Israel Economy Bleeding Out as Damage Compounds
This post relies heavily on fresh and detailed report from Mondoweiss, The end of Israel’s economy, which appears not to have gotten the attention it deserves. Some initial observations:
Israel has locked itself in a long-term, resource, credibility and morale draining conflict, and no willingness to climb down. Israel cannot “win” in Gaza save exterminating and ethnically cleansing its population. It lacks the power to prevail over Hezbollah (save via nukes with literal blowback risk). More and more commentators are pointing out that while Netanyahu and his claque have been saying they will attack Hezbollah soon (in July was the last promise, and admittedly July is not yet over), the IDF has been opposed and so far, the IDF has prevailed. New developments confirm the IDF’s reluctance:
Israel and the US have been unable to beat back Ansar Allah attacks, even as Ansar Allah is successfully escalating, as its strike on Tel Aviv demonstrates.
A new story in Haaretz suggests why Israel got itself in the mess of over-committing in Gaza. Recall how the US and Europe got in over their heads in the Ukraine proxy war. They were convinced the shock and awe economic sanctions would send Russia reeling, in an upside scenario leading to a quick ouster of Putin, or at least so damaging the (incorrectly presumed to be weak) Russian economy and military so as to assure battlefield success with existing Ukraine resources. They did not have a Plan B when Plan A failed. They defaulted to pouring weapons and men into the kinetic war, not just draining their weapons stocks but increasingly their economies.
Israel may also have believed it could land a knockout punch to Hamas. If it had succeeded, flooding the tunnels in Gaza could have killed many Hamas fighters, and even if not, would have destroyed much of their weapons and stores. Most important, it would have eliminated their big asset of being able to move and operate nearly entirely out of the reach of the IDF, yet able to launch guerrilla attacks when opportunities arose.
From the Hareetz story, Atlantis Is Lost: How the Israeli Army’s Plan to Flood Hamas’ Network of Tunnels Under Gaza Failed:
It was supposed to be the game changer, a new, relatively quick and lethal solution to one of the more complex fronts in the Gaza Strip. Or as the army described it: “A significant engineering and technological breakthrough for dealing with the underground challenge.” Behind all these descriptions was “Atlantis,” a system that was supposed to take out the Hamas tunnels and to kill senior Hamas officials, by pumping in seawater at high intensity…
The question of how it happened that a project described by the Israel Defense Forces as a “tie breaker” turned into a steadily growing failure has a complex answer. One of the main causes is the backdrop. During the first days of the war, says a defense source, “The achievements on the ground against Hamas officials were insignificant. Most of the Hamas forces, mainly the military arm, entered the tunnels and that created pressure on the senior IDF command.”
That’s why, says another source who spoke to Haaretz, [head of Southern Command, Maj. Gen. Yaron] Finkelman demanded solutions; ways of striking at Hamas activists in the tunnels. “There was frustration because during those stages the forces didn’t really think that we’d start to enter all the tunnels,” recalls the source. “They also began to realize the dimensions of the tunnels that Military Intelligence didn’t know about.”
The article contains a great deal of information about how Hamas changed its tunnel structures over time to make it even more resistant to an IDF clearance operation.
As the extract above indicates, Israel was eager for a quick, decisive victory over Hamas, or at least some early successes they could use to restore the illusion of Israeli military superiority in the region and at home. As Alastair Crooke and Scott Ritter have often pointed out, Hamas, Hezbollah, and Iran recognize that Israel is set up to wage short, fierce, air-power heavy conflicts, and not slow, resource and will-sapping slogs.
The BDS campaign may be starting to wear on Israel. 135 Congresscritters boycotting the Netanyahu speech is a sign that it is becoming acceptable, even respectable, in the US to criticize Israel’s genocide, which is a meaningful shift. Even though the Houthi campaign against Red Sea shipping has been the most effective initiative so far, Israelis are starting to worry that the sanctions are starting to escalate. From another new Haaretz story, Biden Has Let the Israel-sanctions Genie Out of the Bottle:
Many may not know that on Tuesday, Japan imposed sanctions on four Israeli settlers for violence against West Bank Palestinians.
Japan as a country is off the Israeli radar screen, and a fairly large number of settlers and far-right groups are already being sanctioned by Western powers. What difference does it make that Tokyo is joining in?
In fact, Japan’s decision is a worrying one. It is friendly to Israel and traditionally doesn’t entangle itself in the Israeli-Palestinian conflict any more than it needs to. That Tokyo is acting now is because its partners in the Group of Seven countries have been doing the same since the United States announced its first set of sanctions against four violent settlers on February 1….
To date, the sanctions that have been ordered are minor…
But the trend is unmistakably pointing in the direction of more sanctions imposed by more countries.
Confirming this concern, a tweet flagged by guurst:
It’s not clear how much depth and resilience Israel’s economy (and society) have. Some on the anti-war right assert that Israel is a fake economy, more an imperial outpost than a reasonably self-supporting country. This is a topic I’d like to examine further but lack the bandwidth at this juncture. Any reader data points (better yet data sources) are very much welcome.
On the surface, Israel’s import and export statistics don’t indicate much US dependence. From the OEC, using 2022 data:
The top exports of Israel are Diamonds ($10.5B), Integrated Circuits ($7.83B), Refined Petroleum ($4.08B), Medical Instruments ($2.51B), and Potassic Fertilizers ($2.31B), exporting mostly to United States ($20.3B), China ($5.53B), Palestine ($4.6B), Ireland ($3.86B), and United Kingdom ($3.18B).
Imports The top imports of Israel are Diamonds ($7.3B), Cars ($6.67B), Crude Petroleum ($3.73B), Refined Petroleum ($3.7B), and Broadcasting Equipment ($2.56B), importing mostly from China ($14.4B), United States ($11.6B), Turkey ($7B), Germany ($6.46B), and India ($4.86B).
Admittedly, the US despite its distance is a surprisingly large export partner. Integrated circuits could be taken as a signifier for high-value military-related products, something which many Americans would assume it a top Israel export category.
To flip the question: what becomes of Israel if it continues to suffer an exodus, particularly of highly skilled, highly mobile professionals and experts? Many argue that the US and wealthy Zionists can continue to prop Israel up on an open-ended basis. But what if enough “talent” leaves and businesses shutter so that the support goes into what increasingly looks like a welfare queen? And how does a state that has become that much of a dependency defend itself in a neighborhood that it has united against it?
Now to some of the highlights from the important Mondoweiss story, which I encourage you to read in full. Critically, it describes severe, potentially irreparable damage all across the economy:
The economic indicators speak of nothing less than an economic catastrophe. Over 46,000 businesses have gone bankrupt, tourism has stopped, Israel’s credit rating was lowered, Israeli bonds are sold at the prices of almost “junk bonds” levels, and the foreign investments that have already dropped by 60% in the first quarter of 2023 (as a result of the policies of Israel’s far-right government before October 7) show no prospects of recovery. The majority of the money invested in Israeli investment funds was diverted to investments abroad because Israelis do not want their own pension funds and insurance funds or their own savings to be tied to the fate of the State of Israel. This has caused a surprising stability in the Israeli stock market because funds invested in foreign stocks and bonds generated profit in foreign currency, which was multiplied by the rise in the exchange rate between foreign currencies and the Israeli Shekel. But then Intel scuttled a $25 billion investment plan in Israel, the biggest BDS victory ever.
The crisis strikes deeper at the means of production of the Israeli economy.
These are all financial indicators. But the crisis strikes deeper at the means of production of the Israeli economy. Israel’s power grid, which has largely switched to natural gas, still depends on coal to supply demand. The biggest supplier of coal to Israel is Colombia, which announced that it would suspend coal shipments to Israel as long as the genocide was ongoing. After Colombia, the next two biggest suppliers are South Africa and Russia. Without reliable and continuous electricity, Israel will no longer be able to pretend to be a developed economy. Server farms do not work without 24-hour power, and no one knows how many blackouts the Israeli high-tech sector could potentially survive. International tech companies have already started closing their branches in Israel.
An aside: the loss of Colombia’s coal supplies clearly would have a serious impact, if nothing else on prices as Israel scrambles for substitute sources. Whether the result is Ukraine-style daily outages has yet to be seen, but if so, for an advanced economy, the impact would be devastating. These are the top coal exporters in 2023, per Tradeimex Solutions, so Israel is not bereft of alternatives.
But how quickly can it line up replacement supply agreements? And to what extent would these new shipments be vulnerable to Houthi attacks?
The flip side is this section may somewhat understate the deteriorating condition of Israel’s businesses. In a July story, the Cradle cites CEO of Israeli information services and credit risk management firm, CofaceBdi, who said 60,000 businesses are expected to have closed by year end 2024. The tweeted video below claims (without sourcing, but its other stats echo those from mainstream accounts) that 50% of startups are on track to closing within six months:
Back to Mondoweiss:
Israel’s reputation as a “startup nation” depends on its tech sector, which in turn depends on highly educated employees. Israeli academics report that joint research with universities abroad has declined sharply thanks to the efforts of student encampments. Israeli newspapers are full of articles about the exodus of educated Israelis. Prof. Dan Ben David, a famous economist, argued that the Israeli economy is held together by 300,000 people (the senior staff in universities, tech companies, and hospitals). Once a significant portion of these people leaves, he says, “We won’t become a third world country, we just won’t be anymore.”…
The two sectors of the Israeli economy that do not report a crash are the arms companies, which are reporting high sales (although most of them are domestic, arming the genocide), and the “exits” — as international corporations scavenge the carcasses of Israel’s tech sector looking for bargains. Even Google expressed interest in buying the Israeli cyber security company Wiz, founded by Israeli intelligence officers who are eager to sell their company to Google in order to be able to leave Israel…
In the age of the information economy, the economic prospects of states are neither determined by raw materials nor the quality of the workforce. Instead, we live in an era of an “economy of expectations.” The hype of Israel’s “startup nation” has turned into a #Shutdownnation. Two senior Israeli economists, Jugene Kendel and Ron Tzur, published a secret report in which they predict that Israel will not survive to its 100th year. The report is kept secret because they do not want it to become a self-fulfilling prophecy, but they gave interviews about it.
However, even if this trajectory continues, or even accelerates due to a disastrous foray against Lebanon, it will do little to help Gaza. As we pointed out some time back, all Israel need to do is starve out the enclave. And that plan is proceeding apace.