Professor Efraim Chalamish is an adjunct professor of economic law at NYU (New York University), as well as a writer and media personality focusing on economics, energy, and security. He is also a jazz musician. Chalamish is a senior advisor and the head of the Israel Practice at the internationally renowned Kroll – Risk and Financial Advisory Solution. He spoke with Israel Hayom.
Q: Professor Efraim Chalamish, we have only recently reported on the growing proximity of Saudi Arabia to Iran, as a "goodwill gesture" to China. At the same time, senior officials in Saudi Arabia still do not rule out potential normalization with Israel. This is a highly complex report and takes us into a whole world of alliances, taking sides, and international economic challenges, as well as the extremely delicate fabric of the relationship between Jerusalem and Beijing, and just how the US enters into the middle of all this.
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"I think that these issues are connected with a prominent, global trend that I have identified: instead of choosing sides, states and private companies are seeking to build alliances that suit their needs. The classic example of this in recent weeks is indeed that of Saudi Arabia, as you have mentioned. On the one hand, it is attempting to draw close to Israel via a direct route. On the other hand, it did indeed sign a normalization agreement with Iran.
"At the same time, Saudi Arabia and the US are engaged in a somewhat volatile relationship. And yet, the Americans are engaged in a constant effort to draw nearer to Saudi Arabia because of energy issues. The recent visit of the US Secretary of State to Saudi Arabia is a prime example of this.
"They are also highly aware that by holding Riyadh closer to their chest they will be more successful in moderating various negative elements across the Middle East. This teaches us that in both international and economic relations, and also the development of both private and public companies, the key word is multiple and varied alliances. I think that Israel too understands this, of course, and thus several years ago, Prime Minister Benjamin Netanyahu's government decided to foster closer ties with China, which reached a peak in 2018 – 2019."
Q: But then we sought to take a timeout. Why?
"The decision to take a timeout resulted from two key considerations. One consideration was extremely considerable pressure on the part of the US on Israeli companies not to raise funds from Chinese institutions or to enable them to win tenders, as they believed that this would expose Israel to China's influence in the realm of national security. The second issue is that in Israel, people had become accustomed to the American DNA in investments, and now all of a sudden they came to realize that with China things work differently in terms of schedules and fund transfers, for example. This attempt, coupled with US pressure, led to a dramatic drop in Chinese investments in Israel."
Q: But, of course, this doesn't mean that Israelis stopped working with China. How do you foresee this relationship developing in the coming years?
"I believe that Israelis, both at the government and business levels, will need to be much more sensitive to how they manage this tension between the US and China. On numerous occasions, we hear people use the term 'trade wars'. A good way of contending with it is to focus on those sectors that are not perceived by the US to pose a threat to its national security, such as agriculture and the environment. By adopting this approach, it should be possible to sell similar technologies to both countries, and there are Israeli companies that are doing quite a good job of this, in precisely those areas that do not involve a clash.
"It is important to remember that China has attained an achievement that no other country has ever done in history, by lifting hundreds of millions of people out of poverty. It did so, among others, by enabling access to water sources, energy, electricity, and basic technologies. These are all spheres in which Israel excels and so there is no good reason why this relationship should not continue to grow. By the way, Israel is not the only country facing this tension in balancing its relations between the US and China, or tension between other countries. Many countries successfully walk such a tightrope."
Q: Over the course of years, Israel too will be forced to continue to play this delicate game vis a vis these two global superpowers
"I totally agree. There is clearly no substitute, in terms of the security, diplomatic and economic ties, for the unbreakable bond with the US. On the other hand, Israel cannot afford to simply give up its ties with China, and the enormous economic treasure trove on which it stands. It ties in with the Chinese influence on continents of importance to Israel such as Africa, America, and parts of Asia. Israel does not wish to be perceived as a threat by China in those countries in which it is involved in economic activity. Beyond that, China, as is well known, is the second largest economy in the world."
Q: That is interesting, as for years now people have been saying that China is about to become the largest economy in the world. For the time being, that is still not the case
"There is a term called 'Peak China'. This term is based on the question of when China will actually reach its peak, as on every occasion it was extremely close to overtaking the US, turnarounds occurred preventing it from conquering the peak. It depends, among others, on the size of the population, productivi,ty and prices.
"That reminds us of another theory from a few years ago, according to which the world has exhausted its oil production capacity. This is of course far from being an accurate view of the situation, for the moment, as every month more and more oil and natural gas production sites are discovered in various locations. So, both in relation to China and on the issue of exhausting energy resources – there are theoreticians who believe that we will never actually reach the point where oil production ends, precisely as we shall never reach a situation in which China conquers the peak."
McDonald's modifications
Q: How, for example, does the existing tension between the US and China also have an impact on the trade and economy in the Middle East and specifically on us, here in Israel?
"There are numerous examples of this. One of them is that of the countries that raised funds from the US and then saw that this is too complicated, so they decided to raise funds from China, where the process is much simpler for them. In Israel, this question emerges mainly in the context of raising capital for startups. In recent years, the US has adopted legislation to make it more difficult for Chinese companies to issue in the US or to sell US technologies to Chinese companies.
"If I were to further underscore the connection to Israel, it is possible that companies raising funds from blocs associated with China might well encounter difficulties when issuing stocks later on in the US or to be sold to US institutions due to the new legislation. Thus, this also has an impact on the ability of Israeli startups and tech companies from Israel, especially those that are currently facing difficulties and are looking to more creative locations for raising funds – such as India and China, for example."
Q: India is a whole issue in itself. The relations between India and Israel have grown stronger in recent years
"That's true. And from an internal-Asian perspective, India competes with China economically. Due to the concern over too much Chinese influence in Israel, in recent years Israel has been moving close to India, more and more agreements are being signed, and I expect the relationship between Israel and India to continue to grow stronger, especially in view of this fact. Over the course of time, Israel's activity with India might come at the expense of its exposure to China. Already today, we can identify a significant, even exponential increase, in the number of delegations coming from India, alongside more and more Israeli companies placing their focus on what is after all the largest democracy in the world. The Government of Israel too has been trying and indeed with considerable success to generate joint ventures with economic and security entities in India."
Q: The cooperation with India is another creative means used by tech companies for fundraising. What additional challenges do you expect to see among companies operating on the international market?
"There are two central trends, challenges if you like, that I have identified. One is the shift from a global perception to a local perception. Each product or human capital must engage in local modifications when it moves to another country or market."
Q: Ostensibly, this is not something new
"Correct, even a company such as McDonald's has to implement modifications to the type of food or the local taste. But I wish to say something else here – when international companies implement a strategy elsewhere, they cannot simply allow themselves to engage in a form of "cut and paste" activity. Central reasons for this are the various approaches to the supply chain and the technological separation between the superpowers. Chinese vehicle manufacturers, for example, currently tend to base their operations more on local components and much less on international logistics.
"This trend is especially vital for the Israeli market. Israeli companies are required to invest much more in these local modifications. An excellent example of this is the shift of many Israeli companies to a local management model instead of remote control from Israel. This also serves to bolster trust with the local government and helps to contend with national security challenges."
And what is the other trend?
"The other trend is the place occupied by national security and the central position of the security outlook in almost every economic decision made. This is manifested in both public policy and also in private companies that are trying to sell a product or a service in a foreign market. In the past, the issue of national security was relevant only to security companies that tried, for example, to sell sensitive technologies. Today, this is relevant to almost all sectors and products."
But why is this the case?
"As countries perceive many sectors to be critical for their national security. Take, for example, the food and pharmaceutical industries. If in the past, the products manufactured by these sectors were more or less considered to be routine items, then the war in Ukraine – and all the more so following the COVID-19 pandemic – have turned these products, like food and water, into those that involve aspects of national security."
Responding rather than initiating
Let's talk about the current domestic situation in Israel. We have not long completed a military operation here, and the next operation or war is only a matter of time. At the same time, it appears that the warnings issued by the economists regarding the judicial reform are hovering like a gray cloud above Israel's economic growth. How is it even possible to raise funds in such an environment?
"I believe that our thinking here is defensive. In other words, thinking that the fundamental questions are 'How do changes impact us', 'What will the judicial reform do' and 'Why is there an economic downturn'. On the other hand, there is a lack of sufficient investment of time, energy, and communication to understand what needs to be done here during good periods in order to increase investment in Israel.
"We have become so infatuated with the term 'Startup Nation', that we assume that everything will continue to work on its own. Although there are organizations in Israel such as Start-Up Nation Central and the Israel Innovation Authority, which really do a tremendous job – but on the whole, on many occasions, emphasis is placed on what the state can do to avoid causing damage, and people tend to lose sight of the real focus of what needs to be built.
"I recently attended a certain forum, and one of the participants there said in fun: 'Absolutely not, on this matter, I really wish to give credit to the government.' And then he added: 'Can you believe it, even I had something positive to say about the government.' As far as that individual is concerned, somebody from the private sector, the state basically does nothing more than interfere and impede. And I would like to say that this is a matter of perception and it is high time that we do something to change that perception. As I see it, the state does not interfere with the private sector. One of the trends that I have noted is that in most countries the state itself is seen as a key tool for building up the private sector, and certainly not as an entity that tampers and hampers."
In other words, it is a catalyst for business. And in Israel, this is not the case. But why is that so?
"On many occasions, you can hear high-tech people adopting an approach of 'As long as the state does not interfere.' But this is not true of the world we live in today. Many countries are racing ahead because they build new frameworks and work hand in glove with the business sector.
"On this matter, it is worthwhile being aware of an important example in the field of government capital funding. In other words, how is capital managed by the government, capital that is essentially owned by the government and invested in the private sector, in a certain country, or around the world? Countries such as Ghana, Nigeria, Saudi Arabia, and Qatar have substantial revenues from oil and gas, and they then take these revenues from the energy sector and create sovereign wealth funds that invest globally. This then obviously provides those countries with a considerable financial return in the form of innovation and growth investments. This is essentially a growth engine that increases a country's revenues."
I don't want to ask how many such funds exist in Israel.
"In Israel, there is currently only one central fund of this type, which was established after the discovery of the natural gas here. In international terms, it is still considered to be rather small. In Singapore, a country from which Israel has learned a great deal, and vice versa, there are government funds that invest in education, security, and construction. The existence of such funds in a country helps to shore up its industry. The UAE is another example that is of particular interest to Israel's attention. Many of the companies and the wealth funds there are government-owned, including those that have recently invested in Israel. The private sector in Saudi Arabia, for example, is extremely small.
"To a certain extent, such funds are a throwback to the beginning of the high-tech industry, way back in the 90s, when venture capital funds such as the Yozma Group gave the initial boost to the Israeli high-tech industry. Perhaps the time has come for us to recall the fruits obtained by these former, historical investments, and to implement them accordingly so that our landing in a world that is advancing and changing at the speed of light will be that much softer."
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