How did the Israeli economy react to the war against Hamas?
Hear from a major player on the ground – Dr. Eugene Kandel, former economic adviser and Chairman of the Tel Aviv Stock Exchange, discusses Israel’s financial resilience after the war against Hamas. Having made aliyah from the Soviet Union in 1977 with his family, Dr. Kandel covers the stock market rebound, missed economic opportunities with Jordan and Egypt, and the success of the Abraham Accords.
*The views and opinions expressed by guests do not necessarily reflect the views or position of AJC.
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Transcript of the Interview:
Manya Brachear Pashman:
Professor Eugene Kandel served as economic adviser to the Prime Minister of Israel from 2009 to 2015, and with Ron Sor is a co-founder of Israel’s Strategic Futures Institute. He is also chairman of the Tel Aviv stock exchange, the only public stock exchange in Israel, known locally as the Bursa. He is with us now to talk about the impact of Israel’s war against Hamas in Gaza on Israel’s economy, the potential and impact so far of the Abraham Accords, and how history could one day view October 7 as a turning point for Israel’s democracy.
Dr. Kandel, welcome to People of the Pod.
Eugene Kandel:
Thank you. Thank you for having me.
Manya Brachear Pashman:
Before we begin, your family came to Israel in 1977. Can you share your family’s Aliyah story?
Eugene Kandel:
Yeah, when I was 14, my family was living very comfortably in the Soviet Union. My father was a quite known writer, playwright, a script writer. And around him was a group of Jewish people of culture that were quite known in their domains, mostly Jewish. And so at some point in 67 he sort of had this vision and started studying Hebrew. But 1970 and then by ‘73 when I was 14 years old, he came to me and said, Look, your mom and I decided to immigrate to Israel. What do you think about it, and I said, I don’t know what I think about it. Okay, you know, if we want to immigrate, let’s immigrate. I never felt too much belonging there.
So unfortunately, Soviet authorities had other ideas about that. So we spent four years as refuseniks. My father, together with Benjamin Fine, were the editors of the underground publication called Tarbut. And for people who did not live there, they put their names on it. So this was, these were typewritten copies of Jewish culture monthly. And there were two names on it. You could go to jail for this. My father was always pretty brave man for his petite size, because during the Second World War, he was very, very hungry, to say the least. So he didn’t really grow very much. But he’s very big inside.
And so the following four years were pretty tough on them, because he couldn’t work anywhere. Just like in McCarty years in this country, people would give work to their friends and then publish it under their own name. That’s what he did for his friends, and they would share the money with him, or give him most of the money. There were very, very brave people. And then, you know, there was an incident where they wanted to send a message to my father to be a little less publicly outspoken. And so two KGB agents beat me up.
And that started a whole interesting set of events, because there was an organization in Chicago called Chicago Action for Soviet Jewry. Pamela Cohen. And I actually met Pamela when I was studying at the University of Chicago. And thanked her. So they took upon themselves to harass Soviet cinema and theater and culture officials. And so they were so successful that at some point, the writers league from Hollywood said that nobody will go to Moscow Film Festival unless they release us because they do not want to associate with people who beat up children. I wasn’t a child, I was 17 years old, but still. And that sort of helped. At least, that’s how we think about it.
So it’s worthwhile being beaten up once in a while, because if it lets you out, I would take it another time. And then we came to Israel in a very interesting time. We came to Israel four hours after Anwar Sadat left. So we came to a different Israel. On the brink of a peace agreement with Egypt. And so that was it.
We came to Mevaseret Zion, which was an absorption center. A small absorption center. Today I actually live probably 500 yards from where we stayed. Sort of full circle.
And today, it’s a significant, it’s about 25,000 people town. And that’s the story, you know, in the middle, in between then and now, I served in the military, did two degrees at Hebrew University, did two degrees at the University of Chicago, served as professor at the University of Rochester, and then for 28 years, served as professor of economics and finance at the Hebrew University. So I keep doing these circles to places where I started.
Manya Brachear Pashman:
You say you arrived four hours after Sadat’s visit to Israel on the brink of a peace agreement with Egypt. Did that peace agreement live up to expectations?
Eugene Kandel:
Well, it depends what are your expectations. If your expectation will continue in the war, it definitely did, because, you know, for the last, you know, whatever, 48 years, we didn’t have any military activity between Israel and Egypt. And we even have security collaboration to some extent. But if you’re thinking about real peace, that would translate into people to people peace, business to business peace, it did not generate that at all. Because there was a very, very strong opposition on the street level and on the intellectuals level.
It actually started to break a little bit, because today you can find analysts on Egyptian television that are saying that we are, we are stupid because we don’t collaborate with Israel. It is allowed today, It’s allowed to be said in, you know, 20-30, years [ago], that person would have been ostracized and would never be allowed to speak.
So there is some progress, but unfortunately, it’s a huge loss for the Egyptian economy. For Israeli economy, it is probably also a loss, but Israeli economy has a lot of alternatives in other countries. But Egyptians don’t seem to be able to implement all the things that Israelis implemented a long time ago. You know, whether it’s water technologies, whether it’s energy technologies. Lots of lots of stuff, and it’s really, really unfortunate that we could have helped Egyptian people, the same people who rejected any relations with us. And that’s a pity.
Manya Brachear Pashman:
The next peace agreement that came was with Jordan in 1994, quite some time later. Did that peace agreement live up to expectations, and where were you in 1994?
Eugene Kandel:
1994, I was a professor at the University of Rochester, so I wasn’t involved at all. But again, it was a very, very similar story. It was the peace that was sort of forced from above. It was clearly imposed on the people despite their objections, and you saw demonstrations, and you still see. But it was clear to the leadership of Jordan that Israel is, in their case, is absolutely essential for the survival of the Hashemite Dynasty. In the end the Israeli intelligence saved that dynasty, many, many times.
But again, it wasn’t translated into anything economic, almost anything economic, until in the early 2000s there were some plants in Jordan by Israeli businessmen that were providing jobs, etc. But I was privileged to be the first to go to Jordan together with American officials and negotiate the beginning of the gas agreement.
We were selling gas to Jordan, because Jordan was basically going bankrupt because of the high energy costs. Jordan doesn’t have its own energy, apart from oil shale. Sorry, shale oil. And for some reason they weren’t able to develop that. But Israeli gas that we are selling to them as a result of what we started in 2012 I believe. Actually very important for the Jordanian economy. And if we can continue that, then maybe connect our electrical grid, which is now in the works, between the water-energy system.
And now maybe there is a possibility to connect the Syrian grid. If we have an agreement with Syria, it will help tremendously these countries to get economic development much faster. And it will help Israel as well, to balance its energy needs and to maybe get energy, provide energy, you know, get electricity, provide gas. You know, there’s all these things where we can do a lot of things together. If there is a will on the other side. There’s definitely will on the Israeli side.
Manya Brachear Pashman:
In addition to gas, there’s also water desalination agreements, as well, right?
Eugene Kandel:
Yeah, there was a Red to Dead project, which was to pump the water all the way from the Red Sea along the Arava Valley. And then there is a 400 meter, 500 meter drop. And so to generate electricity through that desalinate that water that you pump, and then send that water to Egypt, send the electricity that was generated and not needed to Israel and then dump this salt stuff into the Dead Sea. Frankly, I don’t know where this project is. Nobody talks about it for the last seven, eight years. I haven’t heard.
Now there are different projects where you would get energy generated in Jordan and sold to Israel in Eilat, for example, because it’s difficult for us to bring electricity all the way South. And so if the Jordanians have large fields of photovoltaic energy they can sell, they can satisfy the needs of a lot, and then in return, we can desalinate water and send it to them. So there’s all kinds of projects that are being discussed.
Manya Brachear Pashman:
But Israel does provide water to Jordan, correct?
Eugene Kandel:
There are two agreements. One agreement, according to our peace agreement, we are supposed to provide them with a certain amount of water. I don’t remember the exact amount. But that’s not enough, and so we also sell them water.
So think about it. There is a sweet water reservoir called Tiberius, Kinneret, in the north, and we sending water from there into two directions according to the agreement. We’re sending it to Amman, pumping it up to the mountains, and then we’re sending it throughout the Jordan Valley, all the way along the Jordan River, to the Jordanian side. So it’s quite striking when I used to go between Jerusalem and Amman, it’s actually an hour and a half drive. That’s it. You go down, you go up, and you’re there.
And so when you’re passing the Israeli side, you see the plantations of date palms that are irrigated with drip irrigation. So very, very economically, using the brackish salt water that is pumped out of the ground there. You cross two miles further, you see banana plantations that are flood irrigated at 50-centigrade weather, and the water that comes from them comes on an open canal. So basically, 50% of the water that we send this way evaporates.
Growing bananas in that climate and using so much water, it’s probably, if you take into account the true cost of water, it’s probably money losing proposition, but they’re getting the water. The people that are the settlements on that Bank of Jordan River, are getting it for free. They don’t care.
And if somebody would just internalize that, and instead of sending the water down in an open canal, would send the whole water up to Amman, where there is a shortage of water, enormous shortage of water. And then you would take the gravity and use that water to generate electricity, to clean that water, the sewage, clean it and drip irrigate plantations, everybody would make enormous amounts of money. Literally enormous amounts of money. And everybody’s lives would be better, okay? And I’m not talking about Israelis. It’s within Jordan. And you can’t say that there’s no technology for that, because the technology is two miles away. You can see it.
And it just puzzles me. Why wouldn’t that be done by some entrepreneurs, Jordanian entrepreneurs. We could really help with that. We could even help by buying the water from them back. The water that we give them, we can buy it back. Because in Israel, the water is very expensive. So we could finance that whole thing just by sending the water back, but that would be probably politically unacceptable, I don’t know. But it’s really, really . . . for an economist, it’s just a sad story.
Manya Brachear Pashman:
Missed opportunities. Well, let’s go back. I introduced you as the chair of the Tel Aviv stock exchange, the Bursa. And I am curious. Let’s talk about the economy. Does Israel treat its stock market the same way we do? In other words, are there opening and closing bells at the beginning and end of every day? How does the Tel Aviv Stock Exchange work compared to the United States?
Eugene Kandel:
Well, we do have the opening bell, but it’s usually reserved for some events. We don’t have the events every day. Usually, if there’s a new listing, or there’s somebody celebrating, like, 20 years of listing, we have all kinds. Recently, we had Mr. Bill Ackman came and gave a speech and opened the trading together with us.
There are events around Jeffries Conference. But it’s much more, you know, ceremony, I mean, it’s not really connected to anything. Trading starts whether you press the button or don’t. But Israeli stock exchange is unique in the following sense: it is an open limit book. What means that there is, you know, buyers meet sellers directly, and it works like that, not only in stocks, which is similar to what it is everywhere, but it’s also in bonds, government bonds, corporate bonds, and in derivatives.
So in that sense, we do have our ceremonies, but the interesting thing is, what is happening with the exchange in the last two years. Accidentally, I joined two years ago as the chairman, and over the last two years, the stock exchange, the indices of Israeli Stock Exchange were the best performing out of all developed countries, by far.
Manya Brachear Pashman:
Did that have something to do with the war?
Eugene Kandel:
Well, it should have been, you know, in the opposite direction, but, the war is, not this length of war, not this intensity of war . . . but if you look back over at least 25 years, the Israeli economy responds very robustly to military conflict. Usually they’re much shorter. If you look at even quarterly returns of the stock exchange, you would not know that there was a war in the middle, definitely not annual. If you look over the last 25 years, and you look at this stock, annual returns of the indices, you would not know that there was anything wrong, apart from our 2003 crisis, and Corona. Even the great financial crisis, you would not see it. I mean it was basically past us, because we didn’t have a financial crisis in Israel. We had repercussions from, you know, the rest of the world’s financial crisis, but we didn’t get our own.
And so we do have resilience built in, because we’re just so used to it. However, having said that, it’s the first time that we have such a long and intensive war on seven, whatever fronts. So it is quite surprising that just like any other time, it took about three months for the stock market to rebound after October 8. It was a big question whether to open the market on October 8. We struggled with it, and we decided that we do not want to give anybody the right to disrupt the Israeli economy.
I mean, it was a really tough decision, because there was certain people were saying, Well, how can you do that? It’s a national tragedy. And of course, it was a national tragedy. But closing the market would have meant two things.
First of all, it would have shown the world that our economy can be interrupted. It would have given the benefit to those people that did these atrocities, that they managed to do more damage than they already did. And we didn’t want to do that. And it didn’t collapse. It went down, of course, but it rebounded within less than three months. By the end of that year, it was back on the same level.
And then it did this comeback, which was quite phenomenal. And it’s an interesting question, how come? Because during that time, we had some cases where Israel was boycotted by investors, very few, by the way, but we also saw many, many new investors coming in.
You could look at the war from the negative side. Of course, huge costs. But with all that, it was about 10% of annual GDP, because we are, you know, we’re a big economy, and we borrowed that very easily because we had a very strong macro position before that. So we now 76% debt to GDP ratio. It’s much lower than majority of developed countries. But we still had to borrow that. It was a lot of money, and then the defense budget is going to go up. So there is this cost.
But vis a vis that, A, Israeli technology has been proven to be unmatched, apart from maybe us technology in certain cases, but in some cases, even there, we have something to share. And so we have huge amounts of back orders for our defense industries. During the war, and they were going up when some of the countries that are making these purchases were criticizing us. They were learning from what we did, and buying, buying our equipment and software, etc.
And the second thing, we removed the huge security threat. If you look before October 7, we were quite concerned about 150,000 missiles, some of them precise missiles in Hezbollah’s hands, an uninterrupted path from Iran through Syria to Hezbollah, constantly replenishing. We would bomb them sometimes in Syria, but we didn’t catch all of them. We had Hamas, we had Hezbollah, we had Syrians, we had Iranians. We had, you know, not, you know, Iraqi militia. So, Hezbollah doesn’t exist. Well, it exists, but it’s nowhere near where it where was at. And the Lebanese Government is seriously attempting to disarm it. Syria, we all know what happened in Syria. We didn’t lift a finger to do that.
But indirectly, from what happened in Hezbollah, the rebels in Syria became emboldened and did what they did. We know what happened with Hamas. We know what happened with Iran. Okay, Iran, even Europeans reimposed the sanctions. So that’s the side effect.
So if you look at the Israeli geopolitical and security situation, it’s much, much better. And in that situation, once the war is over and the hostages are returned, and hopefully, we will not let this happen again, ever, to work hard so we remember that and not become complacent. It’s an enormous, enormous boost to Israeli economy, because this security premium was quite big.
So that is on the positive side, and if we play smart, and we play strategically, and we regain sort of good relations with some of the countries which are currently very critical of us, and somehow make them immune to this anti Israeli antisemitism propaganda, we can really get going.
Manya Brachear Pashman:
You mentioned investors. There were more investors after the war. Where were those investors coming from, internally or from other countries?
Eugene Kandel:
It’s interesting that you asked this question, because in 2020, early 2024 a lot of Israeli institutions and individuals moved to S&P 500, and they got really hammered. Twice. Because A, S&P 500 was lagging behind the Tel Aviv Stock Exchange. So there was some other players coming in, because otherwise, when you move money, usually, you should see a drop, but you saw an increase. That meant that there are others came in. But the more interesting thing is that shekel was very weak when they bought dollars, and now shekel is about 15% stronger, so they lost 15% just on the exchange rate. And so a lot of money that went to S&P came back in the last six, eight months. So the internal money came back.
But on top of internal money, we looked at the behavior of foreign investors right after October 7. They didn’t flee the country. Some of them sold stocks, bought bonds. And then so Israeli institutions made money on that, because Israeli institutions bought stocks from them at about 10%, 15% discount, and then when it rebounded, they made money. But that money didn’t leave, it stayed in Israel, and it was very costly to repatriate it, because the shekel was very weak. And so buying dollars back was expensive. And the money slowly went into stocks. And then so people made quite a lot of money on this.
Manya Brachear Pashman:
The last topic I want to cover with you is external relations. You mentioned Syria, the potential of collaborating with Syria for water, gas.
Eugene Kandel:
Electricity.
Manya Brachear Pashman:
Electricity. And I presume that you’re referring to the possibility of Syria being one of the next members to join the Abraham Accords. That has been mentioned as a possibility.
Eugene Kandel:
Maybe. But we can, we can do something much less.
Manya Brachear Pashman:
Outside of the Accords.
Eugene Kandel:
Outside of the Accords, or pre-Accord, or we can, we can just create some kind of collaboration, just we had, like as we had with UAE for for 15 years before the Accord was signed. Was a clear understanding.
You know, I was in UAE, in Dubai on the day of signing of the Accord. I landed in Dubai when they were signing on the on the green loan, on the White House lawn. And we landed. It was amazing. It was the degree of warmth that we received from everybody, from ministers in the economy to ministers that came to speak to us, by the dozen to people in the hotel that were just meeting us. They issued, for example, before signing the Accord, there was a regulation passed by by UAE that every hotel has to have kosher food. We don’t have that in Israel. I mean, hotels mostly have kosher food, but not all of them, and, and it’s not by law.
This was, like, clear, we want these people to feel comfortable. It was truly amazing. I’ve never, I could never imagine that I would come to a country where we didn’t have any relations until today, and suddenly feel very, very welcome. On every level, on the street, in restaurants. And that was quite amazing, and that was the result of us collaborating below the surface for many, many years.
Manya Brachear Pashman:
Parity of esteem, yes? Suddenly.
Eugene Kandel:
Yeah, they didn’t feel they did exactly the important part when the UAE businessman or or Ambassador order you feel completely no chip on the shoulder whatsoever. They feel very proud of their heritage. They feel very proud of their achievements. They feel and you feel at the same level. They feel at the same level, just like you would with the Europeans. We always felt that there was something like when, when, Arab delegations, always tension. I don’t know whether it was superiority or inferiority. I don’t know. It doesn’t matter, but it was always tension in here. I didn’t feel any tension. Was like, want to do business, we want to learn from you, and you’ll to learn from us. And it was just wow.
Manya Brachear Pashman:
Same in Bahrain and Morocco?
Eugene Kandel:
I haven’t been to Bahrain and Morocco. I think Bahrain wants to do business. They were very even, sort of some of, we sent the delegation to Bahrain to talk about sort of Israeli technology and how to build an ecosystem in the same with Morocco. I think it’s a bit different. I think it’s a bit different because we didn’t see much going on from from these two countries. Although Morocco is more advancing much faster than Bahrain. There are a lot of interesting proposals coming out of it.
There’s a genuine desire there. In the last two years, of course, it was difficult for for anybody to do anything in those but interestingly, when almost no European airlines or American airlines were flying to us, Etihad and Emirates were flying to Israel. They were flying.
Manya Brachear Pashman:
Past two years?
Eugene Kandel:
Yeah, they would not stop. And you’re just like, wow.
Manya Brachear Pashman:
So would you say the Abraham Accords have had a significant impact on Israel’s economy at all?
Eugene Kandel:
I do not know. I mean, I don’t have data on that by the sheer number. I mean, the the number of Israeli tourists Sue UAE, it’s probably 10 or 20 to one to the vice versa. So we’ve been Israelis flooding UAE. In terms of investments, there are some technology investments. There’s some, some more infrastructural investors, like they bought 20% of our gas field. There are collaborations between universities and research centers. So it’s hard to measure, but you have to remember that there was a huge amount of trade and collaboration under the surface. So it surfaced. But that doesn’t mean that there was an effect on the economy, just people suddenly saw it. So you don’t know what the Delta was.
If the same amount of business was suddenly coming out of Jordan, we would have seen, you know, big surge. So I’m not sure how much . . . I don’t mean to say that there was no impact. I’m just saying that the impact was much more gradual, because there was so much already, right?
But I’m sure that it is, it is continuing, and the fact that these airlines were continuing to fly, indicates that there is a demand, and there’s a business. Initially a lot of Israelis thought that there was, this was a money bag, and they would go there and try to raise money and not understanding culture, not understanding. That period is over. I mean, the Emiratis conveyed pretty clearly that they not. They’re very sophisticated investors. They know how to evaluate so they do when they make investments, these investments make sense, rather than just because you wanted to get some money from somebody.
Manya Brachear Pashman:
Well, thank you so much.
Eugene Kandel:
Thank you.
Manya Brachear Pashman:
If you missed our last episode, be sure to tune in for my conversation with AJC’s Director of Congressional Affairs Jessica Bernton. We spoke shortly after receiving the news that a deal had been reached and the hostages from the October 7 Hamas terror attack might finally come home after two years in captivity. That dream was partially realized last week when all the living hostages returned and the wait began for those who were murdered.