The Bank, the Buck and the Next War

Bank of Israel chief Stanley Fischer has been buying dollars for two years. While the official reason for this is to boost exports by devaluating the shekel, there are other considerations, which may not bode well for the future

Every few weeks I get a call from an international investment house or a risk-assessment firm. The callers always wants to know if and when Israel will attack the nuclear facilities in Iran.


"You have to understand that this is a critical question for my employers," one adviser told me. "They need to decide whether to go long or short in oil."

An Israeli military operation will send energy prices spiraling worldwide, and investors want to decide in advance what the most expedient move would be in such a situation. One investor says he is uneasy about Israeli bonds, which have done well in recent years, and he wants to protect himself against a potential fall should war break out.

Bank of Israel Governor Stanley Fischer is readying for a possible war by hoarding vast amounts of dollars. Last month, Israel's foreign currency reserves reached an all-time high of $67 billion. They have been increasing steadily for the past two years, since Fischer started buying dollars on the open market. The policy is presented as being aimed at creating a deliberate devaluation of the shekel in order to support Israeli exports. But according to a senior official in the economic establishment, "There are also geopolitical considerations, which do not exist in other countries." Most countries aim to build up a "security cushion" of hard currency to guarantee their ability to repay debts and finance imports in hard times, he explains, "But because of the geopolitical situation, we have a little more [hard currency] than what the economics textbooks recommend."

Prime Minister Benjamin visit to the United States this week is likely to rattle the investors and their advisers. Following a long period of quiet on the subject, Netanyahu has catapulted the confrontation with Iran back into the political headlines. He called on the U.S. administration to posit a "credible military threat" against the Iranians, and added that the sanctions as such will not induce Tehran to abandon its threatening nuclear program.

The U.S. defense secretary, Robert Gates, immediately took issue with the prime minister. The sanctions are working, he declared. But the Israeli message was received loud and clear. Netanyahu is trying to influence the agenda of U.S. President Barack Obama, who is looking for another realm to invest his efforts in the next two years, following the Democratic Party's serious setback in the midterm Congressional elections. Netanyahu wants "Iran first," but Obama is insisting on "the settlements first." Obama's relatively mild response to reports about Israel's intention to build thousands of new residential units in Jerusalem's Har Homa neighborhood and elsewhere across the Green Line indicates that he is looking to cut a deal with Netanyahu. The hopes and expectations of the Israeli left - that Obama would come down hard on Netanyahu immediately after the elections - have so far not been fulfilled.

Netanyahu wants to offer Obama a blueprint for an Israeli-Palestinian agreement that can be achieved within a year. In return, he has a few requests: a large-scale security package from the U.S. - not only for the West Bank; the enlistment of additional Arab states in a broad regional settlement that will be signed parallel to the Israeli-Palestinian agreement; and an American demand from the Palestinians to return to the talks, rather than presenting their case before the UN Security Council. Netanyahu knows that before these requests are discussed he will have to give Obama something on the settlements, in order to overcome the obstacle of the construction freeze.

This week's preoccupation with Har Homa is diverting attention from Netanyahu's public call for an escalation in the confrontation with Iran. True, he did not urge the Americans to load stealth aircraft with bombs and destroy Natanz. The premier knows this is not the way Washington works: The Americans go to war only in the wake of a provocation by the other side. Accordingly, he made do with a proposal for a "credible military threat." The fact is, says Netanyahu, that in 2003 the Iranians took fright at the display of American might in the conquest of Iraq and suspended their nuclear project for a time.

In his imagination, Netanyahu sees a replay of the 1962 missile crisis in Cuba. In this scenario, the U.S. imposes a maritime blockade on Iran and the economic stranglehold prompts Ayatollah Ali Khamenei, Mahmoud Ahmadinejad and their colleagues to throw in the towel and drop the nuclear program.

President John F. Kennedy won everlasting glory for the courage and control he demonstrated in the missile crisis, in which the world was closer than ever before to a nuclear catastrophe, after the Soviets installed surface-to-surface missiles on Fidel Castro's island - a short hop, skip and jump from Miami, Washington and New York, in ballistic terms. Kennedy put his foot down and the Russians backed off and removed the missiles from Cuba (after the U.S. promised quietly to remove its missiles from Turkey ). If Obama can reprise this exercise and get Iran to forgo its nuclear project without firing a shot, he will justify the Nobel Peace Prize he was awarded last year big-time - and earn himself a place of honor in history.

But that scenario is better suited for a Hollywood action movie. In reality, Netanyahu does not trust the Americans to take serious action against Iran. If he truly believed that Obama wanted to put a stop to Iran's work on a nuclear bomb, he would not be preaching to him publicly about what to do. The prime minister apparently thinks that Washington has reconciled itself to Iran having nuclear weapons capability, and that it intends to contain Tehran by diplomatic means and deterrence, but not to use force. He is disturbed by what he heard about the renewal of the talks between Iran and the big powers, in which the Americans dropped their demand for a complete halt to uranium enrichment in Iran. But the prime minister's public castigation looks like an Israeli attempt to "wag the dog" and drag America into a war it doesn't want.

What course of action will Netanyahu take? Will he launch a preventive war against Iran? The risks are great. Accepting an Iranian nuclear capability would place Israel under a dark cloud. Bombing the Iranian facilities from the air, or any other aggressive action that could be identified with Israel, is liable to make the warning issued by the outgoing director of Military Intelligence, Amos Yadlin - who predicted heavy Israeli casualties in the next war - a reality.

If Tel Aviv is assaulted by missiles and rockets, and airlines stop flying into Ben-Gurion International Airport, Israel will suffer a serious economic blow as well. The impressive achievements of the past year - Israel's high growth as compared to that of the Western economies, the country's 15th place ranking in the United Nations' human development index, and Tel Aviv's third-place position on the "Lonely Planet" list of tourist destinations - will instantly evaporate.

Israel has not recovered to this day from the economic blow inflicted by the Yom Kippur War. Will it take another risk of this magnitude?