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Israel: Background and Relations

with the United States


Updated November 14, 2006


Carol Migdalovitz
Specialist in Middle Eastern Affairs
Foreign Affairs, Defense, and Trade Division


Congressional Research Service ❖ The Library of Congress







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Israel: Background and Relations with the United States


Summary

On May 14, 1948, the State of Israel declared its independence and was
immediately engaged in a war with all of its neighbors. Armed conflict has marked
every decade of Israel’s existence. Despite its unstable regional environment, Israel
has developed a vibrant parliamentary democracy, albeit with relatively fragile
governments. The Kadima Party placed first in the March 28, 2006, Knesset
(parliament) election; Prime Minister Ehud Olmert formed a four-party coalition
government that has been enlarged to include one more. Israel has an advanced
industrial, market economy in which the government plays a substantial role.

Israel’s foreign policy is focused largely on its region, Europe, and the United
States. The government views Iran as an existential threat due to its nuclear
ambitions and support for anti-Israel terrorists. Israel concluded a peace treaty with
Egypt in 1979 and with Jordan in 1994 but never achieved accords with Syria and
Eebanon. It negotiated a series of agreements with the Palestinians in the 1990s, but
the Oslo peace process ended in 2000, with the intifadah or uprising against Israeli
occupation. Israeli and Palestinian officials have accepted but have not implemented
the “Roadmap,” the international framework for achieving a two-state solution to
their conflict. Israel unilaterally disengaged from Gaza in summer 2005 and is
constructing a security barrier in the West Bank to separate from the Palestinians.
The victory of the Hamas terrorist group in the January 2006 Palestinian
parliamentary elections has complicated Israeli-Palestinian relations. On June 25, the
Hamas military wing kidnaped an Israeli soldier, provoking an Israeli military
offensive to force his release. Israel unilaterally withdrew from southern Eebanon
in 2000, but Hezbollah occupied the area and continued to fire rockets from it into
northern Israel. Hezbollah sparked a war when it kidnaped two Israel soldiers on
July 12; a cease-fire took effect on August 14. European countries collectively are
Israel’s second largest trading partner, and the EU participates in the peace process.

Since 1948, the United States and Israel have developed a close friendship based
on common democratic values, religious affinities, and security interests. U.S.-Israeli
bilateral relations are multidimensional. The United States is the principal proponent
of the Arab-Israeli peace process, but U.S. and Israeli views have differed on various
issues, such as the fate of the Golan Heights, Jerusalem, and Israeli settlements. The
United States and Israel concluded a free-trade agreement in 1985, and the United
States is Israel’s largest trading partner. Israel has historically been the largest
recipient of U.S. foreign aid. The two countries also have close security relations.
Other issues in U.S.-Israeli relations include Israel’s military sales to China,
inadequate Israeli protection of U.S. intellectual property, and espionage-related
cases. This report replaces CRS Issue Brief IB82008, Israel: Background and
Relations with the United States, and will be updated as developments warrant. See
also CRS Report RE33530, Israeli-Arab Negotiations: Background, Conflicts, and
U.S. Policy, CRS Report RE33566,LeZ7anon.' The Israel-Hamas-Hezbollah Conflict,
and CRS Report RE33222, U.S. Foreign Aid to Israel.



Contents


Most Recent Developments.1

Historical Overview of Israel.2

Government and Politics .3

Overview .3

Recent Political Developments .4

Current Government and Politics.6

Economy .7

Overview .7

Current Issues.8

Foreign Policy .9

Middle East .9

Iran.9

Palestinian Authority.10

Egypt .11

Jordan.12

Syria.12

Eebanon . 13

Other .14

European Union.14

Relations with the United States .15

Overview .15

Issues . 16

Peace Process.16

Trade and Investment.17

Aid.18

Security Cooperation.19

Other Current Issues.20

Military Sales.20

Espionage-Related Cases.21

Intellectual Property Protection.22

U.S. Interest Groups.22

List of Figures

Figure 1. Map of Israel .23

List of Tabies


Table 1. Parties in the Knesset


6




































Israel: Background and Relations
with the United States


Most Recent Developments

Israel engaged in a two-front war against U.S.-designated terrorist groups in
response to the June 25 kidnaping of an Israeli soldier by Hamas and others near
Gaza and the July 12 abduction of two Israeli soldiers from northern Israel by
Hezbollah.' The Israeli public and parliament supported the war in Lebanon as a
legitimate response to an attack on sovereign Israeli territory and a long overdue
reaction to Hezbollah rocket attacks on northern Israel. During the war, however, the
Israeli public and press increasingly questioned its prosecution. Charges levied
against the government and military leadership include hesitant decision-making;
poor intelligence concerning Hezbollah locations, arms, tactics, and capabilities;
deficient training and equipment for mobili z ed reservists; tactics unsuitable for
terrain and enemy; excessive reliance on air power; ill-prepared home front defense;
and inadequate presentation of the Israeli view to international audiences.

Israelis have been debating the war since it was concluded. Critics note that the
kidnaped soldiers are still in captivity and that Hezbollah retains its arms and has
been strengthened politically. The government claims success in forcing Hezbollah
from the border and in degrading its arms, particularly in destroying its long-range
rockets, and in pressuring the Lebanese government, aided by international forces,
to assert itself in south Lebanon. Israeli officials took Hezbollah leader Shaykh
Hassan Nasrallah’s admission that he would not have authorized the July 12 action
if he had known how strongly Israel would react as confirmation that the group had
been weakened and that Israel’s deterrence had been strengthened.^

Nonetheless, public opinion polls indicate little support for the government and
its main coalition partners. Prime Minister Ehud Olmert’s Kadima Party and
Defense Minister Amir Peretz’s Labor Party.^ Meanwhile, support for the rightist


' For extensive coverage of these developments, see CRS Report RL33530, Israeli-Arab
Negotiations: Background, Conflicts, and U.S. Policy, by Carol Migdalovitz and CRS
Report RL33566, Lebanon: the Israel-Hamas-Hezbollah Conflict, coordinated by Jeremy
M. Sharp.

^ Nasrallah’s August 27, 2006 interview with Lebanon television, cited by Joshua Mitnick,
“Hezbollah Says Its War with Israel Was a Mistake,” Washington Times, August 28,2006,
among others.

^ See for example, Israeli Poll Shows Likud Leading With 29 Seats; Qadima Down to 16
From 29, Ma’ariv, November 10, 2006, Open Source Center Document GMP20061110
746009.




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Likud and Yisrael Beiteinu parties and their leaders, Benjamin Netanyahu and
Avigdor Lieberman, has increased. However, elections are not imminent because
Members of the Knesset are unlikely to vote no confidence in the government
because many are likely to lose their seats in an early vote.

The incumbents have no plans to resign. Olmert is not challenged as leader of
his Kadima Party. Peretz’s hold on Labor’s helm may be more insecure as his
internecine foes include prominent personalities and appear to be increasing. They
include former Ben Gurion University President Avishay Braverman and former Shin
Bet (Israeli counterintelligence and internal security service) head Ami Ayalon, who
were high on the Labor list in the last election but failed to get cabinet posts. The
next Labor leadership primary is scheduled for May 2007 but may be postponed.

In October, Olmert broadened the coalition in order to stabilize it, bringing in
Yisrael Beiteinu and increasing the government’s strength in the Knesset to 78 out
of 120 seats. Yisrael Beiteinu leader Lieberman became Deputy Prime Minister and
Minister for Strategic Threats. Olmert claims to have sought Lieberman because
Peretz may be unable to enforce discipline on Labor Knesset members to enable
passage of the 2007 budget. Olmert agreed to support Lieberman’s proposal to
change the electoral system by providing for the direct election of the prime minister
and abolishing the president’s office, with the latter’s powers to be transferred to the
prime minister, and increasing the electoral threshold from 2.5% to 4%, among other
steps. The fate of the proposal is uncertain. (Labor) Minister of Culture and Sport
Ophir Pines-Paz resigned from the government to protest the inclusion of what he
labeled a party with “racist characteristics,” i.e., Yisrael Beiteinu. Pines-Paz now
intends to run for the Labor leadership.

As a result of the war, the government has shelved plans for unilateral
disengagement from the West Bank. Many Israelis believe that unilateral
disengagements from the south Lebanon and the Gaza Strip had enabled the
transformation of those regions into terrorist bases and led to war. Kadima, which
won election on a promise of disengagement, may need a new vision.

On November 1, Former Jewish Agency Chairman Sallai Meridor was
appointed as the next Israeli ambassador to the United States.


Historical Overview of Israel"^

The quest for a modem Jewish homeland was launched with the publication of
Theodore Herzl’s The Jewish State in 1896. The following year, Herzl described his
vision at the first Zionist Congress, which encouraged Jewish settlement in Palestine,
a land that had been the Biblical home of the Jews and was later part of the Ottoman
Empire. In 1917, the British government issued the Balfour Declaration, supporting
the “establishment in Palestine (which had become a British mandate after World
War I) of a national home for the Jewish people.” Britain also made conflicting


For more, see Howard M. Sachar, A History of Israel: From the Rise of Zionism to Our
Time, New York, Knopf, 1996.




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promises to the Arabs concerning the fate of Palestine, which had an overwhelmingly
Arab populace. Nonetheless, Jews immigrated to Palestine in ever greater numbers
and, following World War n, the plight of Jewish survivors of the Nazi holocaust
gave the demand for a Jewish home greater poignancy and urgency.

In 1947, the U.N. developed a partition plan to divide Palestine into Jewish and
Arab states, with Jerusalem under U.N. administration. The Arab states rejected the
plan. On May 14, 1948, the State of Israel proclaimed its independence and was
immediately invaded by Arab armies. The conflict ended with armistice agreements
between Israel and its neighbors: Egypt, Jordan, Lebanon, and Syria. Israel engaged
in armed conflict with some or all of these countries in 1948, 1956, 1967, 1973, and
1982. Since the late 1960s, Israel also has dealt with the threat of Palestinian
terrorism. In 1979, Israel concluded a peace treaty with Egypt, thus making another
multi-front war unlikely. Israel’s current relations with its neighbors are discussed
in “Eoreign Policy” below.


Government and Politics


Overview

Israel is a parliamentary democracy in which the President is head of state and
the Prime Minister is head of government. The unicameral parliament (the Knesset)
elects a president for a seven-year term. The Prime Minister is the leader of the party
with the most seats in parliament. The political spectrum is highly fragmented, with
small parties exercising disproportionate power due to the low vote threshold for
entry into parliament and the need for their numbers to form coalition governments.
In the March 2006, election, the threshold to enter parliament was raised from 1 % to
2% — an action intended to bar some smaller parties from parliament but that
spurred some parties to join together simply to overcome the threshold. National
elections must be held at least every four years, but are often held earlier due to
difficulties in holding coalitions together. The average life span of an Israeli
government is 22 months. The peace process, the role of religion in the state, and
political scandals have caused coalitions to break apart or produced early elections.

Israel does not have a constitution. Instead, 11 Basic Laws lay down the rules
of government and enumerate fundamental rights; two new Basic Laws are under
consideration.^ On Lebruary 2, 2006, the Knesset’s Constitution, Law, and Justice
Committee approved a draft constitution encompassing existing Basic Laws and a
chapter of human rights and basic principles. However, the coalition agreement of
the government that took power in April promised the ultra-orthodox Shas Party that
Basic Laws would not be changed (i.e., transformed into a Constitution) without its
approval. Israel has an independent judiciary, with a system of magistrates courts
and district courts topped by a Supreme Court.

There is an active civil society. Some political pressure groups are especially
concerned with the peace process, including the Council of Judea, Samaria, and Gaza


^ For Basic Laws, see [http://www.mfa.gov.il/mfa/govemment/law/basic%201aws/].




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(Yesha Council), which represents local settler councils and opposes any withdrawal
from occupied Arab territories, and Peace Now, which opposes settlements, the
security barrier in the West Bank, and seeks territorial compromise. Both groups
have U.S. supporters.

Recent Political Developments

Israel’s domestic politics have been troubled in recent years. Prime Minister
Ariel Sharon’s plan to disengage from the Gaza Strip and four small West Bank
settlements split his Likud Party. In November 2005, Histadrut labor federation head
Amir Peretz defeated acting party leader Shimon Peres and former Infrastructure
Minister Benjamin Ben Eliezer in a Labor Party leadership primary. Peretz
emphasized the party’s need to champion socioeconomic goals, which it had
subordinated for the sake of joining Sharon’s coalition. On November 20, Labor
voted to withdraw from the coalition government, depriving Sharon of his
parliamentary majority.

On November 21, Sharon said that he was no longer willing to deal with Likud
rebels, resigned from the party, and founded a new “centrist” party, Kadima
(Lorward). He asked President Katzav to dissolve parliament and schedule an early
election. Some 18 Likud Members of the Knesset (parliament) (MKs), including
several ministers, the chairman of the Likud Central Committee, several Labor
Knesset members, players in other political parties, and prominent personalities
joined Kadima. Lormer Labor leader Peres supported Sharon. Kadima’s platform
or Action Plan stated that, in order to secure a Jewish majority in a democratic Jewish
State of Israel, part of the Land of Israel (defined by some Israelis as the area between
the Jordan River and the Mediterranean Sea) would have to be ceded. It affirmed a
commitment to the Road Map, the international framework for achieving a two-state
solution to the Israeli-Palestinian conflict. Israel would keep settlement blocs, the
security barrier, and a united Jerusalem, while demarcating permanent borders.^

Lormer Prime Minister and Linance Minister Benjamin Netanyahu won a Likud
primary to replace Sharon as leader of Likud on December 19. Netanyahu called for
“defensible walls” against Hamas and borders that would include the Jordan Valley,
the Golan Heights, an undivided Jerusalem, settlement blocs, and hilltops, and for
moving the security barrier eastward.

On January 4, 2006, Sharon suffered an incapacitating stroke. In a peaceful
transition under the terms of Basic Law Article 16 (b). Deputy Prime Minister Olmert
became Acting Prime Minister. On January 16, Olmert became acting chairman of
Kadima.

The Hamas victory in the January 25 Palestinian parliamentary elections rapidly
became an Israeli election issue, even though all parties agreed that Israel should not
negotiate with Hamas. On March 8, Olmert revealed plans for further unilateral
withdrawals from the West Bank and said that he would reallocate funds from
settlements to the Negev, the Galilee, and Jerusalem. Although Olmert declared that


® For Kadima’s Action Plan, see [http://kadimasharon.co.il/15-en/Kadima.aspx].




CRS-5


he prefers negotiations, if they do not develop in a “reasonable time,” then he would
proceed with what he called “convergence,” or merging of settlements east of the
security barrier with large settlement blocs that will be west of the barrier/
Netanyahu charged that the unreciprocated, unilateral withdrawal from Gaza had
rewarded terrorists and contributed to the Hamas win. He criticized Olmert’s plan
as another unilateral concession that would endanger Israel. Peretz proposed that
Israel continue a dialogue with moderate Palestinians, not Hamas.

The March 28, 2006, Knesset election results were surprising in many respects.
The voter turnout of 63.2% was the lowest ever. The contest was widely viewed as
a referendum on Kadima’s plans to disengage from the West Bank, but it also proved
to be a vote on economic policies that many believed had harmed the disadvantaged.
Kadima came in first, but by a smaller margin than polls had predicted. Labor,
emphasizing socioeconomic issues, came in a respectable second. Kadima drained
off supporters from Likud, which lost 75% of its votes from 2003. L ikud’s decline
also was attributed personally to Netanyahu, whose policies as Finance Minister were
blamed for social distress and whose opposition to unilateral disengagement proved
to be unpopular with an increasingly pragmatic, non-ideological electorate.

The Shas campaign specifically aimed at restoring child allowances for the large
families of its constituents. Although it opposes disengagements, the party’s spiritual
leader has made rulings in the past that may allow Shas to accommodate Kadima’s
plans for the territories. Yisrael Beiteinu (Israel Our Home), a secular party appealing
to Russian-speakers, wants borders that exclude Israeli Arabs and their land and
include settlements; it opposes unilateral disengagement and the Road Map. The
rightist NU/NRP drew support from settlers; it opposes all withdrawals from the
West Bank, where it believes Jews have a biblical right to settle. The new Pension¬
ers’ Party (GIL) drew single-issue voters harmed by Netanyahu’s policies as well as
young protest voters. It did not elaborate its positions on other issues. The ultra¬
orthodox United Torah Judaism was part of the last Sharon government; it seeks
increased child allowances and deferments for religious school students from the
military and, despite protracted negotiations, has not struck a deal to join the
government. United Arab List, Hadash, and Balad — Israeli Arab parties — are not
part of a new government but are expected to passively support any future
disengagements.


^ During his May 2006 meeting with President Bush at the White House, Olmert used
“realignment” and not “convergence” as the English translation for his plan.




CRS-6


Current Government and Politics

On May 4, 2006, the Knesset (parliament) approved a new four-party coalition
government of Prime Minister Ehud Olmert’s Kadima Party, the Labor Party, the
Pensioners’ Party, and the ultra-orthodox Shas Party. It controlled 67 out of 120
seats in the Knesset, with 25 cabinet ministers, and Dalia Itzik of Kadima as the first
woman Speaker of the Knesset. The government’s guidelines call for shaping
permanent borders for a democratic state with a Jewish majority.* The government
will strive to negotiate with the Palestinians, but it will act in the absence of
negotiations. The guidelines also promise to narrow the social gap. Labor wants
Olmert to negotiate with Palestinian President Mahmud Abbas before deciding on
a unilateral move. Shas joined the coalition without agreeing to evacuate West Bank
settlements as specified in the guidelines and will decide on the issue when it is on
the government agenda.


Table 1. Parties in the Knesset


Seats

Party

Orientation

29

Kadima

Centrist, Pro-disengagement

19

Labor

Leftist, Social-democrat

12

Likud

Rightist, Anti-disengagement

12

Shas

Sephardi Ultra-orthodox

11

Yisrael Beiteinu
(Our Home Israel)

Russian-speakers, Nationalist, Secular, Against unilat¬
eral withdrawals, but for exchange of populations and
territories to create 2 homogenous states

9

National Union (NU)/

National Religious Party
(NRP)

Nationalist, Ashkenazi Orthodox, Seeks to annex the
West Bank (Land of Israel) and transfer Palestinians to
Jordan

7

Pensioners’ (GIL)

Single-issue: guaranteed pensions for all; Supports
unilateral withdrawal from West Bank

6

United Torah Judaism (UTJ)

Ashkenazi Orthodox, Anti-withdrawals

5

Meretz/Yahad

Leftist, Anti-occupation, Civil libertarian

4

United Arab List/Ta’al

Israeli-Arab, Islamist

3

Hadash

Israeli-Arab, Communist

3

Balad

Israeli-Arab


* For the entire text of the government guidelines, see [http://www.mfa.gov.il/MFA/
Govemment/Current-i-Govemment-i-of+Israel/Basic%20Guidelines%20of%20the%2031s
t%20Government%20of%20Israel].












































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There are currently
several unresolved scan¬
dals involving prominent
politicians. Justice Min¬
ister Haim Ramon re¬
signed after being in¬
dicted for indecent as¬
sault on a female soldier
and is on trial. The
Chairman of the Knesset
Foreign Affairs and De¬
fense Committee,

Kadima Knesset member
Tsahi Hanegbi, also has
been indicted for illegal
conduct during his ten¬
ure as Environment Min¬
ister from 2001-2003.

Then, on October 15,
police recommended that
the Attorney General
indict President Moshe
Katzav for rape, sexual
assault, and fraud. The
Attorney General has not
yet made a decision. The
President is immune
from trial while holding
office but could be tried if he resigns or is impeached. Impeachment requires 90
votes in the 120-seat Knesset. Katzav’s lawyer has said that the President will resign
if charged. Finally, the State Comptroller has accused Prime Minister Olmert of
corruption for appointments of cronies when he was Minister of Industry and turned
the case file over to the Attorney General. Other ongoing investigations concern
Olmert’s sale of his Jerusalem home significantly above market prices and
accusations that, while Finance Minister, he had accepted bribes from U.S.
businessmen during the sale of a government-bank controlled bank.


Key Cabinet Officers


Ehud Olmert

Prime Minister; Minister of
Social Welfare

Kadima

Tzipi Livni

Vice Prime Minister;

Minister of Eoreign Affairs

Kadima

Shimon Peres

Vice Prime Minister; Negev
and Galilee Development

Kadima

Amir Peretz

Deputy Prime Minister;
Minister of Defense

Labor

Avigdor Lieberman

Deputy Prime Minister;
Minister of Strategic Threats

Yisrael

Beiteinu

Meir Shitrit

(Acting) Minister of Justice;
Housing

Kadima

Avi Dichter

Public Security

Kadima

Shaul Mofaz

Deputy Prime Minister;
Minister of Transportation*

Kadima

Roni Bar-On

Interior

Kadima

Yuli Tamir

Education

Labor

Eli Yishai

Deputy Prime Minister;
Minister of Industry, Trade,
and Labor

Shas


*Also in charge of strategic dialogue with the United States.


Economy


Overview

Israel has an advanced industrial, market economy in which the government
plays a substantial role. Most people enjoy a middle class standard of living. Per
capita income is on par with some European Union members. Despite limited natural
resources, the agricultural and industrial sectors are well developed. An advanced
high tech sector includes aviation, communications, computer-aided design and
manufactures, medical electronics, and fiber optics. Israel greatly depends onforeign
aid and loans and contributions from the Jewish diaspora. After economic declines




CRS-8


in 2001 and 2002 due to the effects of the Palestinian intifadah (uprising) on tourism
and to the bursting of the global high-tech bubble, Israel’s economy recovered.
Before the 2006 war in Lebanon, most economic indicators were positive: inflation
low, employment and wages rising, and the standard of living rising.

Under Former Finance Minister Netanyahu, the government attempted to
liberalize the economy by controlling government spending, reducing taxes, and
resuming privatization of state enterprises. The chronic budget deficit decreased,
while the country’s international credit rating was raised, enabling a drop in interest
rates. However, Netanyahu’s critics suggested that cuts in social spending widened
the national income gap and increased the underclass. According to Israel’s National
Insurance Institute, 20% of all Israelis and 30% of Israeli children live below the
poverty line.

Israel has a budget deficit target of 3% of gross domestic product, and the
government is allowed by law to raise the annual budget by only 1.7%. Olmert
vowed not to increase the deficit while lessening the social gap. The coalition
agreement calls for raising the minimum wage to $1,000 a month by the end of the
Knesset session, canceling a 1.5% pension cut of the Netanyahu era, guaranteeing a
pension for all workers, and increasing spending on heath care, child allowances,
daycare, and other socioeconomic programs.

Current Issues


The 2006 budget was not
approved before the dissolution
of the last parliament; therefore
spending remained at 2005
levels from January through
May and a budget surplus
accrued due to the low
expenditures and higher than
expected tax revenues. The
surplus was expected to enable
the new government to spend
more on social programs.
Finance Minister Hirschson
proposed a budget cut of 1
billion New Israeli Shekels
(NIS) (U.S.$224 million) for
2006, of which NIS 510 million
(U.S.$114 million) was to be
taken from defense and none
from social programs. The
Knesset passed the budget on
June 7, 2006, by a vote of 53 to
22, with 45 abstentions. Some
Labor Knesset members
objected to cuts in bread
subsidies, failure to address the


Basic Facts

Population

6,276,883 (2005.)

Population
Growth Rate

1.2% (2005 est.)

Ethnic

Groups

— Jewish 80.1% (1996)

— non-Jewish (mostly Arab)
19.9% (1996)*

GDP Growth
Rate

5.2 (2005 est.)

GDP Per Capita

$22,200 (2005 est.)

Inflation Rate

1.3% (2005 est.)

Unemploy¬
ment Rate

8.9% (2005 est.)

Ratio of debt to
GDP

101% (2005 est.)

Foreign Debt

$74.46 billion (2004 est.)

Imports

crude oil, grains, raw materials,
military equipment

Exports

cut diamonds, high-technology
equipment, fruits and vegetables

Main Trading
Partners

United States, Belgium, Germany,
United Kingdom

Sources: CIA, The World Factbook, January 2006; and
the Israeli government.

*Within 1967 borders.




CRS-9


pension issue, and defense cuts, but voted for the budget to sustain the coalition.
Likud, Meretz, and the Arab parties voted against the bill. UTJ, Israeli Beiteinu, and
NU-NRP abstained after the government pledged to support organizations they
champion.

In the end, the defense budget was not cut due to military expenditures for the
war in Lebanon. On August 31, the Knesset Finance Committee passed a 6% across-
the-board cut (totaling about $450 million) for all ministries, except defense and
social welfare. Finance Minister Hirchson estimates the cost of the war to be about
$3.5 billion, and the Israeli Bureau of Statistics projects a 4.5% GDP growth rate for
2006 (compared to 5.2% in 2005) due economic losses resulting from the closure of
industrial plants in northern Israel, inability to work on agriculture in that region,
attendant business, property, and tax losses, and the loss of tourism revenues.

On September 12, the cabinet approved the 2007 budget. Only Shas voted
against it. Labor Leader Peretz abstained over a minimum wage issue, but other
Labor ministers disagreed with his assessment and voted for the budget.


Foreign Policy


Middle East

Iran. Israeli officials state that Iran will pose an existential threat to Israel if it
achieves nuclear capability. Ayatollah Khomeini, founder of Iran’s Islamic
revolution, decreed that the elimination of Israel is a religious duty. President
Mahmud Ahmadinejad quoted Khomeini when he called for Israel to be “wiped off
the map,” has described the Holocaust as a “myth” used as a pretext to create an
“artificial Zionist regime,” and suggested that Europe, the United States, or Canada
donate land for a Jewish state. He repeatedly makes virulently anti-Israel statements.
The Iranian Shahab-3 missile is capable of delivering a warhead to Israel. Israeli
officials have called on the international community to thwart Iran’s nuclear
ambitions in order to avert the need for Israel to act as it did against Iraq’s reactor at
Osirak in 1981.

When U.S. Vice President Dick Cheney warned in early 2005 that Israel might
act pre-emptively against Iran, Israel’s then Defense Minister Shaul Mofaz countered,
urging a U.S. pre-emptive strike. Israel has nuclear weapons, and the prospect of a
counterattack is seen by many as a deterrent against an Iranian attack. On January
17, 2006, then Acting Prime Minister Olmert said, “Under no circumstances ... will
Israel permit anyone who harbors evil intentions against us to possess destructive
weapons that can threaten our existence.” He added, “Israel acted, and will continue
to act, in cooperation and consultation with ... international elements.”® On April 23,
he told the cabinet, “our position has always been that it would not be correct to focus
on us as the spearhead of the global struggle as if it were our local, individual
problem and not a problem for the entire international community. The international


® “PM Olmert, President Qatzav Discuss Iran, Peace Process During News Conference,”
Open Source Center Document FEA20060117017385, January 17, 2006.




CRS-10


struggle must be led and managed by — first and foremost — the US, Europe, and
the UN institutions. We are not ignoring our need to take ... steps in order to be
prepared for any eventuality.”'”

On May 23, 2006, Israeli Chief of Staff Dan Halutz said that, according to
intelligence estimates, Iran would be in possession of nuclear weapons by 2008-
2010. He also noted that U.S. assessments predicted that Iran would not develop the
bomb before 2010-2015, but that Israel must prepare for the possibility of a more
imminent threat." On November 13, Prime Minister Olmert told the U.S. “Today
Show” that he would find acceptable any compromise that President Bush does to
stop Iran from acquiring nuclear capabilities.

Iran also provides financial, political, and/or military support to the Lebanese
Hezbollah as well as to Hamas, Palestinian Islamic Jihad (PU), the A1 Aqsa Martyrs’
Brigades, and the Popular Front for the Liberation of Palestine-General Command
— Palestinian terrorist groups seeking to obstruct the peace process and destroy
Israel. In January 2006, then Defense Minister Mofaz charged that Iran had financed
a PIJ suicide bombing in Tel Aviv and Israeli officials blamed Iran for Hezbollah’s
attack on northern Israel in July 2006.

Palestinian Authority. During the Oslo peace process of the 1990’s, Israelis
and Palestinians negotiated a series of agreements that resulted in the creation of a
Palestinian Authority (PA) with territorial control over parts of the West Bank and
the Gaza Strip. Israel refused to deal with the late Palestinian leader Yasir Arafat
after Sharon came to power and during the intifadah or Palestinian uprising against
Israeli occupation. Israel’s relations with the PA and its leaders improved somewhat
after Arafat’s death in November 2004 and the election of Mahmud Abbas as
President of the PA in January 2005. Sharon and Abbas met at a summit in Sharm
al-Shaykh, Egypt, in February, and promised to end violence and to take other
measures. Israel made some goodwill gestures toward the PA, and President Abbas
and 13 Palestinian factions agreed to an informal truce. However, Sharon and Abbas
did not meet after June 2005. Although Israeli officials described the disengagement
from the Gaza Strip as unilateral, they met with Palestinian counterparts to
coordinate security and disposition of assets.

Israel still has 242 settlements, other civilian land use sites, and 124
unauthorized settlement outposts in the West Bank and 29 settlements in East
Jerusalem — all areas that the Palestinians view as part of their future state. Israel
retains military control over the West Bank and is building a security barrier on West
Bank territory to separate Israelis and Palestinians and prevent terrorists from
entering Israel. Palestinians object to the barrier being built on their territory. The
barrier is taking the form of a future border between Israel and Palestine and will cut
Palestinians off from East Jerusalem.


“23 Apr Cabinet Session; Daily Says Olmert Readying for ‘Swift’ Convergence,” Open
Source Center, Document GMP20060424621005, Jerusalem Government Press Office,
April 23, 2006.

" Ha’aretz report, May 24, 2006.




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The Israeli government accepted the Roadmap, the framework for a peace
process leading to a two-state solution developed by the United States, European
Union, U.N., and Russia, reluctantly and with many conditions. Sharon contended
that the Roadmap requires that the PA first fight terror, by which he meant disarm
militants and dismantle their infrastructure. Abbas preferred to include terrorist
groups such as Hamas in the political system and refused to disarm them prior to
January 2006 parliamentary elections. Hamas’s victory in those elections created
policy dilemmas for Israel and the international community. Israel demanded that
Hamas abrogate its Covenant that calls for the destruction of Israel, disarm and
disavow terrorism, and accept all prior agreements with Israel as preconditions for
relations with a Hamas-led PA.

Israel officially refuses to negotiate with Hamas for the return of the Israeli
soldier kidnaped from a post at Kerem Shalom, Israel, near the Gaza Strip on June
25, 2006. Since the kidnaping, Israel has arrested many members of the Hamas-led
PA government and legislature for participating in a terrorist group, and Israeli forces
have been conducting military operations against Hamas and other militant groups
in the Gaza Strip as well as in the West Bank. Egyptian officials are attempting to
mediate a resolution that would involve a prisoner exchange. Analysts believe that
this effort may be complicated by the need to have a deal acceptable to Hamas
political bureau head Khalid Mish’al, who is based in Damascus and subject to
influence by the Syrian and Iranian governments.

Egypt. After fighting four wars in as many decades, Israel and Egypt signed
a peace treaty in 1979. In 1982, Israel withdrew from the Sinai Peninsula, which it
had taken in the 1967 war. Egypt and Israel established diplomatic relations,
although Egypt withdrew its ambassador during the four years of the second
intifadah, 2001-2005, because it objected to Israel’s “excessive” use of force against
the Palestinians. Some Israelis refer to their ties with Egypt as a “cold peace”
because full normalization of relations, such as enhanced trade, bilateral tourism, and
educational exchanges, has not materialized. Egyptian President Hosni Mubarak has
visited Israel only once — for the funeral of former Israeli Prime Minister Yitzhak
Rabin. Outreach is often one way, from Israel to Egypt. Egyptians say that they are
reluctant to engage because of Israel’s continuing occupation of Arab lands. Israelis
are upset by some Egyptian media and religious figures’ anti-Israeli and occasionally
anti-Semitic rhetoric. Nonetheless, the Egyptian government often plays a
constructive role in the Arab-Israeli peace process, hosting meetings and acting as a
liaison. In March 2005, it helped secure an informal Palestinian truce and later helped
prevent it from breaking down due to violence between Palestinian factions and
Israel and between Palestinian security forces and factions. As noted above,
Egyptians have been trying to secure the release of a kidnaped Israeli soldier being
held by Hamas militants.

Since the January 2006 Hamas election victory, Egyptian officials have
unsuccessfully urged the group to accept a 2002 Arab Eeague declaration that offers
Israel recognition within its 1967 borders. On June 4, President Mubarak and Prime
Minister Olmert had a very cordial meeting. Mubarak praised Olmert as a man of
“vision and credibility,” while Olmert reciprocated with compliments and pledged
to work closely with Mubarak to advance the peace process.



CRS-12


Egypt deployed 750 border guards to secure the Gaza-Egyptian border (Rafah)
after Israel’s disengagement from Gaza. After one year, the two sides will jointly
evaluate the mission. Israel refused an Egyptian request to deploy military border
guards, instead of police, for greater control of smuggling along the entire border in
Sinai, which some Israelis argue would require a change in the military appendix of
the 1979 peace treaty. In fall 2006, Israeli officials repeatedly expressed frustration
with Egyptian failure to control arms-smuggling into Gaza.

In December 2004, Egypt and Israel signed a Qualified Industrial Zone (QIZ)
Agreement under which jointly produced goods enter the U.S. market duty free as
part of the U.S.-Israeli Eree Trade Agreement (ETA). As a result of the QIZ, Israeli
exports to Egypt grew 110% in 2005. On June 30, 2005, Israel signed a
memorandum of understanding to buy 1.7 billion cubic feet of Egyptian natural gas
for an estimated U.S.$2.5 billion over 15 years, fulfilling a commitment made in an
addendum to the 1979 peace treaty. The deal includes cooperation in construction
of the infrastructure and may expand to other energy areas. Gas is not expected to
flow before 2007.'^

Jordan. Israel and Jordan signed a peace treaty in October 1994 and
exchanged ambassadors, although Jordan did not have an ambassador in Israel during
most of the intifadah. Relations have developed with trade, cultural exchanges, and
water-sharing agreements. Since 1997, Jordan and Israel have collaborated in
creating 13 qualified industrial zones (QIZs) to export jointly produced goods to the
United States duty-free under the U.S.-Israel Eree Trade Agreement (ETA), although
Jordanian companies are now said to prefer arrangements under the U.S.-Jordan ETA
over the QIZ. Normalization of ties is not popular with the Jordanian people, over
half of whom are of Palestinian origin, although King Abdullah n has attempted to
control media and organizations opposed to normalization. Believing that a two-state
solution to the Israeli-Palestinian conflict would contribute to regional stability, the
King is very supportive of the peace process, wants the Roadmap to be implemented,
and has hosted meetings between Israeli and Palestinian leaders. He opposes
unilateral Israeli steps in the West Bank, fearing that they would strengthen
Palestinian radicals who could destabilize the region and undermine his regime.
Abdullah met Olmert in Jordan on June 8, 2006.

Syria. Israel and Syria have fought several wars but, except for rare breaches,
have maintained a military truce along their border for many years. Yet, they failed
to reach a peace agreement in negotiations that ended in 2000. Since 1967, Israel has
occupied Syria’s Golan Heights and, in December 1981, effectively annexed it by
applying Israeli law there. There are 42 Israeli settlements on the Golan. Syrian
President Bashar al-Asad has said that he wants to hold peace talks with Israel, but
Israeli officials demand that he first cease supporting the Eebanese Hezbollah militia,
which attacks Israeli forces in the disputed Shib’a Earms area of Eebanon and


See also CRS Report RL33003, Egypt: Background and U.S. Relations, by Jeremy Sharp.

See also CRS Report RL33546, Jordan: U.S. Relations and Bilateral Issues, by Alfred
Prados and Jeremy M. Sharp; and CRS Report RS22002, Qualifying Industrial Zones in
Jordan: A Model for Promoting Peace and Development in the Middle East? by Mary Jane
Bolle, et al.




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communities in northern Israel and aids Palestinian terrorist groups. They also wa
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