Israeli Financial Expert Warns Markets Are Ignoring Severe Sanctions Risk
IBI Mutual Funds chairperson Ela Alkalay warns that the Israeli financial market is dangerously ignoring the risk of international sanctions over settlement activity and E1 corridor development, comparing the potential economic fallout to the isolation of Russia.
The possibility of international sanctions spilling over into the financial system and paralyzing parts of the Israeli economy has become a major risk occupying local financial institutions. Ela Alkalay, chairperson of IBI Mutual Funds, is warning against the market ignoring this risk and failing to price it into asset values.
The backdrop to these concerns is a statement issued last month by 12 nations, including Britain, France, and Canada, signaling their intention to advance measures against economic activity in settlements. Israel's banking system is already bracing for the possibility that legislation in the UK and other countries could prohibit financial institutions from providing financing services to projects beyond the Green Line.
The Financial Contagion Mechanism
In an interview with Calcalist, Alkalay explains why advancing construction in the E1 corridor is a political tipping point, how the financial contagion mechanism will operate, and why she believes the local market is taking a massive gamble by failing to price in the existing risk.
Over recent years, Israel has frequently dealt with pressure from boycott movements like BDS. Alkalay explains the fundamental difference between that pressure and the state-level punitive measures currently taking shape: "The difference is dramatic. In this sense, BDS is child's play. There, you have individuals waking up and deciding that political awareness outweighs their economic interest, opting for a boycott either as individuals or as institutions. But the moment it becomes state-level sanctions, it becomes the law. This means it is out of my hands, and even if I am a pro-Israel person living in New York, working with entities in Israel would constitute a violation of the law."
The Significance of E1 and the Global Stance
Why does international sensitivity focus specifically on construction in the E1 area between Jerusalem and Ma'ale Adumim? "The worst-case scenario is that continued development of the E1 area, which is in everyone's crosshairs, will lead to a harsh international response. The E1 zone is seen as a point of no return. It separates the northern West Bank from the southern, and Ramallah—the financial and political center—from Hebron—the industrial and commercial center. If you create this severance, many countries view it as an irreversible step."
She adds that because large parts of the world currently recognize the right of Palestinians to self-determination, they view such moves as an expression of occupation. "And you cannot accept an occupation in Israel while rejecting Russia's occupation of Ukraine. The moment you accept a situation where one country enters the borders of another, it plunges the world into a spiral that people have tried very hard to avoid since World War II."
Implications for Banks and the Broader Economy
Even if sanctions are imposed on companies building in those areas, will it inevitably spill over to banks and institutional investors financing them? Alkalay warns that if sanctions of this magnitude are decided upon, the worst-case scenario is that they would target not only the contractor but also suppliers and financiers. In such a case, banks and non-bank credit bodies would be exposed, meaning foreign entities would be barred from working with them.
Unlike Russia, which possesses vast energy resources, agricultural commodities, and a crypto economy to sustain trade, Israel has natural gas but no oil and is entirely dependent on imports. "To survive, we must have the global financial system. If exports here stop, or if we are cut off from the system, our economy cannot truly survive. The risk-reward ratio here is simply incomprehensible."
Market Pricing and Asset Allocation
Despite these looming risks, the local market is not pricing them in. "The local market is making a huge bet that things will not go there, or that the response will not reach Russian proportions. This risk is not priced in any way, not even the scenario where England imposes financial sanctions. This is certainly not priced into the stocks of banks and insurance companies," Alkalay notes.
As someone managing money for the public, how does one translate such geopolitical risk into actual investments? Alkalay suggests that while most of the real estate sector may not be heavily exposed depending on public tenders, a logical move for risk-averse investors in the more solid parts of their portfolios is to create a bias toward foreign markets rather than Israel.
