Economic Statecraft
The Economics of Conflict: The Impact of the War Against Hamas on the Israeli Economic System

It can be expected that the Israeli economy, in the event of a protracted confrontation with Hamas, will face difficulties that were generally characteristic earlier, during the period of the Al-Aqsa intifada, writes Elizaveta Yakimova.

By the end of the second quarter of 2023, protest activity and the delayed consequences of the pandemic had revealed a number of problems that could be layered on top of the typical difficulties for the Israeli economy during the escalation periods in the Middle East conflict. However, there are also what could be called “anchors of stability”, that enable the state to cope with current challenges, albeit not without losses.

In September, Israeli Finance Minister Bezalel Smotrich informed parliament about the interim results of his work. Presenting a report to the relevant Knesset committee, the cabinet minister reported on the “sustainability” of the country’s economic system. The basis of his argument was the confirmation by Fitch of the state’s A+ sovereign credit rating. As in the past, the politician considered protests against the sensational judicial reform to be the key negative factor. In this regard, as Smotrich emphasised, great risks have emerged to threaten future Worldwide Governance Indicators (WGI). The index is used by the World Bank to measure six aggregate indicators, including political stability, government effectiveness, rule of law and corruption. In other words, according to the minister’s logic, the main threat to the Israeli economy in the short term was the deterioration of the external perception of the public administration system due to the actions of the demonstrators, while the situation itself was not so negative.

The assessment of the situation provided by the Ministry of Finance report itself was somewhat different. Economists paid particular attention to a 60% decrease in the volume of foreign investment and an 80% decrease in the average cost of an Israeli start-up when sold to a foreign corporation. There are hints of an industrial crisis affecting areas that have a high level of dependence on investments from abroad, particularly high technology. 

Another alarming signal was the noticeable drop in interest of Israeli investors in the domestic market amid the weakening of the shekel.

In addition to what has been said, based on the results of the second quarter of this year, Israel saw a 3.1% increase in GDP and a 1.2% increase in GDP per capita. Imports, despite the plan of the Netanyahu government to reduce the cost of living in the country using foreign goods, decreased by more than 9%, but exports (excluding diamonds) grew by 0.3%, slightly recouping the decline in the first three months of 2023. With these figures, as well as a 1.5% decline in defence spending reported by Israel’s Central Bureau of Statistics at the end of September, the country reached the October 7 critical line when the Palestinian group Hamas began its massive attack.

Politically, in the current circumstances, a comparison is often made between the current escalation of the Middle East conflict and 1973, which is mainly due to the coincidence of the Hamas attack with the 50th anniversary of the Yom Kippur War. 

Economically, however, the situation has parallels with the Al-Aqsa intifada of 2000–2005. Its impact on the state was characterised by a sharp decline in the tourism sector, a decline in foreign investment and an outflow of labour. 

The second general Palestinian uprising, however, did not damage the entire high-tech industry. This is explained by the fact that initially one of the basic factors in the formation of the Israeli economic miracle was the response to numerous challenges faced by the people and the state. As a result, when demand falls in one segment, its growth in another is recorded. In the case of conflicts, we are talking primarily about healthcare and security.

Economic Statecraft
How Benjamin Netanyahu’s Right Turn Affects the Israeli Economy
Elizaveta Yakimova
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 labour market appears to be at risk of becoming a little more tense due to the fact that some of the consequences of the Covid-19 pandemic have not been overcome. As the aforementioned Al-Aqsa intifada showed, during periods of terrorist attacks there is a refusal to hire Palestinians, an increase in Israeli Arabs expressing solidarity with the actions of the militants, as well as a massive call-up of reservists. However, if 20 years ago agriculture and construction, where mostly low-skilled personnel were employed, suffered from most of the losses, today retailers were the first to sound the alarm. For them, the war dealt an almost double blow in the form of Palestinian worker absenteeism from work and Israelis employed in logistics joining the army. To solve the problem, an emergency meeting of the Ministry of Labour and the Federation of Trade Unions (Histadrut) was convened on October 8 leading to an agreement on the possibility of increasing the working time fund with an increase in overtime payments to 150%.

The legacy of Covid lockdowns is a continuing shortage of foreign labour, with increased demand in healthcare, child and elderly care, construction and agriculture. In the latter case, by attracting personnel from abroad, it was planned to replace the Palestinians, including to minimise losses to the economy in the event of a possible escalation of the conflict. Before the pandemic, workers came from the post-Soviet space and Asian countries such as Nepal, Thailand, and the Philippines. People from there who worked in the southern regions of Israel were among those killed and captured as a result of the attack launched by Hamas on the morning of October 7. In this regard, we can expect both a decrease in the interest of foreigners themselves in looking for work in Israel in the future, and corresponding restrictions imposed by their governments. A similar precedent has already taken place when in the mid-2010s China did not issue permits to its own personnel to work in Judea and Samaria.

Finally, the escalation of the conflict is reflected in the energy market. Moreover, the situation in Israel changed noticeably at the turn of the second decade of the 21st century, when significant gas reserves were discovered on the country’s shelf. Since October 9, due to the risk of missile strikes, it was decided to freeze the Tamar field; the gas produced there goes to both domestic and foreign markets. At the current stage, priority is given to the needs of Israeli consumers, for which the powers of the Minister of Energy have been expanded to use other deposits and energy sources in the interests of supplying the country. In the event of a protracted conflict, and especially a shutdown for security reasons on other production platforms, Israel may have difficulty implementing a long-term strategy for industry, both in terms of attracting foreign investment in infrastructure and building the image of a reliable supplier.

Thus, for now it can be expected that the Israeli economy, in the event of a protracted confrontation with Hamas, will face difficulties that were generally characteristic earlier, during the period of the Al-Aqsa intifada. At the same time, we are talking not only about direct losses in a number of sectors most susceptible to the negative impact of hostilities, but also about the fact that before the escalation, the country was already experiencing a crisis in attracting investment in the high-tech industry, as in the early 2000s, the general Palestinian uprising coincided with overcoming the consequences of the bursting of the dot-com bubble. A positive effect on the situation can be the fact that Israel is now noticeably more energy independent than it was 20 years ago, while witnessing the negative effect of risks associated with not quite overcoming the consequences of the pandemic. Because of this, it is possible that the Israeli government may require a comprehensive economic recovery plan in the future.

Norms and Values
The Aggravation of the Arab-Israeli Conflict as a Lesson for the Whole World
On October 11, the Valdai Club held a discussion dedicated to the aggravation of the Arab-Israeli conflict. The moderator was Oleg Barabanov, programme director of the Club, who noted that the escalation of the conflict was unexpected for everyone, including the expert community. Against this background, the topic of a civilisational conflict has again become relevant, one which cannot be resolved by any political efforts and which is likely to continue to manifest itself.
Club events
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.