In the month since Russia invaded Ukraine, Israel has emerged as a potential weak link in the chain of sanctions being imposed by the United States and the European Union – and even a possible sanctions buster.
The Israeli government has refused to join the sanctions regime, and there have been reports of Russian-Jewish oligarchs renting luxury homes and flying in and out of Israel. Israel has maintained air links, even going so far as insuring El Al Airlines on its Moscow run when the carrier could no longer get private coverage.
Foreign Minister Yair Lapid has vowed that Israel will not allow itself to be a conduit for bypassing sanctions, but its more-or-less neutral stance on the war, its large population of Russian immigrants and the influence of Russian-Jewish oligarchs in Israel have raised doubts. “You don’t want to become the last haven for dirty money that’s fueling Putin’s wars,” Victoria Nuland, the U.S. undersecretary of state for political affairs, told Israelis two weeks ago.
The sanctions regime being imposed by the EU, and especially the United States, is far tougher than any in the past. Experts say that even if they wanted to, the ability of Israeli companies to circumvent the sanctions is severely constrained.
In any case, Israel was doing very little business with Russia before the war, and with the Russian economy nosediving into a recession, there’s little incentive to risk sanctions-busting.
The quasi-governmental Israel Export Institute says two-way merchandise trade between Israel and Russia was just under $1.5 billion last year – less than 1 percent of Israel’s total. Of that, $688 million was imports from Russia. Adding in Russian goods that traveled through third countries and didn’t make the official statistics, Israeli imports from Russia are a much larger $2.29 billion. Two-way trade in services, such as high-tech work, added another $255 million in 2020 (the latest year for which figures are available).
Sanctions aren’t likely to hurt any particular business sector in Israel because exports to Russia are not only small but diverse.
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One exception is agriculture: farmers exported $160 million in fresh fruits and vegetables to Russia last year. In addition to losing that market, they won’t get paid anytime soon for goods they delivered before the war due to currency controls imposed by Russia, according to the Export Institute.
In some cases, produce on its way to Russia was turned back before it could reach its destination and will have to be thrown out.
Another sector that is likely to be hurt is the diamond polishing industry, which sources many of its stones from Russia. Israeli imports of precious stones and metals from Russia amounted to $524 million last year – about a third of all imports from the country, according to the Export Institute. Russian diamonds are in demand because until now they didn’t carry the stigma of being “blood diamonds” (those mined in war zones and sold to finance conflicts).
Israeli exports to Russia have been falling since 2014, when the West imposed a milder round of sanctions following Russia’s annexation of Crimea. A combination of sanctions, a plummeting ruble and recession in Russia in the year that followed slashed Israeli exports to Russia by 30 percent, the Export Institute says.
That story is repeating itself now, except that this time the sanctions are much more comprehensive and the recession will be even more severe. A survey of economists conducted by Russia’s own central bank sees gross domestic product contracting 8 percent this year.
Few Israeli companies have joined their peers in the United States and Europe in announcing bans on doing business with Russia, but few have anything to ban. Among those that have, Unilever Israel issued a statement about sanctioning Russian business, but did so as a wholly owned unit of the EU-based food maker. A handful of high-tech companies have done the same, including the online freelance market platform Fiverr and payments company Payoneer.
Not all Israeli companies have the luxury of cutting ties, though – most notably property developers with real estate assets in Russia. Israeli property holdings in Russia have fallen sharply from the boom years before 2014, but some companies continue to have investments there.
MirLand, for instance, has projects in Saint Petersburg and Yaroslavl. Gazit Globe, meanwhile, said this month it held over $310 million in assets in Russia (although that represents just 2.4 percent of its total portfolio). And Israel Canada has a stake in the giant Planetgrad project under development in Saint Petersburg, slated to contain 30,000 apartments and 1.6 million square feet (150,000 square meters) of commercial space.
Their headache is less about Western sanctions than about Russian countermeasures. As MirLand reported to the Tel Aviv Stock Exchange this month, Moscow has barred foreign companies from repatriating foreign currency, so its Russian operations can’t pay dividends or debt. Even though it is an Israeli company, its holdings in Russia are held through a subsidiary in Cyprus – an EU member that Russia has designated as unfriendly, meaning it can’t now sell the assets either.
Russia’s economic woes are compounding the troubles of MirLand, Gazit Globe and Israel Canada. The value of the ruble has plummeted, cutting into the book value of their properties, and local interest rates have soared.
No wiggle room
While the Israeli government is not joining the West’s sanctions regime, the EU and, even more so, U.S. rules give Israel’s biggest companies little room to maneuver.
In an online seminar offered earlier this month by the Economy Ministry’s Foreign Trade Administration, Israeli companies were told just how onerous and wide-ranging Western sanctions are against Russia, compared to any previous measures. Because the Israeli economy is so tightly meshed with the U.S. and European economies, few big Israeli firms can remain aloof from the new rules.
In the case of U.S. sanctions, Andrew Schlossberg, of the U.S. law firm Akin Gump Strauss Hauer & Feld, noted that Washington regards Israeli companies with a U.S. presence as being answerable to American rules, but also those using American services such as insurance or forwarding (maybe even a U.S.-based email server). Foreign businesses are also subject to sanctions rules in Washington’s eyes just by using U.S. dollars.
“Even if you’re in Israel and you’re dealing with a counterparty in U.S. dollars, the U.S. is essentially saying, ‘We have jurisdiction over this transaction because of the use of U.S. dollars.’ It’s quite broad,” Schlossberg said.
The EU doesn’t assert that kind of extraterritoriality on its sanctions regime, but Isabelle Van Damme, a partner in the Brussels law firm Van Bael & Bellis, told the seminar that the bloc wasn’t giving Israeli companies much wiggle room either – even if they have no operations in the EU itself.
“Any business that you’re doing with the EU is affected by the sanctions,” she said. “This could mean, for example, that you hold a bank account in the EU through which you do certain transactions, or even if you make payments through an intermediary bank in the EU on its way to Russia.”
The bottom line for most Israeli businesses, including the banks they work with, is that they are “confused,” says one industry source. The rules are complicated, often not clearly defined, constantly changing and enforced by authorities in far-off Washington and European capitals.
Nevertheless, Russian oligarchs – most notably Roman Abramovich – have received a lot of attention from the Israeli and world media as a sanctions-busting risk. However, Ram Gamliel, a Ramat Gan attorney who works with Russian businesspeople who have come or are thinking of coming to Israel, says the great majority don’t fit the oligarch definition.
They are wealthy, he says, but didn’t make their fortunes through Russia’s tainted privatization process but through ordinary business. Over the years, and especially since 2014, they have established a presence in Israel – either as immigrants with dual citizenship or by buying homes and making investments locally.
He estimates that they number a couple of hundred and expects another “wave” to be arriving in the wake of the Ukraine war.
These wealthy Russians haven’t been personally targeted by the United States or Europe, but Gamliel worries they are being smeared wherever they go simply for being Russian. One reason they may prefer Israel over Europe and other sanctuaries they favored previously is because Israel is seen as friendlier these days.
“We haven’t seen such a generalized witch hunt here: ‘If you’re Russian, we’ll take away your money.’ In Israel, you don’t fear a witch hunt. They won’t be acted against just because they’re Russian. If they’re on the wrong side of the law, and there’s a legitimate reason to act against them, yes. But it won’t be like you see in other places, especially in Europe,” Gamliel says.
Russia’s political instability and chronic economic problems caused many of them to move their money out of the country long before the war with Ukraine broke out, so they don’t have to contend with currency controls, he adds.
Even now, though, they aren’t really fleeing Russia. “A lot of them understood the situation beforehand,” Gamliel explains. “They regard the situation now as temporary – not something that’s going to last for years. They look at the West as a paper tiger … so they say, ‘We have to be prepared six months or eight months.’”