliated companies based in Dubai.

Al-Saeedi said that the group has long prioritised the energy sector.

“These companies work primarily as a front for money laundering for the group,” he stated, adding that smuggled oil could provide direct income through domestic sales and monopoly pricing.

Al-Saeedi said that the Houthis used a range of illicit channels to move weapons, oil, and money, including smuggling networks and financial laundering. Another source of Houthi financing, he said, came from Iranian oil sold to third parties, with the proceeds transferred to the group through complex financial networks, including cryptocurrency transactions and local exchange houses.

The networks operate under extensive international sanctions. The US designates the Houthis as both a “Foreign Terrorist Organisation” and a “Specially Designated Global Terrorist” group. The United Nations Security Council separately lists the Houthis under its Yemen sanctions regime, subjecting the group to a targeted arms embargo.

“Cutting off external funding to the Houthis may lead to suffocating them, but they have other sources of income, of course,” al-Shalafi said.

The Houthis have previously denied using Iranian fuel to finance their operations.

A domestic economic crisis

The Houthis’ extensive revenue-raising network exists alongside a deepening economic and humanitarian crisis in the areas it controls and across Yemen more broadly.

The UN estimated in March that 22.3 million people in Yemen require humanitarian assistance and protection.

In Houthi-controlled areas the crisis is compounded by the fact that public sector employees have not received salary payments for years. The economic misery has led to increasing public criticism of the Houthis in the areas under their control, despite the group’s intolerance for dissent.

Al-Shalafi pointed out that the group’s regional actions are deeply tied to this domestic reality, seeking an escape from crises over unpaid salaries and high prices.

“They transformed these economic crises into a combat priority, turning them into war, confrontation, and mobilisation,” al-Shalafi said. “The war, of course, gives them the justification to continue imposing levies, for military spending, and to postpone the entitlements of the people inside.”

The Houthis say the root cause of the issue – the lack of payment of public sector salaries – stems from the transfer of the headquarters of the Central Bank of Yemen to government-controlled Aden, and the loss of access to the country’s oil and gas revenues. They accuse Saudi Arabia, which backs the Yemeni government, of blockading them.

Can the Houthis profit from their gains?

The question now is whether control of the coastline, ports, and territory around the Bab al-Mandab Strait, at the southern entrance to the Red Sea, will substantially expand the group’s financial power – or primarily increase its military leverage.

“[Houthi] control over the Mocha coast and Bab al-Mandab will not be met by a world standing idly by or paying royalties and levies to the Houthis; there will be a confrontation or conflict of some kind to settle this issue,” al-Shalafi said.

Whatever the effect of the latest territorial gains, Yemen already has two increasingly separate economic systems, posing long-term challenges.

“There are two completely different economies in the Houthi-controlled areas and the government-controlled areas,” al-Sa’eedi said. “In my view, these current economic complexities cannot be resolved without a decisive military outcome that controls the ground, or a comprehensive political settlement.”