Wooing U.S. Investors, Egypt Has Israel Issues

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By Lisa Beyer

As they visit Egypt this week as part of the biggest U.S. trade delegation ever to tour the Middle East, more than 100 senior business executives are scrutinizing the environment for investment in a country now under the sway of the Muslim Brotherhood.

Given the new government's hostility to Israel, the executives will need to include in their calculations the risk that future Egyptian ventures may run afoul of strict U.S. laws punishing compliance with the so-called Arab Boycott of Israel.

In place since Israel's founding in 1948, the boycott prohibits citizens of the 22-member Arab League from buying from, selling to or entering into business with Israelis; a secondary boycott extends to any entity that does business with Israelis; a tertiary one covers companies that deal with those companies. These days the boycott is sporadically enforced by Arab League members and causes minimal damage to Israel's economy. Still, it is a noxious measure that goes so far as to apply to companies with "Zionist sympathizers" in executive or board positions.

The Egyptian government disavowed the boycott when it made peace with Israel in 1979. While President Mohamed Mursi vows to respect the treaty, anti-Israel sentiment is high within the Muslim Brotherhood's Freedom and Justice Party, from which Mursi emerged, and vituperative language is common. Egypt has already trampled on the treaty once, moving tanks into the largely demilitarized Sinai peninsula last month, in violation of specified limitations.

The U.S. has long led the effort to end the Arab Boycott. U.S. rules provide hefty civil and criminal penalties for non-compliance. Beyond facing fees, violators can lose foreign tax credits and the right to export. U.S. companies are also required to report quarterly to the Commerce Department if they are so much as asked to comply with the boycott. U.S. companies doing business in Egypt occasionally reported such requests even under the relatively Israel-friendly old regime.

The new guard could ameliorate investor worries about a surge of such boycott requests by meticulously respecting the Israel treaty terms and enforcing party discipline on how to talk about the country next door.

(Lisa Beyer is a member of the Bloomberg View editorial board.)

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-0- Sep/11/2012 17:03 GMT