Opinion |

Israel Overcame COVID. How Will We Weather the Ukraine War?

What is the worst that the Ukraine war can throw at Israel? A little inflation and some lost exports. But there might be some economic benefits too

David Rosenberg
David Rosenberg
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A demonstrator holds a sign showing the face of Russian President Vladimir Putin made to resemble Nazi Germany's Adolf Hitler during a protest against Russia's military operation in Ukraine, in front of the Russian embassy in Tel Aviv, on February 26, 2022.
Demonstrator holds sign showing Putin's face made to resemble Hitler at a protest against the Ukraine war, in front of the Russian embassy in Tel Aviv, February 2022Credit: JACK GUEZ - AFP
David Rosenberg
David Rosenberg

Anyone who tells you either that the war in Ukraine will lead to global economic catastrophe or that it will have no long-term impact is talking out their hat. It’s too early to even say with confidence that Russia is succeeding militarily, much less what success or failure may bring.

Economist Nouriel Roubini has warned the conflict is going to traumatize the global economy, disrupting an already crippled supply chain and reviving 1970s-style stagflation. Others say that the world can get along just fine without Russia and/or Ukraine – after it gets over the initial shock. After all, Russia only accounts for 2 percent of the world’s gross domestic product. Its oil and gas exports are important, but they aren’t irreplaceable.

The markets are not a good barometer for what lies ahead. Commodities prices are soaring, especially for the things that Russia and Ukraine produce a lot of. Oil is now over $100 a barrel, its highest since 2014, and wheat prices have reached their highest since 2008. But it’s the nature of markets to panic in the face of sudden and dramatic events whose implications aren’t yet known. There’s no reason to assume that the price of gasoline and bread is going to stay at those levels.

The worst outcome would be World War III, which would give new meaning to John Maynard Keynes’ observation about capitalism that “in the long run we are all dead.” But let’s say it results in something less catastrophic: Global supply chains, which have yet to steady themselves from the COVID blow, remain clogged and supplies of Russian and Ukrainian energy and farm products are limited by sanctions and/or war damage. Rising levels of inflation rise even more and the most vulnerable parts of the world, mainly Europe, slip into recession. A war-wary world rearms.

If so, where does that leave Israel? Strangely enough, possibly in not such bad shape.

Conventional wisdom once held that as a tiny, trade-dependent economy the world’s woes would inevitably become ours. If anything, Israel is more globalized than ever before, but every time the world threatens us with another crisis, the economy has stood firm.

Not since the dot.com boom and the second intifada has Israel experienced a serious recession. Growth held up during the Great Recession and the COVID pandemic, as well as when confronted with the localized threats of wars with Hezbollah and Hamas, and two years of government stagnation and repeated elections. Even when Israel took a hit, it bounced back quickly.

What is the worst that the Ukraine war can throw at us? The first is energy prices, not only higher oil but higher coal costs. Israel is committed to stop burning coal for electric power by 2025, but in the meantime close to a quarter of electricity comes from burning coal. Russia supplies as much as 30 percent of that.

Electricity bills will inevitably go up, but bear in mind that Israel is paying very low prices for its domestically produced natural gas, so the increase, compared to what Europeans are going to suffer, is minor. Even the price of gasoline won’t rise as much as oil prices suggest because so much of the price charged at the pump is due to taxes.

Israel’s other big vulnerability to inflation is food, wheat in particular. Ukraine supplies about half the wheat Israel consumes as well as a host of other agricultural products, and its ports are closed. The price of bread will no doubt go up due to higher global prices; there may even be some shortages until supply chains right themselves. But flour-based products account for just 3.5 percent of the average Israeli family’s monthly spending, so higher prices won’t make much of a dent in household budgets.

Israeli exports may not be much affected either. Russia and Ukraine are important commodity exporters, but in all other aspects their economies are of little consequence to Israel. Last year, Russia and Ukraine together accounted for a mere 1.6 percent of exports, or less than $1 billion. So, even if exports to Russia dry up because Russia’s biggest banks have been tossed out of the SWIFT global financial messaging network, the hit will be small.

The real export risk to Israel is political. Jerusalem’s decision not to join the sanctions campaign, combined with a big population of Russian immigrants and a small but critical population of oligarchs, could easily turn Israel into a conduit for sanctions-busting. The government should be on guard for that – it’s not worth the price of offending the Americans.

Those are the downsides, such as they are. But there are some potential upsides too.

The threat of war

The world is waking up again to the threat of war. Putin’s aggressive actions are now making Russia’s neighbors more anxious than ever and have caused Germany to announce a big hike in defense spending. And, now that Russia has undertaken a war of conquest, many countries in Asia fear China will be less hesitant to make one of its own and seize Taiwan.

Israel’s defense industry will likely be a beneficiary, especially as it specializes in the tools of 21st-century warfare, like drones and battlefield electronics. Israel’s cybersecurity sector should get no less of a boost, not only from governments but from businesses, even if Russia has for some reason not as yet deployed its cyberwarfare capabilities against Ukraine as expected.

Even Israel’s energy industry stands to gain. Just a few weeks ago, the projected East Mediterranean pipeline for shipping Israel and Cypriot gas to Europe looked dead in the water because it seemed financially unviable and ran against Europe’s new focus on renewable energy.

But Europe’s calculations may change. Europe gets 40 percent of its natural gas from Russia, but Russia is proving to be too risky a supplier. Renewables are still the future of energy, but as the pre-war energy crisis in Europe has amply demonstrated, it will take time for them to replace fossil fuels. East Mediterranean gas may start looking more attractive.

Caveat emptor: Roubini and the other bears may be right. A world that spins into a deep recession and/or allows the global supply chain to die away won’t need Israeli arms, cybertools or gas. If there is reason to remain optimistic that that won’t happen, it is because it’s not in the West’s interest to let it happen and because Beijing is determined to prevent it. China’s economy has benefited from globalization and will do its best to shore it up.

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