Economic Statecraft
How Benjamin Netanyahu’s Right Turn Affects the Israeli Economy

The increased likelihood of a large-scale escalation of the Middle East conflict, which is also associated with the latest transit of power in Israel, worries not only the international community and peace mediators, but also foreign investors, forcing them to reconsider their strategy of maintaining a presence in the country. Of concern is Benjamin Netanyahu’s failure to deter potentially risky activities from far-right members of his cabinet, writes Elizaveta Yakimova, Research fellow at the Department of Israel and Jewish Communities, RAS Institute of Oriental Studies.

The 1988 election poster of the Likud party read: “On the left is only the sea!” In this way, the consolidated alliance of the Israeli right, which turned into a full-fledged party in the same year, called for a confrontation with its opponents from the opposite side of the political spectrum. Following the results of the elections to the 25th Knesset, held in early November last year, Benjamin Netanyahu came as close as possible to the slogan of almost 35 years ago, having formed perhaps the most right-wing government in Israeli history. While approaches to the peace process have traditionally been a watershed for the political ideology of this Middle Eastern state, the question is how the 37th cabinet’s right-wing bias could affect Israel’s economic development in the near future.

The attack of the executive branch of government on the judiciary, planned as part of the reform of the Supreme Court, led to a fall in the Israeli stock and currency markets. In the last days of January, the shekel lost about 2% against the US dollar, the TA-35 index (an indicator of the dynamic change in the value of shares of the 35 largest companies of the country) fell by 2%, and the TA-125 shed 2.2%. The banking sector suffered the most, with its sub-index down 3% on average. A week later, the trend continued, albeit less dramatically, and the TA-35 and TA-125 indexes fell by 0.88% and 0.92%, respectively. The Israeli drug giant Teva Pharmaceutical Industries and chipmaker Tower Semiconductor were among the few to show share growth.

At a meeting of the head of government with the leadership of the largest Israeli banks, the latter reported an outflow of capital from client accounts. More often than others, representatives of the innovation industry were noticed in the withdrawal of funds. The reason for their behaviour? Economic experts reasoned that they were transferring funds into dollars against the background of the weakening shekel and preparations for relocation abroad due to dissatisfaction with the policies of the new cabinet ministers. Among the first who refused to transfer money to the treasury of the new government are projects built on the basis of artificial intelligence technologies: the start-up Verbit and the Disruptive AI venture fund.

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The increased likelihood of a large-scale escalation of the Middle East conflict, which is also associated with the latest transit of power in Israel, worries not only the international community and peace mediators, but also foreign investors, forcing them to reconsider their strategy of maintaining a presence in the country. Of concern is Benjamin Netanyahu’s failure to deter potentially risky activities from far-right members of his cabinet. So, in early January, Minister of National Security Itamar Ben-Gvir climbed the Temple Mount (a similar step by Ariel Sharon in 2001 served as a pretext for the second intifada). The nature of the response to increased terrorist activity is also considered controversial. The January attack on a Jerusalem synagogue, which turned out to be the deadliest since 2011, was described by Palestinians as a response to IDF raids in the West Bank aimed at identifying individuals involved in earlier attacks on Israelis.

The new government also has in its arsenal the means of exerting economic pressure on the Palestinian National Authority. Upon taking office as finance minister, far-right politician Bezalel Smotrich ordered the transfer of 139 million shekels collected on behalf of the PNA as taxes to support the victims of terror. The measure, which became an element of sanctions against the PNA after its attempts to transfer the Israeli dossier to the ICC, is capable of aggravating the socio-economic situation in the Palestinian territories, thereby prompting the local population to become more actively involved in the fight against Israel.

The country’s leadership has urged people not to panic and not to mix the economy with politics, although they partially do something similar on their own. For example, in the new cabinet of Benjamin Netanyahu, contacts with international rating agencies will not be the responsibility of the Ministry of Finance, as it was before, but of the Minister for Strategic Affairs, Ron Dermer, who represents the Prime Minister’s inner circle. His powers were previously significantly expanded in the foreign policy sphere, due to his active involvement in the dialogue with the US administration. However, the redistribution of functions with the Ministry of Foreign Affairs, as it seems, is not so dangerous. First, Ron Dermer already had experience working as a diplomat in Washington. Second, Benjamin Netanyahu considered his candidacy when appointing the head of the foreign affairs ministry and abandoned this idea mainly in order to maintain stability within the Likud. Financiers, on the contrary, warn of an attempt by the government to establish tighter control over this area by replacing professionals with more convenient political figures. They see trends similar to those present in the reform of the judicial system.

On the whole, contrary to alarmist sentiments, the situation does not yet look critical. At the end of last year, knowing about the distribution of ministerial portfolios in the Israeli government and the “right turn” derived from this, the international rating agency S&P assigned Israel an “AA-” rating, expecting 2% economic growth. At the same time, the main negative factors that will affect the country were not internal political reforms or the threat of a new round of the Palestinian-Israeli conflict, but global processes. Last spring, the venture fund American Insight Partners, the leading sponsor of Israeli technology start-ups, warned about the crisis and a possible reduction in investment in the Middle Eastern country. Now, the US investor is once again stating plans to minimize its presence, but this time it is presenting information through the prism of solidarity with innovative companies that do not support a right-wing change in policy.

In reality, the relationship of the stock and currency markets with the actions of the sixth government in the career of Benjamin Netanyahu has not yet become a sustainable trend. This is manifested in the example of the shekel exchange rate, which is more dependent on the dynamics of US currency. Moreover, the control of more moderate members of the cabinet over a number of key ministerial portfolios also inspires certain confidence. Nir Barkat, who received the post of Minister of Economy and Industry, comes from an innovative environment; in the past he was the author of the economic section of the Likud party programme. His colleague from the Foreign Ministry, Eli (Eliyahu) Cohen, previously headed the economic department himself, and also took part in the work of the commission of the Israeli Parliament (Knesset), which developed banking reform. All this, it seems, can help increase the efficiency of the government’s foreign economic activity and curb the “brain drain” in the innovative business environment.

Prospects for the development of the domestic economic situation, taking into account the transformations proposed by the Minister of Finance, look somewhat more ambiguous. In mid-January, the ministry presented a package of reforms, including limiting the increase in tariffs for electricity and water, as well as simplifying the rules for importing food products. All this is intended to lower the cost of living in the country – one of the main reasons for the discontent among citizens during the last long term of Benjamin Netanyahu as prime minister. At the same time, Bezalel Smotrich’s programme includes changes in taxation in the field of rental property and does not contain proposals to freeze mortgage payments, which could neutralize efforts to combat price containment.

Israeli–Palestinian Conflict: When Concessions Are Impossible
Amos Yadlin
That Israel is now experiencing a moment of heightened political, economic, and military power is no excuse to avoid dealing with the Palestinian issue; rather it is a window of opportunity to settle the conflict under favorable conditions.
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.