Upon the outbreak of the Ukraine war, Yair Lapid (then foreign minister) asserted that Israel would never become a safe haven for Russian oligarchs. Lapid made Israel’s joining the sanctions on Russia subject to the continuation and intensification of escalation in Ukraine, pointing out that “Israel hasn’t yet involved in the sanctions on Russia.”
Following Russia’s threat to close the Jewish Agency, Israel menaced to take negative moves against Russia, possibly involving Israel’s joining the sanctions regime against Russia.
This article investigates the likelihood of imposing sanctions on Russia by Israel and their potential implications for political stability in Israel.
A Bird’s Eye View
(1) The world’s oligarchs find in Israel a safe haven for their funds and personal due to several factors, including the following:
- The Israeli regulations that makes room for wealth accumulation, with tolerant policies that don’t necessitate providing the source of funds and create more space for tax evasion, allowing for increasing investments in the Israeli market.
- Oligarchs’ potential to influence the political circles in Israel, which could give rise to decisions that increase the power of the affluent, as has been evidenced by granting Roman Abramovich (the Russian billionaire) the Israeli citizenship in 2018 following the economic sanctions imposed on Russia at the time.
It is no wonder then that Israel ranks fourth among countries attracting millionaires and is classified as a burgeoning destination for wealth seekers, with millionaires residing in the country exceeding 157,000, a figure that is expected to grow by 2024 to 174,000 millionaires with 20 billionaires.
The United States is ranked first among countries hosting affluent Jews in the world, followed by Russia and Israel. Reports indicate that there are 12 Jews billionaires who have Russian citizenship, with a total wealth of $82 billion (based on 2020 statistics). However official Russian reports of 2014 state that they are 48 billionaires with a total fortune of $133 billion.
(2) Formally, Israel has not yet joined the sanctions against Russia, but has timidly prevented funneling any new Russian funds to Israel. Recently, a government letter has been circulated to Israeli Banks, prohibiting receiving deposits or processing transactions from Russia.
Israeli bank reports indicate that about 20 percent of the total wealth of the richest Russian-Jewish oligarchs are still in vaults of Israeli banks, with no ban enforced so far.
Determinants of the Israeli Conduct
Before engaging in any economic sanctions against Russian oligarchs, there are several key determinants that Israel should think long and hard of, which we detail below.
1. Israel has no established sanctions system in place: As such, for sanctions to be imposed, a special sanctions committee is set up to decide separately on each case, considering every case merits and the negative repercussions of sanctions on the Israeli economy. Under the scenario of Israel imposing sanctions, it will basically conform to the sanctions list provided by the United States.
2. The Milchan’s Law: In 2008, Ehud Olmert’s government enacted the Milchan’s Law, which provides for exempting the world’s rich from paying taxes or submitting any financial disclosure statements to Israeli banks provided that they infuse the Israeli economy with investments. In 2018, Netanyahu desperately defended the law after growing calls for its cancellation.
But will Israel venture upon repealing the law? In effect, there have been eight failed attempts to annul the law, all of which were faced by the opposition of then finance ministers Yair Lapid and Moshe Kahlon, along with State observers.
Repealing the law will have a negative impact on the rest of oligarchs investing in Israel, who may flee to regional countries such as the UAE or Turkey. This will cause Israel to lose an important driver of economic growth, particularly if we know that Israel comes fourth among countries gaining the wealthiest people (see the Million Migration chart below).
Regarding the potential sanctions to be imposed on Russia and Russian Oligarchs in Israel, several scenarios arise before the Israeli decision-maker, including:
I- Exceptional Measure in Coordination with the US
Seemingly, several allies of the United States are opening up to the Russian market, including India, which seeks to establish a special mechanism to import energy from Russia away from the sanctions system. Israel can seek joint coordination with Washington to regularize the situation of the wealthy Russian Jews, particularly those who are directly far from politics or the Kremlin.
Overall, the Israeli economy is a key determinant of the survival of the current coalition government in Israel. The Israeli economy cannot sustain any negative economic shocks such as crowding out of investments or the imposition of sanctions.
In return, the United States could provide guarantees to Israel to make substantial investments in the Israeli high-tech sector to offset the impact of sanctions or promote an integrative regional path between Israel and Middle Eastern countries, such as the UAE and Turkey.
II- A UAE Proxy
There are growing indications that affluent Russians may flee to the UAE, given its tolerance on financial transparency and illicit financial flows. Estimates suggest that the UAE isn’t seriously considering introducing related controls. In addition, the UAE has not announced its alignment with the US so far. Rather, it is trying to strike a balance, given its growing political and economic relations with Moscow. This does not rule out cooperation between the Emirati and Israeli banks in coordinating the transfer of the wealth of Russian Jews and non-Jews between Tel Aviv and Dubai, particularly since the two sides are hinting at a rejection of the nuclear agreement and may consider raising bargaining chips with the United States.
III- US Pressure
A last scenario would involve Washington requiring Israel to officially join the sanctions against Russia, without taking heed of the impacts. This would mean canceling the Milchan’s Law that serves as an umbrella for a substantial number of millionaires in Israel, which would give rise to growing resentment in the Russian interior, particularly among those of Avigdor Lieberman of the Yisrael Beiteinu Party (current Minister of Finance) who considers himself the protector of the Russian community in Israel.
In short, Israel’s imposition of sanctions on the Russian Jews billionaires in Israel will be a determining factor in the Israeli-US relations, contributing to the growing uneasiness from the Israeli side in case of the continuation of the war in Ukraine.
There are still some hidden tensions in the relations between Washington and Tel Aviv, given Israel’s willingness to strike the necessary balance with all parties, without fully and unconditionally siding with the United States, which is trying to impose its vision of the international regime that preserves US hegemony.
Despite the United States’ initial rejection of the Nord-Stream 2 project between Germany and Russia, the Biden administration managed to address the issue with a tripartite agreement giving Washington the right to cancel the project in the event of conflict of interests. Overall, the current US administration is unlikely to commit Israel to a unilateral decision without coordination with Tel Aviv, allowing it to have the flexibility that would ensure the survival of its government for a longer period.