Israel’s Submarine Affair: A Tale That Goes From Netanyahu to Gas Fields to Iran

Haaretz’s crime reporter and defense expert answer questions on the corruption case in which the police seek indictments on people close to the prime minister

Netanyahu on board the INS Rahav, the fifth submarine in the fleet, after it arrived in the Haifa port January 12, 2016.
\ BAZ RATNER /REUTERS

UPDATE: State's witness Michael Ganor arrested after retracting testimony in submarine affair

Israel Police recommended the indictment of six people for bribery and other offenses related to two deals to purchase naval vessels from the German conglomerate ThyssenKrupp. The following are answers to some key questions about the affair.

What were the deals?

One was for the acquisition of two submarines, while one was for the purchase of missile boats to defend Israel’s natural gas fields off the coast.

Germany’s Federal Security Council approved the submarine deal last year with a clause allowing its cancellation if it turned out that corruption was involved. Germany had agreed to cover one-third of the purchase price, which was estimated at about 1.5 billion euros.

Thus in light of the police’s recommendation to indict, it’s not clear what will become of this transaction. Prime Minister Benjamin Netanyahu also wanted to include anti-submarine ships in the deal, but defense officials opposed this idea, which was shelved.

The four missile boats are due to start arriving in Israel next year; their price tag is 430 million euros.

To what extent is Netanyahu involved in the affair?

The main allegation against the prime minister was that he pushed to buy additional submarines for the navy despite defense officials’ objections. The main person making this claim was Moshe Ya’alon, who was defense minister from 2013 to 2016. To this day he insists that Netanyahu was involved in the purchase, or at least turned a blind eye despite knowing about an attempt to buy ships and submarines for which there was no operational need.

The police also looked into suspicions that Isaac Molho, Netanyahu’s special envoy for the peace process, sought to advance the deal – at the behest of ThyssenKrupp’s representative in Israel, Michael Ganor – by lobbying Netanyahu to try to eliminate any possible obstacles put up by the German government.

But the police never viewed Netanyahu as a suspect at any stage of the investigation and considered Ya’alon’s testimony baseless gossip.

Netanyahu has denied all the allegations, saying that all his efforts to arrange the deal with Germany were based on staff work by the Israel Defense Forces and Israel’s security needs.

He also denied knowing that his personal lawyer, David Shimron, was working on Ganor’s behalf and said that Shimron never approached him on this issue. In private conversations, Netanyahu has said he believes Shimron is innocent and will ultimately be cleared of any wrongdoing.

Precious gas fields

An Israeli missile boat off the Haifa coast, February 2017.
Olivier Fitoussi

What was behind the purchase of the missile boats?

Missile ships would protect Israel’s huge offshore gas fields that were discovered early this decade; the navy currently has 11 such ships.

The initial plan was to buy missile boats from Germany, which expressed a willingness to cover part of the cost. But after Israeli peace negotiations with the Palestinians broke down, Germany decided not to provide the grant.

Israel then considered buying the ships from South Korea. The idea was to craft a huge deal in which Israel would buy the ships and South Korea would buy Israel’s Iron Dome anti-missile system.

The Defense Ministry solicited bids, and shipyards from South Korea, Spain, Italy and Israel responded. But German shipyards didn’t bid because of the modest price tag. The ministry published its invitation to bid on July 22, 2014 – the very day the ministry’s legal adviser, Ahaz Ben-Ari, informed its then-director general, Dan Harel, that Shimron had called and asked whether the bidding process had been halted.

According to a defense source, once the bids were received, they were shown to the Germans. At that point, the idea of Germany subsidizing a purchase from its own shipyards was revived.

After Berlin renewed its offer to subsidize the acquisition, the Defense Ministry froze the bidding process, and In 2015 the ministry signed the deal to buy the four missile boats from ThyssenKrupp.

The acquisition is being financed through an unusual arrangement. The defense budget will cover one-third of the 430 million euros, and the rest will be paid for out of royalties from the gas fields. The Defense Ministry needed a loan to implement the deal and received it from Israel Discount Bank.

What are the arguments for and against buying the submarines?

The navy currently has five submarines, and a sixth is slated to be delivered in two years. The addition of three more would let the navy expand its submarine operations. According to foreign reports, the subs give Israel a second-strike capability because they can carry missiles with nuclear warheads.

Still, defense officials believed that additional submarines were needed. In the IDF’s discussions on its multiyear plan, senior officers proposed that the number of subs be capped at five, thus the oldest submarine would be retired once the sixth sub arrived from Germany.

German engineering

What is known about the German company?

A lot – ThyssenKrupp is a huge industrial conglomerate listed on the German stock market’s blue-chip DAX index. Interestingly, it has had commercial ties with the Iranian government since 1974, before the Iranian Revolution late that decade.

In the late 1970s, the Iran Foreign Investment Company owned a quarter of the German corporation’s shares. But in 2003, after ThyssenKrupp came under pressure over this issue, it reduced IFIC’s holdings to below 5 percent by buying back some of the shares – at a hefty price. In its financial reports, the company noted that it had tried to find another way to reduce the Iranian holding, but without success. Today IFIC owns 4.5 percent of ThyssenKrupp’s shares.

In 2006, IFIC’s German branch received dividends of 18.5 million euros from ThyssenKrupp. The U.S. Treasury Department says IFIC’s German branch is controlled by the Iranian government. Iran has also earned the equivalent of hundreds of millions of shekels from its shares in ThyssenKrupp.

The Defense Ministry admitted that it knew about IFIC’s stake only after several days of insisting that it was unaware of any Iranian involvement in ThyssenKrupp.

Why did Israel consider forgoing a deal with the German company despite the substantial discount?

One reservation that Ya’alon raised during the negotiations with the Germans was that Israel was becoming a captive customer of ThyssenKrupp because the purchase had implications extending to contracts on maintenance and spare parts.

Ultimately it was decided to buy the missile boats from ThyssenKrupp due to the grant that was being provided. Germany is considered the world’s leading supplier of submarines, and no other option was considered.

In arms deals, political considerations are also involved. Is there an option to sign arms deals with countries to which Israeli companies could export? As part of previous deals with ThyssenKrupp, for example, the Germans committed to purchases from Israeli companies. But ThyssenKrupp failed to meet its commitment to spend hundreds of millions of euros on products from Israeli firms.