Pyramids in the Sky

Israelis learned from the story of Azzam Azzam. Decades of peace with Egypt have not brought booming business.

The story began when Gabi Bar's phone rang. "He was the Industry and Trade Ministry officer responsible for business ties with Arab countries," says an Israeli who does business in Egypt, describing an incident that happened about five years ago. At the other end of the line was Yoram Blizovsky, the legendary Manufacturers Association director. Israelis who had founded a company in Port Said had been arrested that night by the Egyptian police, Blizovsky told Bar. He urged Bar to act quickly before things got out of hand.

The two Israelis had been arrested for public rowdiness, Israel was told: Business rivals had told the police that they were running around the streets drunk. The charge was never proved and finally, after lightning intervention by the Israeli government, the two were whisked off on the first available plane to Israel. They never went back. Their investments in Port Said were lost.

But perhaps there's some comfort in having company. These two aren't the only ones with stories like that. "The names Dvora Ganani and Azzam Azzam hover above the Israeli-Egyptian business scene and still tell Israelis not to come to Egypt," says the Israeli source. Ganani had been engaged in Israeli-Egyptian trading during the 1990s, and even moved to Cairo.

But the authorities didn't appreciate her style of business or her flamboyant style. One day she was arrested. Happily for her, then-prime minister Ehud Barak arrived on a visit shortly after her arrest and announced that he wasn't leaving without her. Ganani returned to Israel on his plane, but had to leave her business behind.

Azzam Azzam was a lot less lucky. He was suspected of Mossad affiliation and espionage and was arrested. Israel's denials didn't move Cairo. Only after years of delegations and negotiations was he freed.

The peace with Egypt has always been a "cold" one. Egyptian president Hosni Mubarak thaws it occasionally, but it never has developed beyond "lukewarm." The trade agreement signed in the 1980s also has had its ups and downs. Israel exports very little to Egypt, mostly agricultural inputs and imports roughly half as much from Egypt, not including the oil Egypt undertook to provide in the peace agreement that returned the Sinai Desert.

Trade rose in the early 1990s, reaching as much as $60 million a year, mostly agricultural equipment, machinery, chemicals, textiles, metal products, electronics and fertilizer. Imports again ran lower, but still, up to $40 million a year. That was when Israeli textile companies seeking to lower their labor costs began thinking of moving their manufacturing to Egypt. Delta Galil made the leap and set up a plant in Cairo, while Bagir began manufacturing in Port Said. Today their plants are all that remain of corporate Israel's few investments in the neighboring country.

During the mid-1990s Israel and Egypt were exchanging high-ranking business delegations and ministerial promises of joint ventures flowed like the Nile. Nothing ever came of it, at least not publicly.

The second intifada was the perfect excuse for Egypt to cool down the peace again. Mutual trade declined to about $50 million during those years, though the pace picked up again in 2005, when Israel disengaged from Gaza. Ultimately the two countries entered the QIZ trade agreement - Qualifying Industrial Zones. The agreement opened the door to the U.S., with no customers levy, quota or limitation, to all Egyptian products as long as at least 11.7% of the final product originated from Israeli inputs. Later Israel agreed to cut that to 10.5%.

Meaning, in order to walk through that door to the U.S., Egypt's manufacturers had to use components made in Israel. But there was another string attached. To avoid uncontrolled import from Egypt, the plan applied only to plants located in designated industrial zones agreed upon by Washington, Jerusalem and Cairo. These were called the "QIZ."

Two and a half years after the QIZ pact was signed, Egypt has 10 such industrial zones. Most of their export companies are textile makers.

Unless you want your own private exodus from Egypt, you might prefer to place your direct investments elsewhere. You can't separate the diplomatic process from the economic one, Mubarak said more than a decade ago, and that pretty much says it all. He never did believe in economic shortcuts to advance relations between Israel and its neighbors. Anyway, given his paramount goal of maintaining stability, he didn't want to warm up relations with Israel as he battled to quash Islamic extremists.

Stepping up strategic relations with Israel - legitimizing Israel in the region - doesn't appeal to him, either. Israel's regional isolation is convenient: It won't get in the way of Egypt's regional leadership.

Economic relations between Egypt and Israel have been tied to the peace process with the Palestinians. Relations warm up as agreements approach, only to cool.

Yet business has been growing over the years, partly because of pressure from America. But it's almost all sales, not joint investment on Egyptian soil. Israel's exports to Egypt totaled $29 million in 2004, a figure that reached $140 million in 2007. Imports from Egypt grew to $95 million last year. Yet Gabi Bar is optimistic. QIZ was pushed by Israeli and Egyptian businessmen, he points out, and is considered a success in Egypt. Egyptian exports to the U.S. doubled from 2004 to 2006, he notes.

Yet to do business there, you might want to work with local partners and not invest your own equity. Build the plant outside Egypt and sell there, that's the recipe for sleeping well at night, given that Egypt has been known to expel Israelis without compensating them for their business - and given the evident difficulty that Israelis have in reading Egypt's signals.