Lengthy Iran Conflict Likely to Cost Israeli Economy Billions of Shekels

Former finance ministry director general says nuclear Iran involves considerable economic cost to Israel, adds that war with Iran would be much more expensive than Second Lebanon War.

In the heart of the Jerusalem hills is a "pit" which, like its twin in the Tel Aviv headquarters of the Defense Ministry, is intended for use by top government officials in the event of a national security emergency.

It's safe to assume that, in light of growing talks during the past few weeks about an Israeli strike on Iranian nuclear facilities, the pits have been getting thorough inspections and sprucing up.

Construction on the Jerusalem underground war room began in 2002, under Prime Minister Ariel Sharon, and it took a few years and somewhere between NIS 500 million and NIS 1 billion to complete.

In the event of an Israeli strike on Iran and an anticipated Iranian counterstrike, Prime Minister Benjamin Netanyahu and the core of government activities will likely move to the pit in the Jerusalem hills, while Defense Minister Ehud Barak and the top commanders of the Israel Defense Forces can be expected to go underground in Tel Aviv.

They aren't the only ones preparing for an emergency. The Bank of Israel, for example, has its own underground hideaway, more than an hour's drive from Jerusalem, as does the Finance Ministry, while the Central Bureau of Statistics protects its precious data from nuclear attack with radiation-proof storage facilities.

Price for no war, too

While all government ministries and top agencies have protocols in place in the event of war with Iran, including an Iranian counter-attack against Israel, most are tight-lipped about the details. And while no one knows whether Israel will attack Iran or how Iran would respond, what is known is that a war with Iran could cost Israel tens of billions of shekels.

Yarom Ariav, Finance Ministry director general from 2007-2009, is considered an expert in defense budgets.

"Before talking about the implications of war with Iran, it must be said that the alternative carries a price, too. A nuclear Iran involves considerable economic cost to Israel, from its effect on our economic rating to large security outlays," Ariav points out.

He notes that after the Second Lebanon War of 2006 - which lasted 34 days, involved only one front and did not require full troop deployment - the treasury issued an NIS 8.2 billion extraordinary allocation to refill the IDF's emergency armories. In addition, the state paid out NIS 7 billion in compensation and rebuilding costs after the war.

"And that was before the expensive weapons systems we have now - the Arrow, Magic Wand and Iron Dome," Ariav notes, adding that a war with Iran would be much more expensive.

"There's also the collateral damage. Israel's daily domestic product is around NIS 3 billion per day. The question is how many days the economy would be paralyzed if war breaks out. If 50% of the economy is paralyzed, that's a loss of NIS 1.5 billion a day, NIS 45 billion a month," Ariav notes, adding that the long-term effects cannot be forgotten.

"Economists called the decade after the Yom Kippur War 'the lost decade.' There was a decline in the standard of living. Enormous amounts were diverted into restoring the military establishment, at the expense of civilian budgets," Ariav said, adding that a war would hurt Israel's credit rating, tourism and foreign trade.

In April, Fitch Ratings announced that Israel's credit rating would rise if the tension with Iran abated and noted that its decision to retain its Stable outlook for Israel "does not incorporate event risk in the shape of a possible attack on Iran's nuclear facilities."

An executive at an international investment bank, who maintains close contact with investors, said this week that foreign investors are very concerned about the situation with Iran, noting that foreign activity on the Tel Aviv Stock Exchange is near zero these days, largely because of the Iran issue.


Gilad Alper, an analyst at Excellence Nessuah Investment House, disagrees, saying that for foreign investors, “Israel always has a dark cloud hovering above.”
Alper notes that credit default swaps on Israeli bonds − “a classic measurement of the risk the market assigns to a state” − have not risen. According to Alper, the possibility of Israel attacking Iran does not affect whether foreigners invest in the country. He even suggests that a brief, successful Israeli strike could benefit the local economy. “You remove the cloud hanging over the economy, Israel demonstrates its technological superiority − and a few articles go up on Bloomberg about how Israel achieved that superiority,” Alper says, adding that Iran is not the main problem with the Israeli economy.
Giora Eiland, a former head of the National Security Council who is now a senior research fellow at the National Institute for Security Studies, also does not believe that a strike on Iran will critically damage the Israeli economy.
“The direct cost of the attack itself is negligible. What costs is preparing for a strike − the spending on intelligence and the relevant armaments − and most of that we’ve already paid. It’s part of the reason for the increase in the defense budget in the past few years,” Eiland says. The costs arising from an Iranian counterstrike, Eiland admits, cannot be estimated “without knowing the nature of the response − and I personally think it won’t be dramatic.”