Egypt Revolt Halts U.S. Bid to Push Israel Ties Using Trade

Photographer: Khaled Desouki/AFP/Getty Images

Egyptian protesters run as they take cover during clashes with riot police in Tahrir square in Cairo on June 29, 2011. Close

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Photographer: Khaled Desouki/AFP/Getty Images

Egyptian protesters run as they take cover during clashes with riot police in Tahrir square in Cairo on June 29, 2011.

Sinai gunmen, Egypt’s revolt and a retired diplomat threaten to derail U.S.-backed efforts to spur the peaceful integration of Israel and the Arab world through trade and investments.

Three decades after former President Jimmy Carter brought Egypt’s Anwar Sadat and Israel’s Menachem Begin together at Camp David, the historic peace treaty they signed is at risk. The ousting of President Hosni Mubarak has unleashed criticism of the Egyptian-Israeli ties and repeated bombings of a Sinai Peninsula pipeline are imperiling its biggest economic plum.

Apart from the gas accord, concluded under Mubarak, the administration of then-President George W. Bush in 2005 helped expand a trade agreement with Jordan to Egypt, allowing both countries to exempt exports to the U.S. from tariffs if they included an Israeli component. The efforts boosted ties between the business communities, breathing life into peace treaties upheld by the Arab governments and resented by their people.

“Part of the U.S. strategy has been to try to integrate Israel into the Arab world economically,” said Elijah Zarwan, a Cairo-based senior analyst for the International Crisis Group. “Egyptian foreign policy is going to be much more sensitive to public opinion following the revolt, and that means being sometimes less sensitive to foreign pressure.”

Chants accusing Mubarak of being an agent of Israel made their way into Egypt’s protests and the rallies since. Security forces used teargas in May to prevent protesters from breaking into the Israel embassy in Cairo.

Not Scared

“Israel doesn’t scare anybody anymore,” said Ibrahim Yusri, a former ambassador to Algeria who filed lawsuits against the Mubarak government to end the gas exports, which he says are sold below fair value. The Egyptian-Israeli joint venture that operates the pipeline, East Mediterranean Gas Co., denies his claim.

The pipeline was bombed by masked militants this week for the fourth time in five months. The attacks will force Israel to use dirtier and costlier alternatives and undermine “the most important economic aspect in the peace treaty,” Israel’s National Infrastructure Minister Uzi Landau said July 12.

Shares of Ampal-American Israel (AMPL) Corp., which owns a 12.5 percent stake in the pipeline, have plunged more than 60 percent since the first attack on the facility on Feb. 5, compared with a 4.1 percent drop of the TA-25 benchmark index. Shares were down 2.9 percent in Tel Aviv to 2.90 shekels at 2:43 p.m.

‘Why Get Involved’

Israel recognizes that the pipeline woes, together with the breakdown of Middle East peace efforts, have reinforced wider sentiment in Arab countries that now is not a good time to expand business ties, said Gil Feiler, managing director of Info-Prod Research Ltd., an Israeli consulting firm specializing in information on Arab countries.

“Israel is such a volatile issue with their populations that they say, ‘Why get involved?’” Feiler said in a telephone interview. “The potential for direct trade is very slim.” Qatar shuttered an Israeli trade office after the 2008 military campaign in the Gaza Strip.

A lack of progress to end the Israeli-Palestinian conflict helped push Arab opinion of the U.S. to its lowest since at least 2008 when “Arabs were hopeful that the election of Barack Obama would improve” relations, according to a poll released yesterday by the Arab American Institute. The Zogby International survey of 4,005 people was carried out in six countries, including Egypt.

Economic Damage

For Egypt, an unraveling of the export agreement will deprive the country of a source of hard currency, further weakening an economy that contracted 4.2 percent in the first quarter this year, according to government figures. Israel’s gross domestic product expanded 4.7 percent in the same period.

Egypt’s energy exports were the third-biggest earners of hard currency in the fiscal year that ended June 2010 at $10.3 billion, said Mohamed Abu Basha, an economist at Cairo-based investment bank EFG-Hermes Holding SAE. Egypt’s official international reserves have plunged 26 percent this year to $26.6 billion in June, according to central bank data.

Economic damage isn’t limited to gas. Talks between Egypt and Israel to expand the U.S.-brokered Qualified Industrial Zones, known as QIZ, agreement to more Egyptian provinces are now on hold, said Gavriel Bar, head of Israel’s Industry and Trade Ministry’s Middle East division.

Plant closures in the early days of the revolt cut revenue for the first half of the year and chased away some U.S. customers who bought from Asia instead. “Buyers want to see stability in the QIZ and that’s a challenge we continue to face,” Bar said.

Respect Treaties

Officials under Mubarak had wanted to allow factories in more areas to exempt exports to the U.S. from tariffs. The accord doubled Egypt’s garment sales to the U.S. market to $800 million until 2010, according to Alaa Arafa, chief executive officer of Al Arafa Investments and Consulting (AIVC), the country’s biggest clothing exporter.

Shares of Al Arafa have slid 11 percent this year, compared with a 29 percent drop for the benchmark EGX 30 Index. (EGX30) The shares were up 1.6 percent to $0.65 in Cairo at 1:54 p.m. today.

Yusri, who served as assistant foreign minister, has been using the judicial system since 2007 to end the gas sales. He says he’ll go to the courts again to pressure interim Oil Minister Abdalla Ghorab to enforce a 2010 order to end sales until a price-review mechanism is put in place. Oil Ministry officials didn’t respond to calls and e-mails seeking comment.

Egypt seeks to raise gas prices to Israel to gain 4 billion pounds ($671.7 million) more a year, the state-run Al Ahram newspaper reported today, citing interim Finance Minister Samir Radwan.

No Incentives

The military council that took over interim power from Mubarak has said that Egypt respects all international treaties. Amre Moussa, former foreign minister and the leading candidate for president according to polls from groups including Pew Research Center, said in April he will respect the peace accord “so long as the other side respects it too,” according to his official Facebook page. The Muslim Brotherhood says Israel shouldn’t be offered economic incentives before peace with the Palestinians is achieved.

Some of EMG’s shareholders who include Israel’s Merhav Group, U.S. billionaire Sam Zell and PTT Pcl (PTT), Thailand’s biggest energy company, are seeking more than $8 billion in damages from Egypt because of its failure to protect the pipeline.

“It is sad to observe that over the past six months the government of Egypt behaves as though respecting binding contracts is optional,” Merhav’s Senior Vice President Nimrod Novik, an EMG board member, said in a telephone interview.

That doesn’t bother Yusri, who, at “more than 70” years of age, says he has dedicated his remaining years to forcing Israel to pay more or turning off the tap.

“It has been a hard struggle, but we are determined,” he said.

To contact the reporter on this story: Alaa Shahine in Dubai at asalha@bloomberg.net; Jonathan Ferziger in Tel Aviv at jferziger@bloomberg.net.

To contact the editors responsible for this story: Andrew Barden at barden@bloomberg.net.

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