TLR Bulletin – While your were away

 

January 4, 2017

The Christmas-New Year holiday season is rarely marked by good cheer in the Middle East, let alone peace and goodwill. Yet even given this unhappy norm, the end of 2016 has been characterised by unusually intense activity on almost every front.

 

In order to assist those were fortunate enough to be able to disconnect for a week or two, herewith a brief summary of key recent Israeli developments, all of which are still very much works in progress, that will accompany us during 2017, if not beyond — and will therefore be the subjects of fuller treatment in due course.

 

A)DOMESTIC POLITICS: The noose tightens on Netanyahu

 

For Prime Minister Binyamin Netanyahu there has been both good news and bad news, but the latter has far outweighed the former. The passage of the two-year budget for 2017-18 and the accompanying Arrangements Law was the main good news for him, primarily because it should have ensured him a relaxed 2017 on the domestic political front, by pushing off any possible elections until mid-2018 at the earliest.

 

However, all the rest is bad news, both at home and overseas. Domestically, he is once again under police investigation, reportedly for receiving unspecified gifts from unspecified foreign ‘businessmen”. His public response has been that this investigation will turn up nothing (at least nothing criminal or even untoward), just as all the earlier accusations and investigations against him over the years have failed to provide evidence sufficient to press charges against him. In addition, his vituperative attacks against the media have become increasingly frequent and repetitive – and so, I suspect – unconvincing.

 

If the current investigation does turn into a formal charge sheet – a definite possibility, given the newly-appointed Attorney-General’s readiness to authorise a formal interrogation of the premier – then he will have to step down and, unless the charges are definitively thrown out, he will have great difficulty returning to office. On the other hand, even if this investigation fizzles out like its predecessors, due to lack of evidence, he will be damaged and the erosion of his support in Likud and in the country will accelerate. Yair Lapid’s Yesh Atid is now well ahead of Likud in the polls and, after all the caveats about polls are said and done, the rise of Yesh Atid and the relative decline of Likud is a clear trend that seems an accurate reflection of the public mood.

 

 B)DOMESTIC POLITICS?: Foreign policy flux

 

Strictly speaking, the latest clash between Netanyahu and his government and between President Obama and his Administration, counts as foreign policy. However, because the substantive issue is the future of the “Occupied Territories” / “Judea and Samaria”, with Netanyahu trapped between the extremist elements in his own party and coalition versus the long-standing American opposition to settlement expansion, the row is actually an excellent example of the continuing validity of Henry Kissinger’s dictum that “Israel doesn’t have foreign policy, only extensions of domestic policy”.

 

In any event, it is important to separate two strands of the tangled skein. One is the open and fierce row with the Americans, which is plainly laced with deep personal antipathy between the two leaders and their key aides. Fortunately for Netanyahu and Co., that problem will disappear on January 21, although the Obama Administration is likely to make further moves against the Israeli government and its policies before it departs – most likely in the framework of the upcoming conference in Paris, which Israel has already announced it will not attend.

 

Nevertheless, the precedents established in the UN and elsewhere by the passage of Security Council resolution 2334, will remain as the legacy of the Obama presidency and, it is widely felt in Israel, have inflicted serious diplomatic damage on Israel. How serious and how long-lasting this damage proves to be will only become clear when the Trump Administration takes over. If the hopes placed by the Israeli right-wing parties in the new US government are realised, then the immediate damage may be reversed — but even then the longer-term issue of a deep crack in the hitherto solid wall of bipartisan US political support for Israel will remain unresolved, awaiting any future Democratic president.

 

But in terms of domestic Israeli politics, Netanyahu has been wounded twice – and it will take a great effort on his own and Trump’s part to repair this damage, even if Trump does choose to help him. Netanyahu’s first blunder was his failure to foresee the American move at the UN, despite ample warning that it was likely in the interregnum between the elections and the inauguration. Indeed, the latest moves by the Netanyahu government regarding the territories, settlements and allied matters, were unnecessary provocations of the outgoing Administration that could and should have been avoided – by Netanyahu forcefully asserting himself within the coalition. But if the American refusal to veto was a severe blow, his own petulant and almost hysterical response to the UN resolution was the second and entirely self-inflicted wound he suffered in late December. Rarely, if ever, in his long years in power has the irrational ‘Bibi’ so overpowered the calculating ‘Netanyahu’ in the foreign policy sphere.

 

C) REGIONAL DEVELOPMENTS: Syria settlement in sight

 

In tandem with these events at home and in the US, critical developments have taken place in the long-running Syrian civil war – namely, the completion of the reconquest of Aleppo by forces loyal to the Assad regime, and the subsequent ceasefire agreed to by many – although by no means all – of the warring elements.

 

Behind these developments stands Russian President Putin, whose military intervention in Syria last year turned the tide decisively in Assad’s favour — to the chagrin of numerous American and other pundits who expected this venture to prove disastrous, along the lines of the Soviet invasion of Afghanistan in 1979 and the American invasion of Iraq in 2003. As a result of his successful application of limited military power – with the Iranian and Hezbollah soldiers doing the (very) dirty work on the ground – Putin is now in position to dictate the terms of the settlement that will hopefully bring an end to the murderous civil war.

 

 

Whether such a settlement is possible at all, let alone whether it proves durable, remains to be seen. What is undeniable is that Russia is now the arbiter of the future shape of Syria and its government, while the Americans have little to no influence over the outcome – especially now that Erdogan’s Turkey is co-operating and co-ordinating with Russia.

 

From Israel’s point of view, the crucial interest at stake is the degree of Iranian influence in Syria and, specifically, the need to prevent the establishment of any Iranian or Hezbollah military presence in southern Syria, along the border between the Syrian and Israeli parts of the Golan region. To achieve this, Israel will obviously need Putin’s firm support and, ironically, perhaps that of Assad, too. The Israeli argument will be that any Iranian/ Hezbollah presence on the Syrian Golan will be inherently destabilising and, since the primary interest of Assad and Putin in a post-war Syria is to maintain stability and prevent the eruption of renewed conflicts, placing southern Syria back under the direct control of Assad’s army and government is the correct and desirable course to take.

 

Will that argument win the day? Will Putin be able to impose his will on Iran? Will Trump stand back and allow Putin a free hand in Syria – or will he, too, demand that the settlement include the removal of all Iranian forces and proxies from the country? These are the issues that are likely to dominate 2017 and there are currently no answers to any of them.

 

However, to revert to the topics discussed above – one of Netanyahu’s outstanding achievements has been the establishment of very good personal and bilateral relations with Putin and Russia, so that they have a clear understanding of Israeli interests and the ‘red lines’ which, unlike Obama, it will seek to enforce. The demise of Netanyahu, in whatever circumstances, would – to say the least – complicate this delicate but crucial relationship.

 

D) MACRO-ECONOMICS: Firing on all cylinders

 

The strength of the Israeli economy ought to be a source of comfort for the beleaguered premier. It is therefore supremely ironic that despite a steady improvement in the economy’s performance, Netanyahu’s troubles have only intensified. Nevertheless, in the purely political context, the latest economic developments have two clear-cut consequences.

 

The first, mentioned earlier, is that the passage of the 2-year budget considerably enhances the survivability of the current government and of its head, because other than defeating the government over the budget, there is virtually no chance of bringing it down in the regular course of parliamentary activity. However, this effective immunity from parliamentary defeat provides no defence against police investigations and the threat they pose to Netanyahu personally. Nor does it protect Netanyahu from intra-coalition squabbles, especially over ideological rather than material issues – and it certainly cannot prevent him from shooting himself in the foot through foolish words or deeds related to foreign policy issues.

 

The second political consequence of the continued, indeed enhanced, economic strength apparent in recent data, is also positive for Netanyahu: the rising standard of living gives the general public less to complain about and makes it less inclined to actively protest against the government, even over non-economic issues. Once again, though, that advantage can be lost by saying or doing things that create or exacerbate negative feelings toward him.

 

As for the data themselves, in a nutshell they can be labeled as remarkably good. They will be examined in detail in subsequent newsletters, but some outstanding features demand mention at once. The first is the remorseless upward revision of economic performance in general and of exports in particular, over the course of 2016. The data for the first quarter, of which the initial estimate was published in May and generated widespread disappointment and concern, have been revised upward almost every month since then and now show the economy to have been in rude health last January-March, with little sign of the pale and sickly entity portrayed in May.

 

Another important feature which is finally getting the recognition it deserves, is the impact of the boom – mania might be a more accurate description – in purchases of new vehicles on various aspects of economic activity, particularly the state budget. The low level of the budget deficit throughout 2016 (and 2015, for that matter) owed much to the massive revenue flow from the high taxes and levies imposed on car imports. The fact that this boom is financed largely through credit, with buyers taking full advantage of unprecedentedly cheap loans offered to them by banks and non-banks, has also belatedly been noted, with the Bank of Israel now moving to tighten up lending standards in the auto-loan sector.

 

E) CORPORATE AFFAIRS: A mixed bag

 

There is also much of importance happening in the corporate sector, whether as a result of government initiatives or in response to global trends.

 

  • The energy sector has come back to life, with a new round of tenders for licenses for oil and gas exploration underway, while in the background renewed efforts are being made to reach a diplomatic breakthrough with Turkey that would pave the way for a commercial deal in which Turkish companies would buy gas from the Leviathan field. Meanwhile, the Leviathan partners have been lining up the financing they need to proceed with drilling the wells in the huge field – but the senior partner, Noble, has been lagging in this effort and has been generally absent from the news. All of these numerous and complicated issues will be high on the agenda of governments, companies and stock exchange activity during 2017.

 

  • The financial services sector will have its hands full absorbing and acting upon the reforms legislated via the Arrangements Law, in particular the imposed divestment of the two biggest credit card companies by the two biggest banks and the opening up of the credit card sector to competition. The insurance sector will be more focused on ownership issues, with several big companies still on the shelf thanks to the requirements of the Concentration Law. In the asset management sector, the purchase of Meitav Dash, the second-biggest firm, by a foreign investment group, suggests that this sector’s rapid development over the last decade is far from complete.

 

  • Then, of course, there is the high-tech sector, where very conflicting trends are at work. Exports of goods by technology companies, especially in the electronics sector, have been declining, although at least the pharma sector has witnessed a recovery. But the opening of the new Intel plant in the second half of 2017 will surely unleash a surge of growth in this sector.

 

In any event, exports of services by technology companies resumed growing in 2016. Service exports include the sale of start-up companies, and this area enjoyed an annus mirabilis last year, which some observers believe can be maintained while others fear that the boom reflects fantastical valuations fed by hopes of raising ‘unicorns’, which will inevitably revert to reality in due course.

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