Dynamics of Disarray: Ramifications of the Israel-Gaza War in the Arab World
Key takeaways:
Israel’s ground offensive in Gaza has prompted strikes from Hezbollah on Israel’s Northern Border with Lebanon, as well as strikes and trade disruption by Yemen’s Houthi Rebels.
Boycott campaigns and protests, fuelled by anti-Israel sentiment, disrupt trade and prompt economic repercussions, raising concerns for companies associated with Israel.
Russia strategically aligns with the Palestinian cause, aiming to exploit geopolitical events for regional influence, posing a potential challenge to US influence in the region.
Economic pressure on Israel, from evacuation costs to supply chain disruptions, emphasises concerns over the country's struggle to attract major investment from companies and neighbouring states.
Effects of the Conflict
Military and Commercial Repercussions
On October 7th 2023, Gaza-based Hamas launched attacks by land, air, and sea against Israel, alongside a barrage of thousands of rockets, in what the group called "Operation Aqsa Flood." Israel reported 1,200 killed in the attacks and around 240 abducted, primarily in the areas surrounding the Gaza Strip, known as the Gaza Envelope. Hamas declared that the operation was launched to end Israeli occupation, as well as respond to desecration of the Aqsa Mosque in Jerusalem and the killing of hundreds of Palestinians this year. Israel retaliated with air strikes against Gaza and a ground invasion with the stated aim of eradicating Hamas. Palestinian health authorities reported the death toll from Israeli strikes have exceeded 15,000. Despite humanitarian ceasefires, the fighting continues.
Israel has faced multifaceted attacks launched in retaliation to the Israeli bombardment of Gaza. The most prominent of which has come from Lebanon’s Hezbollah, an Iran-backed paramilitary organisation and political party which is generally considered to be the world's most powerful non-state actor. Hezbollah and Israel have engaged in relatively low-level rocket, artillery and missile exchanges along the Israeli-Lebanese border. In a speech by Hezbollah’s leader, Hassan Nasrallah, the group claimed that a third of the Israeli army and half of the Israeli Navy had been drawn to the Israeli-Lebanese border region in preparation for escalation. Hezbollah has attempted to divert Israeli attention, resources and manpower from the Gaza Strip, where Israeli troops face guerrilla warfare in dense urban areas. Yemen's Houthis targeted the southern Israeli city of Eilat with ballistic missiles and drones, with recorded explosions on November 8th. The majority of Yemeni missiles and drones have been intercepted. Rocket fire from Syria has also been reported in the Golan Heights.
US military bases in the region have also become targets as Iran-backed groups respond to Israel's bombardment of Gaza. According to the Pentagon, 76 attacks were launched against US bases in Iraq and Syria between October 17th and December 4th. The group responsible, the 'Islamic Resistance in Iraq' consists of factions of Iraq's 'Popular Mobilisation Forces' (PMF), a coalition of paramilitary groups incorporated into the Iraqi Armed Forces. The group inaugurated the medium range "Al-Aqsa 1" missile class, notably named after the Islamic sacred mosque in Jerusalem, which it first launched at US targets in Iraq and Syria on November 6th. Meanwhile, pro-Palestinian protests in Turkey escalated into a full-blown attempt to storm Incirlik Air Base in Adana, a NATO base housing some 1,500 US troops. Tear gas and water cannons were used to disperse protestors and restore order. Turkey’s Grand National Assembly later echoed the sentiment of the protests, declaring "The products of companies that support Israel will not be sold in restaurants, cafeterias and tea houses in the parliament campus."
The economic repercussions of the conflict have included boycott campaigns, widespread protests and disruptions to trade. The Arab demographic has led boycott campaigns that have seen disruption to companies with links to Israel, labelled as such by the Boycott Divestment Sanctions (BDS) movement. Hezbollah have called to cut exports from Arab countries to Israel, echoed by a consortium of Lebanese parties calling to extend the campaign to the US due to its support of Israel. Not all trade disruption has been directly linked to Israel or the US. Iraqi protestors along the country's border halted oil tankers headed to Jordan in solidarity with Palestine, aiming to prevent Iraqi oil exports to states with normalised relations with Israel. Industries directly associated with Israeli-linked trade, particularly oil, gas, and food, are particularly vulnerable to the impact of boycotts and disruption. Companies with ties to Israel would be wise to exercise caution and consider scenario planning to mitigate the impact of these economic challenges. Multinational corporations should closely monitor public sentiment to proactively address any risks associated with their perceived affiliations.
Activism intending to apply economic pressure to Israeli interests is highly likely to persist as the Israeli offensive continues in Gaza. The longevity of these campaigns are closely interlinked with the severity of the Israeli offensive, with the intensity of bombing a key indicator of escalation. Though Hezbollah and Iran have avoided direct calls for an escalation of violence, the intensity of the Israeli bombing campaign and the deteriorating humanitarian situation in Gaza will provoke pro-Palestinian activism that will extend disruption to companies with Israeli links further.
The US Diplomatic Visit
US Secretary of State Antony Blinken met state officials on a trip to key Middle Eastern states between October 11th and 17th: Israel, Jordan, Qatar, Bahrain, Saudi Arabia, the United Arab Emirates, and Egypt. The tour aimed to ease tensions and prevent conflict escalation, a prospect that would be damaging to US regional interests. The Department of State stated Blinken's trip aimed to "secure the immediate and safe release of hostages, and identify mechanisms for the protection of civilians.". Blinken concluded the tour stating that these aims remain "a work in progress." In Egypt and Jordan, Blinken faced unambiguous refusals to accept Palestinian refugees, which complicated the latter of the trip's stated aims. Broad consensus across the Arab states was the call for a humanitarian ceasefire, which Blinken rejected.
Blinken declared at the end of his trip that an increase in humanitarian assistance to Gaza was imminent; restrictions on which were eased in the weeks following the diplomatic tour. He also succeeded in having Israel agree to humanitarian pauses of four hours per day. Assisted by further diplomatic efforts, notably by Qatar, a seven-day ceasefire was agreed between Hamas and Israel, which took effect between November 24th and December 1st. In addition, Blinken's trip advanced the image of US diplomatic involvement, dampening concerns of conflict spillover and the consequent market shock wave.
Russian Influence in the Middle East
An increasingly threatening player in the Middle Eastern arena, Russia maintains political influence and considerable military strength in Syria. Following the events of October 7th, Russian President Vladimir Putin took an ambiguous stance. In a speech a few days after, Putin described October 7th as "an attack unprecedented in its cruelty" by Hamas and asserted Israel's right to defend itself. In the same speech, however, Putin compared the Israeli attack on Gaza to the Nazi siege of Leningrad, provoking anger among Israelis.
Since then, the Russian President's stance has been clarified. In a remarkable change of tone, Putin declared that Russia, as part of its "Special Military Operation in Ukraine", is engaged in war against the same enemies as the Palestinians. This narrative draws parallels between Ukraine and Israel, with both supported by the United States. This strategic alignment positions Russia in solidarity with the Palestinian cause, aiming to garner support from Arab and Muslim demographics. Russia has long maintained relations with both Israel and Hamas. Putin's calculated shift comes at a strategically opportune moment, capitalising on geopolitical events to position Russia as a sympathetic ally to Palestine. The potential impact of this alignment extends beyond immediate diplomatic implications, with the carefully timed narrative aiming to unsettle US influence in the region.
For decades, the political leadership in the US has been unequivocal: Israel represents the United States' interests in the Middle East. Republican Senator Lindsay Graham once described Israel as America's "eyes and ears", a description since maintained by the pro-Israel lobbying group, AIPAC. A weakened Israel, therefore, would facilitate greater Russian influence in the region. Putin's stance shift coincided with the realised impacts of war on Israel. Israel's central bank announced costly damage-control measures for the Israeli economy, Prime Minister Benjamin Netanyahu's position has proven increasingly precarious, with widespread protests expected to continue. Russia has identified cracks in the United States' key Middle Eastern ally, and upon the emergence of an opportunity to expand its regional power, has pivoted accordingly.
Scenarios
Risk of a Widening Conflict
While the rhetoric of key regional players, both state and paramilitary, has so far suggested serious escalation is unlikely, the tension threatens a sudden widening of the conflict. Attacks against Israel and the United States by Iran-backed groups have been limited in their magnitude but send a clear message against Israeli attacks on Gaza. Importantly, direct engagements by Lebanon's Hezbollah and Yemen's Houthis against Israeli targets signal the greatest potential for escalation. Israeli Defence Minister, Yoav Gallant, stated "what we are doing in Gaza we can do in Beirut". Despite this, Israel has responded with limited force through fear of conflict escalation. Consensus among analysts throughout the conflict has been clear: a multi-front war would be disastrous for all sides. Israel's enemies, meanwhile, capitalise with brazen attacks. Even with steadfast US support, a large-scale reaction by Israel is highly unlikely.
The conflict carries the potential to induce considerable economic impact, particularly on Israeli markets. So long as the conflict remains localised, market impact will not be catastrophic. In early November, Israel’s central bank pledged to sell as much as USD 30 billion from its foreign-currency reserves, with a sudden sale of USD 7 billion, in an attempt to stabilise the shekel. In anticipation of conflict with Hezbollah, Israeli authorities evacuated at least 43 northern settlements, with 28 settlements near the Gaza border evacuated by October 16th. This operation has proven costly due to the logistical efforts involved in evacuating civilians and the resulting impact on local economies. Israeli troops picking crops in abandoned farms epitomised the consequences of the labour shortages. Many Israeli farms employ Palestinian and Thai workers. As a result of the conflict, Palestinians are mostly banned from Israeli farms and most foreign workers have fled. Should Israel's opponents' call to halt fuel and food exports have an effect, the internal economic condition could deteriorate quickly.
With the United States standing firmly with Israel, sending its first weapons shipment only three days after the Hamas attack on October 7th, questions have arisen regarding the extent to which the United States will support Israel economically. World Bank commodity analysts speculated at the outset of the conflict that oil prices would rise significantly. However, this failed to materialise, largely due to the US taking proactive measures against the expected oil price increase. Brent oil prices fell after the US exceeded the expected crude stockpiles from November 6th. Placing this in the context of the wider conflict, the United States has suffered material losses to military facilities and reported injuries among military personnel stationed in Iraq and Syria since the beginning of Israel's assault on Gaza. As Israel's conflict becomes a greater concern for its primary ally, the United States' popular support may potentially be constrained, posing significant security risks for Israel.
The Future of Normalisation
In the Middle East, normalisation refers to the establishment of diplomatic and economic relations between Israel and Arab states. The Abraham Accords of 2020 normalised relations between Israel, the United Arab Emirates (UAE) and Bahrain, prompting a wave of further Arab-Israeli normalisation agreements. Indeed, Israeli normalisation with Sudan quickly followed, and normalisation with Morocco was agreed later that year.
Arab states with established normalised relations with Israel are facing a political dilemma concerning the Israel-Gaza conflict. These nations must navigate a delicate balance between Western influence, growing anti-Western sentiment, and their own demographic realities. While these normalised states theoretically hold the potential to pressure Israel into stopping its attacks, there is a risk of appearing ineffective given Israel's resolve to destroy Hamas in Gaza regardless of the human cost. Under these circumstances, the likelihood of further normalisation agreements seems improbable as these states grapple with conflicting internal and external demands.
Future normalisation between Israel and Arab states will also be complicated by the impact of war on the Israeli economy. The economic impact of war has weighed heavily on Israel and, with regional tensions dangerously high, these costs are expected to increase. The Israel-Gaza conflict is significantly impacting regional economies in the Middle East and North Africa, affecting neighbouring countries' economic stability, particularly in sectors like tourism. Increased uncertainty is also influencing spending and investment across the region. The security of international investment in Israel has been severely compromised. This downturn is expected to continue. Hezbollah's attacks on Israel, whilst low-level in nature, have only increased in both number and magnitude since the exchanges began. The Houthis, a rebel group controlling a large portion of Yemen, threatened to target any Israeli-linked vessel off the Yemeni coast. This threat was realised on November 19th when commercial vessel 'Galaxy Leader', owned by an Israeli businessman, was seized in an air assault operation. These developments will continue to have a detrimental effect on international investment in the country.
In 2021, Israel facilitated bidding for exploration and development rights in its offshore gas fields from international oil companies (IOCs). The Israel-Palestine crisis of May 2021 saw violence erupt between Israel and militant groups in Gaza on a far smaller scale than those following October 7th 2023. The 2021 crisis resulted in major IOCs such as ExxonMobil and Total refusing to invest, citing the “complex” geopolitical situation around the country’s energy resources. So long as Palestinian militant groups and their regional allies continue to operate, Israel will struggle to garner international investment, including from Arab states with normalised relations.
The Arabs and the Russian Alternative
Intensifying anti-Israeli sentiment in the Arab world has amalgamated with opposition to Western states whose leaders flocked to Israel following October 7th to pledge their support. While the Arab world comprises various affiliations and alliances, it is crucial to understand the dominant grievance in Arab public opinion towards the conflict. The initial rhetoric from leaders in the US, UK and EU struck many Arabs as unequivocal support of Israel, giving inadequate attention to allegations of Israeli war crimes and the humanitarian situation in Gaza. The contrast between Western criticism of Russian aggression towards Ukraine and the limited criticism of Israeli bombings in Gaza has sparked widespread accusations of double standards. One key consequence of this sentiment is the growing affinity for Russia in the Arab world.
The war in Gaza has created fertile ground for Russia to gain support and even influence in the Arab world. Upon the request of Syrian President Bashar al-Assad, Russia began its intervention in Syria in 2015. Since then, Russian military bases have been firmly established in the country, notably including the strategically vital Khmeimim Air Base, safeguarding the Damascus government. Pro-regime Syrians created an affectionate nickname for the Russian President: Abu Ali (literally "Father of Ali"). A common moniker in the region, in this case the nickname implies a close friendship. In Iraq, tensions have increased dramatically between pro-Iran militant groups and United States forces since 2020. The identification of the US as a common enemy with Russia has led to many in Iraq adopting the same nickname for Vladimir Putin. Although a peripheral example of attitudes towards Russia in the region, this demonstrates a growing affinity for Russia based on the idea of a common enemy. This rapport has been largely localised to groups in direct opposition with the United States; the current conflation of Israel with the United States threatens to expand this affinity further across the Arab world. The expansion of this alliance, however, is not inevitable. The United States can improve its declining reputation in the Arab world by addressing the perception of bias in its dealings with Israelis and Palestinians. Although this might not be the current focus of US leadership, it is probable that it will become a priority in the upcoming months due to the conflict’s spillover in Western political conversations.
Summary
The war in Gaza has highlighted the intertwined military, economic, and diplomatic dimensions of the Arab world. The manoeuvres of Hezbollah, the Houthis, and the 'Islamic Resistance in Iraq' underscore the complex interactions shaping regional dynamics. As markets respond to the reverberations of military actions and the burgeoning influence of boycott campaigns, the scale of the impact could swell with short notice. The main flashpoints are the Israel-Lebanon border and the Bab al-Mandab Strait, where miscalculation or overreaction could precipitate intense escalation.
The involvement of global powers, particularly the United States and Russia, underscores the intricate dance of diplomacy amid escalating tensions. The careful balance between brinkmanship and de-escalation adds an additional layer of complexity to the conflict. The strategic realignment of Russia as a sympathetic ally to the Palestinian cause, intentionally timed to exploit ongoing geopolitical events, not only carries immediate diplomatic implications but also holds the potential to reshape regional sentiments and alliances. As the region grapples with military and economic repercussions, the future will be marked by the threat of widened conflicts, the trajectory of normalisation efforts, and the evolving relationship between Arab states and the Russian alternative.