“An economic risk of a magnitude we have never encountered before”: The sanctions threat facing Israel
Elah Alkalay warns that international measures targeting settlement activity could expose Israeli financial institutions to serious restrictions. She says the market is betting that the fallout will remain limited.
The possibility that international sanctions could spill over into the financial system and paralyze parts of the Israeli economy has emerged as a growing concern for the local financial sector. Now, an unusually explicit warning on the subject has come from the heart of the financial establishment itself.
Elah Alkalay, chairperson of IBI Mutual Funds, warns that the market is overlooking this risk, which has yet to be reflected in asset prices.
The concern stems from a statement issued last month by 12 countries, including the UK, France and Canada, outlining their intention to pursue measures against economic activity in Israeli settlements. Israel’s banking sector is already preparing for the possibility that legislation in the UK and other countries could prohibit financial institutions from financing projects beyond the Green Line. A legal review prepared for the Association of Banks in Israel indicates that binding legislation would take time, but warns of a more immediate risk: a “chilling effect” in which international financial institutions tighten their due diligence on Israeli counterparts out of concern over legal and reputational exposure.
In an interview with Calcalist, Alkalay explains why construction in the E1 area has become a diplomatic flashpoint, how financial contagion could spread through the economy, and why she believes the local market is taking a massive gamble by failing to price in the risk.
In recent years, Israel has frequently faced pressure from boycott movements such as BDS. What is the fundamental difference between that kind of pressure and the state-level punitive measures now taking shape?
“The difference is dramatic. In that sense, BDS is child’s play. In that case, you have individuals who wake up one morning, decide that their political consciousness outweighs their economic interests, and opt for a boycott, whether as private citizens or as institutions. But once this escalates into state-imposed sanctions, it becomes a matter of law. This means it is no longer a choice. Even if I am a pro-Israel individual living in New York, engaging with entities in Israel could constitute a violation of the law.”
Why is international attention focused specifically on construction in the E1 area, located between Jerusalem and Ma’ale Adumim?
“The nightmare scenario is that further development in the E1 area, which is currently in everyone’s crosshairs, will trigger a harsh international response. The E1 zone is viewed as a point of no return. It separates the northern West Bank from the south, lying between Ramallah, the financial and political hub, and Hebron, the industrial and commercial center. Creating this separation is perceived by many countries as an irreversible step.
“Consequently, even within the Israeli government, there are those who oppose moving ahead with the plan. After all, there is no shortage of other land available for development, so why build specifically there? Because it serves as a de facto declaration regarding the annexation of Judea and Samaria, a fundamental shift that is highly symbolic.
“Since large parts of the world now recognize the Palestinians’ right to self-determination, they view this as a declaration of occupation. One cannot accept an occupation by Israel while rejecting Russia’s occupation of Ukraine. Once a situation is accepted in which one state encroaches on the territory of another, it plunges the world into turmoil. Since World War II, there has been a concerted effort to prevent such a scenario. This move carries significant symbolic implications and could pave the way for further dangerous developments.”
Even if sanctions are imposed on companies building there, could the impact extend to the banks and institutional investors financing them? How serious is the risk that banks could be cut off from the global system?
“It depends on the precise wording of the legislation, which has not yet been passed, but we can look at what happened to Russia in Europe. If sanctions of this magnitude are imposed, the worst-case scenario is that they would target not only the contractors but also their suppliers and financiers. In that event, banks would be exposed, as would non-bank credit providers and any other entity that chose to finance them. Essentially, foreign entities would be prohibited from doing business with them.
“If this were limited solely to the British financial system, that would be one thing. But if international payment systems fell within the scope of the British sanctions regime, that would be far more serious. For settlers who have already been subjected to sanctions, losing access to credit cards has been the most severe blow. Extending the comparison to Russia, where both Europe and the US are involved, such measures could also include asset freezes and visa restrictions.
“If personal sanctions are imposed on you and you want to travel to an apartment you own in Portugal, you may not be able to do so.”
For Alkalay, personal sanctions illustrate how financial isolation can work. The broader concern is what could happen if the same mechanism were extended to companies, suppliers and the institutions that finance them.
“The major difference, however, is that Russia has energy resources, abundant agricultural commodities and a crypto-based economy that enables it to conduct trade. We have gas, but no oil. We are entirely dependent on imports. To survive, we rely on the global financial system. If exports were to halt or we were cut off from that system, our economy could not truly survive. The risk-reward ratio here is simply unfathomable.”
Could the impact of such sanctions extend beyond real estate and finance, affecting the broader Israeli economy, including the high-tech sector?
“Over the past four years, more than 200,000 Israelis have left the country, and about 70% of startups have chosen to incorporate abroad. The main catalyst for these trends was the erosion of the independence of the civil courts, alongside the expansion of the powers of the rabbinical courts. When these processes were halted, the outflow of capital and companies also stopped. However, an international boycott could serve as an equally powerful trigger for such a trend, as we saw in Russia.”
The risk of a boycott has not yet materialized. Is it already reflected in local market prices, for example in the shekel’s relative weakness or in bond yields?
“No. The local market is making a massive bet that things will not go that far, or that any potential response will not reach the scale seen in Russia. This risk is not priced in at all, not even the possibility of the UK imposing a financial boycott. It is certainly not reflected in the valuations of bank and insurance stocks.
“I suspect that part of what is baked into these valuations is the assumption that any future government will act rationally, refraining from development in the E1 area and pursuing a comprehensive diplomatic settlement.
“Netanyahu, too, refrained from taking this step for many years. Furthermore, these processes take time. Tenders are issued, potential bidders emerge and agreements are signed. Only then would countermeasures begin. Many things could happen along the way. Still, it seems to me that a reality in which this risk is not priced in at all is difficult to justify.”
As someone who manages funds for the public, how do you translate this geopolitical risk into investment decisions? Should exposure to the banking and real estate sectors be reduced?
“I believe most of the real estate sector will not be exposed to this. It depends on which companies submit bids for the tenders and whether they are publicly traded. Moreover, the sector is already being priced with a very pessimistic outlook. That said, for the more conservative portion of an investment portfolio, where risk-averse investors seek to minimize exposure to shocks, it would make sense to shift allocations toward international markets rather than Israel.”
Are you already receiving questions from foreign investors about their exposure to this activity?
“The foreign entities we work with are well aware of the situation and are making their own assessments. Their exposure to the Israeli bond market is, by design, specific and limited in scope. They operate primarily where they can capitalize on arbitrage opportunities. The equity market is more complex, although their current exposure is quite targeted, with the exception of the banking sector. Consequently, we have not yet received specific inquiries from them on this matter.”
Institutional investors in Israel rarely speak out on issues with such sensitive political or diplomatic implications.
“We simply would not be doing our job if we did not address this. There is an economic impact at stake, and if it materializes, the consequences would be dramatic. According to data from the JPPI database, there are 40 documented instances of sanctions or restrictions in the financial sector, followed by the defense and arms sectors and trade, with 24 instances each.
“By the time such sanctions are actually implemented, it is already too late. While there may be a window of at least two months to take action, we are facing an economic risk of a magnitude we have never encountered before.”
