The historic announcement in mid-August of normalization of relations between the United Arab Emirates and Israel ignited a surge of excitement in the two countries, bringing years of covert business and security ties between Israel and in the UAE into the open. Over the past decade, the UAE had been leading efforts to defuse the Arab world’s historic animosity toward Israel, due to the security imperative to cooperate with Israel versus Iran. Furthermore, as part of its efforts to develop a more progressive image in the West, there was substantial “de facto normalization” happening even before last month’s breakthrough, including plans for Israeli participation in Dubai’s EXPO 2021. Similarly, outward-looking Israelis have long been fascinated with the UAE, particularly with the futuristic vibe of Dubai, and during over a dozen Israeli delegations have been granted special access.
The initial diplomatic breakthrough was followed on August 29 by a formal decree the United Arab Emirates scrapping a five decades-old economic boycott against Israel, allowing trade and financial agreements between the countries. President Khalifa bin Zayed Al Nahyan issued the decree as part of “the UAE’s efforts to expand diplomatic and commercial cooperation with Israel, leading to bilateral relations by stimulating economic growth and promoting technological innovation.” (Source: UAE’s official WAM news agency)
The decree means UAE citizens and businesses are now free to do business with—and invest in—Israel, and to forge partnership with Israeli companies regarding opportunities in the UAE and beyond. Plans for an exchange of embassies, the potential for expanding tourism and business between these two dynamic countries that share a commitment to technology and innovation has massive diplomatic and strategic implications, some of which may not be fully-appreciated for years.
The accord has broad implications beyond the two countries: If diplomacy moves smoothly, other Arab countries such as Oman, Bahrain and Sudan may soon follow the normalization path with Israel. For Israel, normalization with Saudi Arabia would be the ultimate—and logical—progression. There are already both subtle and tangible signs of detente between Israel and Saudi Arabia. The latest example is that El Al—Israel’s national airline—flew a historic flight on August 31 to Abu Dhabi—transiting the airspace of Saudi Arabia—with an Israeli governmental delegation. Following closely on September 2, is the approval for all flights between the UAE and Israel to utilize Saudi airspace, which will also bring the entire Far East closer to Israel. Furthermore, the massive planned Saudi “future city” of Neom on the Red Sea—close to Eilat —could not be developed without tacit Israeli cooperation due to its proximity to vital international shipping lanes in the Red Sea
We anticipate significant impact in bilateral trade, direct investment in infrastructure, cooperation in science, agriculture, water, energy and tourism. Communication and transactions are also expected to be much easier now that the UAE has opened its phone lines to Israel, stopped blocking access to Israeli websites, and established SWIFT connectivity for direct financial payments.
On the commercial front, the Carnegie Endowment for International Peace estimated that quiet trade relations between Israel and the Gulf states already exceed $1 billion a year, with a large part of this being in security and cybersecurity-related deals between Israel and the UAE (Source: Aaron David Miller in POLITICO, 27 May 2020). With comprehensive bilateral trade and investment agreements expected to be signed by the end of September, Israel’s Finance Ministry now sees potential for annual trade with the UAE quickly growing $2 billion/year, and surging to $6.5 billion once cooperation matures (Source: Finance Ministry Deputy Chief Economist, cited by Bloomberg News, 30 August 2020).
Israeli companies are leaders in AgriTech WaterTech and FoodTech, all of which can be deployed in the UAE. Israel expects to develop joint ventures that can help improve the oil-rich Gulf nation’s food security, such as water desalination and crop cultivation in the desert. There is also vast potential UAE direct investment in Israeli energy fields in the Mediterranean. This might also result in a “re-rating” the value of Israel’s energy assets, a process started by Chevron’s acquisition of Noble Energy, which has substantial assets in both Israeli and Cypriot waters in the Eastern Mediterranean.
Investors Will Soon Recognize The Financial Impact Of This Historic Step
Beyond trade and direct investment, we anticipate significant portfolio investment flows into Israel’s capital markets from Gulf-based investors, starting with UAE’s massive government-controlled funds. Currently, UAE-based Sovereign Wealth Funds—Abu Dhabi Investment Authority (ADIA) in particular—invest globally in public equities linked to benchmarks that are "ex-Israel." Although the weight of Israel is approximately .5% in global benchmarks like MSCI World and FTSE Developed World, even a shift of less than one-half percent of these massive portfolios would still result in significant asset flows.
Other UAE-domiciled SWFs, including Mubadala, Investment Corporation of Dubai, and Emirates Investment Authority, collectively, manage more than US$1.1 Trillion, and the region’s (Gulf Cooperation Council) SWFs manage more than US$3 trillion (Source: Al Arabia (English), 29 August 2019).
The potential asset allocation shift into a broad range of Israeli asset classes—public equity, bonds and VC/private equity—is enormous. We expect that Israel’s capital markets will begin to recognize the prospects of this allocation shift in the coming months. ADIA alone has more than US$650 billion in assets, of which between 32 and 42% is allocated to Developed Market Public Equities and 10-20% in global government bonds. An allocation to Israeli equities that is close-to-benchmark weights by ADIA alone could result in more than S$1.1 billion in portfolio flows. And if some of that allocation is implemented by ADIA’s active managers, the flows could be even larger, perhaps up to $2 billion. And whatever shifts are implemented by the gulf SWFs may inevitably be emulated by the numerous other investors in the UAE, as well as Gulf-linked assets that are managed in Europe and beyond.