UAE firm’s bid to buy Israeli insurance giant poses dilemmas - analysis

Is it wise for Israel to have a UAE state-owned company holding a controlling stake in a financial firm that manages more than NIS 350 billion in assets, including pensions and provident funds? 

A man waves a giant United Arab Emirates flag outside the Prime Minister's official residence in Jerusalem on August 19, 2020 (photo credit: YONATAN SINDEL/FLASH 90)
A man waves a giant United Arab Emirates flag outside the Prime Minister's official residence in Jerusalem on August 19, 2020
(photo credit: YONATAN SINDEL/FLASH 90)

Reports last week that an Abu Dhabi holding company wants to buy a controlling stake in the Phoenix Group, Israel’s insurance giant that controls the country’s most significant pension funds, left some mumbling, “be careful what you wish for.”

When Israel and the UAE, Bahrain and Morocco signed the Abraham Accords in 2020, much was made of the potential economic benefits of the accords, and how they would lead to greater trade between Israel and the Arab world, as well as massive Gulf investment into Israel.

And it has.

The UAE and Israel signed a free trade deal in May and the current annual volume of trade is $2.5 billion and growing, making the UAE a significant trading partner for Israel. Likewise, last year the UAE announced the establishment of a $10b. fund to invest in strategic sectors of Israel.

Great, right? Yes... but.

 A MAN waves a giant UAE flag  outside the US ambassador’s  residence in Jerusalem, August 19,  2020. (credit: YONATAN SINDEL/FLASH90) A MAN waves a giant UAE flag outside the US ambassador’s residence in Jerusalem, August 19, 2020. (credit: YONATAN SINDEL/FLASH90)

First, some UAE officials have been quoted complaining about a cumbersome bureaucracy making it difficult for Emiratis to do business here.

Secondly, some Israelis say that it is one thing if private UAE companies are investing in Israeli hi-tech and businesses, but does Israel really want to sell a controlling stake in major financial institutions to state-owned companies in countries with which it had no diplomatic relations just three years ago? Does it really want a Gulf Arab country to be the custodian of its largest pension fund, and to have access to the sensitive information of hundreds and thousands of its citizens that goes with controlling those funds?

What happens if relations with the UAE suddenly go sour for one reason or the other? After all, this is the Middle East, and stranger things have happened. For instance, Israel had a strategic relationship with Turkey until 2003, when Recep Tayyip Erdogan became prime minister and the relationship went into a tailspin.

Is it wise for Israel to have a UAE state-owned company holding a controlling stake in a financial firm that manages more than NIS 350b. in assets, including pensions and provident funds?

Should Israel let the UAE have a controlling stake in Phoenix?

This is one of the first major diplomatic dilemmas presumptive prime minister Benjamin Netanyahu’s government will have to deal with soon after it is sworn into office, something expected within the next few days.

And this is a diplomatic question. What message will Israel send to the UAE if Israel’s regulatory bodies nix the deal, essentially saying to its Abraham Accord ally that Israel is interested in its investments, but not in all sectors? Making such a rejection even more tricky is the fact that Tahnoun bin Mohammed Al Nahyan, the brother of Emirati leader Mohammed bin Zayed Al Nahyan, heads the Emirati holding company looking to purchase the stake in Phoenix.

This, by the way, is not virgin territory for Israel. It faced a similar question of whether to sell a large sale of a strategic asset to the UAE when Delek Drilling sold a 22% stake in the Tamar gas field to Abu Dhabi’s Mubadala Petroleum in 2021, a deal that was approved before the Bennett government was formed and Netanyahu was still prime minister.

Similarly, Israel has faced these dilemmas for years with the Chinese, beginning when a Chinese company bought the mammoth food conglomerate Tnuva in 2014. Many at the time argued it was unwise for Israel to give control over one of its food giants to a foreign power.

The question became even more acute when the Chinese showed great interest in buying into and developing critical national infrastructures, like ports in Haifa and Ashdod, Tel Aviv light rail lines and desalination plants. At a certain point, the US – in fierce competition with China and afraid of too much Chinese control over strategic sites in Israel potentially posing intelligence risks to the US – put the screws on Jerusalem and demanded greater regulation and oversight of what and how much the Chinese were buying.

But that was China, and Israel could explain to the Chinese that the bids of Chinese firms were rejected because of American objections. Similar objections, however, are not at play when dealing with the UAE. Washington is not telling Israel, as it hinted concerning China, “You have to choose, either Abu Dhabi or Washington.”

Whether to sell a strategic financial asset like Phoenix to the UAE is a decision Israel must make on its own. It is not going to be an easy one, since on the one hand the country wants to keep its critical financial institutions in domestic hands. Yet, on the other hand it wants to deepen and broaden its ties with the UAE across all spheres: security, intelligence and economic.

Under the reported terms of the deal, a consortium of UAE-based funds led by the Abu Dhabi-backed sovereign wealth fund ADQ Developmental Holding Co. will acquire 25%-30% of Phoenix. It will buy this share from US private investment firms Centerbridge Partners and Gallatin Point Capital, which hold just under 34% of the firm.

For the deal to go through, it will have to be approved by the Capital Market, Insurance and Savings Authority, and the Israel Competition Authority, and there is expected to be an in-depth inquiry into all the ramifications of the deal.

In 2017, Israel’s regulatory bodies nixed the energy conglomerate Delek’s sale of a controlling stake in Phoenix to a Chinese firm, and it was reported at the time that the country’s regulators did not want to put a critical financial asset and hundreds of billions of shekels of pension money in the hands of a state-owned Chinese company.

If Israel now decides it is willing to do just that with a UAE-controlled company, it will find itself in the awkward position of needing to explain itself to the Chinese. But if it rejects the UAE bid, it will have to explain itself to the Emiratis.

Every country likes outside investors. The question the UAE bid is forcing on Jerusalem decision-makers is which investors, and in what sectors.