It’s the Economy, Stupid: Israel’s Quiet Backchannel to the Palestinians

The tension of the days of rage that followed America’s recognition of Jerusalem as Israel’s capital remains palpable. The Palestinians have totally cut themselves off from the Trump administration. A peace deal seems further away than ever. And into the Muqata in Ramallah marched a senior Israeli minister who, with a broad smile on his face, declared in Arabic, “Rahat a-Quds!” (“You’ve lost Jerusalem!”)

In another place and time, this certainly could have been a casus belli, but in this story, which took place at the end of last month, those present responded with forgiving amusement and shook the hand of their guest – finance minister and security cabinet member Moshe Kahlon.

It wasn’t Kahlon’s first visit to Ramallah, nor was it his first meeting with senior Palestinian Authority officials. His remark was accepted forgivingly because they are familiar with Kahlon’s direct but endearing style. Since he became finance minister, the former Likud member who now heads a party, Kulanu, which doesn’t have a clear diplomatic agenda, has succeeded in developing a quiet channel with the Palestinian leadership. First it was on the basis of economic cooperation and coordination under the auspices of the defense establishment, while later on other issues were added, spurred by an American bear hug. In essence, since the Palestinians declared that they will not come to the negotiating table if Washington is the mediator, Kahlon is currently the only active diplomatic channel.

Minister of Finance Moshe Kahlon at the Knesset on March 5, 2018.Olivier Fitoussi

Some Palestinian officials refer to him sarcastically as the minister from the refugee camp, because during one of his meetings he told them of his difficult childhood in the projects in Givat Olga. His conversations are sprinkled with the Arabic he learned from his Tripolitan parents. This detail has attracted the attention of foreign news outlets, which have labeled him “the Arabic speaker who could lead Israel.” Only Kahlon really understands Arabic, people familiar with these meetings told Haaretz, in a barb clearly aimed at Defense Minister Avigdor Lieberman, but they hasten to add that Kahlon’s Arabic is very basic and his conversations with PA officials are conducted with the help of interpreters or in English.

Although these meetings were never really a secret, even if all the details aren’t known, the Kulanu chairman tries very hard to conceal this aspect of his work. On all his very lively social networks, among the hundreds of announcements about new financial benefits and pictures of his elderly mother (who still lives in Givat Olga), you will find only a handful of references to diplomatic or security affairs in general and to his ties with Ramallah in particular. That’s no coincidence, of course. Kahlon is proud of his work in this area, but he is also afraid to undercut his right-wing image.

Keep updated: Sign up to our newsletter


Please enter a valid email address

Sign up

Please wait…

Thank you for signing up.

We’ve got more newsletters we think you’ll find interesting.

Click here

Oops. Something went wrong.

Please try again later.

Try again

Thank you,

The email address you have provided is already registered.


‘Restraining measures’

The connection began when he took over the Finance Ministry in 2015, with a telephone call from his Palestinian counterpart Shukri Bishara, which led to a meeting at which they were joined by PA Minister for Civilian Affairs Hussein al-Sheikh. This wasn’t an unusual gesture or a demonstration of good will. Under the Paris Protocol governing economic relations between Israel and the PA – which was even updated in 2012 by Prime Minister Benjamin Netanyahu, who said then this was aimed at “supporting Palestinian society and strengthening its economy” – Israel is obligated to coordinate various economic moves with the PA, including the transfer of taxes collected by Israel on the PA’s behalf.

– Kahlon Hamdallah

Important progress last night between Israeli & Palestinian sides led by @RamiHamdalla & @KahlonMoshe & Gen Mordechai of @Cogat_Israel (1/2)

— Jason D. Greenblatt (@jdgreenblatt45) October 30, 2017

Over the years Israeli governments have at various times held these Palestinian funds hostage, delaying or freezing their transfer as a form of pressure or punishment. This being the case, even a decision to regulate the transfer of funds becomes a significant diplomatic decision, as is a decision on what level of official comes to the meetings. Kahlon’s associates note that the previous finance minister, Yair Lapid, had also met with Bishara under these circumstances, but the relationship never developed in the same way and the debts could not be worked out.

In 2017 Kahlon also started meeting with Palestinian Prime Minister Rami Hamdallah, with Netanyahu’s knowledge and blessing. The two have met three times in Ramallah and are expected to hold another meeting in Jerusalem. The pair, along with members of their staffs, also connect by phone. These meetings are attended by the Coordinator of Government Activities in the Territories, Maj. Gen. Yoav Mordechai, whose responsibility includes the financial and security coordination mechanisms. Sometimes Palestinian intelligence chief Majid Faraj has also attended.

In the absence of any substantial diplomatic process, the Israel Defense Forces has seen itself for a while now as the responsible adult, preserving the channels of dialogue with the West Bank and Gaza in most areas of life. This is always portrayed as an effort to preserve security control. The army believes that confidence-building measures are an important way to prevent violent protests. “Restraining measures,” senior security officials call them.

Kahlon at a ceremony in the Allenby Bridge in January עודד קרני / לע”מ

From time to time the military gets politicians involved as well, and Kahlon was a perfect candidate. His new party was sufficiently free of the traditional political strings, he showed a desire to get deeply drawn in and he has a certain personal charm. He was also lacking diplomatic experience. The meetings that began under the Oslo Accords framework continued, under Mordechai’s direction, to other issues, chiefly an agreement to resolve the PA’s debt to the Israel Electric Corp. and to regulate the PA’s energy sector, which Kahlon signed in September 2016 and which included complex guarantees and arrangements.

Kahlon’s first meeting with Hamdallah took place in June 2017 in Ramallah, where they shared an iftar meal that breaks the Ramadan fast. It had been over 10 years since such a high-level Israeli official had visited PA territory. Since then the discussions between their staffs have touched on such issues as easing conditions for Palestinian construction in the West Bank’s Area C, which is under complete Israeli control; settlements; the situation in Gaza; the reconciliation between the Palestinian factions, and terror.

But the main topics have been economic ones, issues like increasing the number of Palestinians who can work in Israel; dealing with the water and sewerage crisis; upgrading cellular coverage; installing a joint computer system that would block tax evasion at the commercial terminals; regulating pension arrangements for Palestinian workers in Israel; a pilot for a joint industrial zone in the settlement of Betar Illit that would employ 2,000 ultra-Orthodox and Palestinian workers; a fuel terminal; providing Israeli indemnity to banks that provide services to the PA, given the international laws against money laundering, and a joint fund to be financed by the management fees Israel collects on PA taxes that will be used to encourage joint high-tech initiatives. (“Let’s say a firm in Ra’anana wants to work with a company in Ramallah; they’ll get grants,” sources say.)

Sources familiar with the content of the meetings told Haaretz that during one of the discussions about eliminating collection debts, an argument broke out regarding the final amount. The Palestinians had no invoices to present, so the two sides compromised on the same amount as last year. During the discussion Kahlon told them, “They told me that there’s no money for medicine or teachers. I came from a house where they don’t take food out of children’s mouths, and it doesn’t matter whether they are Jews or Palestinians.” This comment made the rest of the conversation easier.

But some Palestinian officials aren’t so enthusiastic. They say the relationship with Kahlon is totally businesslike and stems from the need to manage economic agreements with Israel. The senior PA officials have no partiality toward whoever is managing the contacts with them, as long as he is not a settler, they stress. There are those in the Palestinian “street” who would prefer to cut off all contact with Israel, but they don’t understand that the PA can’t do that because it has obligations, they say.

Kahlon at a ceremony in the Allenby Bridge in January עודד קרני / לע”מ

Shortly after Donald Trump was sworn in as U.S. president, his special envoy to the Middle East, Jason Greenblatt, inserted himself into this complex, developing relationship. He began to meet with Mordechai and subsequently became aware of the role Kahlon was playing. The pursuit of “economic peace” was something Greenblatt had always supported, but its importance intensified when it became the only option on the table due to the abrupt disconnect initiated by PA President Mahmoud Abbas.

Greenblatt and U.S. Treasury Secretary Steven Mnuchin met Kahlon a few times and started to press him to increase cooperation and to deliver results. The few pictures available of these meetings can be found on Greenblatt’s Twitter account, which to some extent have often brought both sides out of the closet when they’d prefer to remain concealed.

The second Kahlon-Hamdallah meeting, which took place in October, was kept secret until it was revealed by Army Radio. The two, with American encouragement, discussed increasing the operating hours at the Allenby Bridge and other West Bank crossings to and from Jordan. At around the same time, a delegation headed by Finance Ministry director general Shai Babad toured the new Palestinian city of Rawabi to advance the paving of an access road to the city. Economy and Industry Minister Eli Cohen, who is also from Kulanu, visited the West Bank to advance the establishment of a joint industrial zone. Cohen later also met in Paris with his Palestinian counterpart, Abeer Odeh.

In January Kahlon appeared with American and Palestinian representatives for a photo op at the inauguration of a new scanning station at the Allenby Bridge that had been purchased with European assistance. At the ceremony, Kahlon said, “I came to the Finance Ministry after a lengthy freeze in the relations between Israel and the Palestinian Authority. We decided to take responsibility and advance a number of joint projects. The project we are inaugurating here is an example of how a small thing can make a big change. We have lots of plans to continue economic cooperation with the PA.”

Israeli sources, however, played down the significance of the Allenby project. “There won’t be more traffic there, but the Americans wanted a quick achievement,” said one.

By his third meeting with Hamdallah, which was after U.S. recognition of Jerusalem as Israel’s capital, Kahlon had already become a significant channel for messages between the administration and the Palestinians. “Go back to negotiating with the Americans, they are the only honest broker in the region,” Kahlon said then.

Both Netanyahu and Abbas are aware of what goes on at these meeting; sometimes the other security cabinet members are also told. Having Kahlon out there, front and center, is good for everyone. When there’s something to boast about, Netanyahu, who for years had been promoting the idea of “economic peace,” can take credit with the American administration. When there is criticism from the right, he can blame Kahlon.

But where is Kahlon planning to take this new role? No diplomatic plan, even a partial one, has emerged from this. The man who in the past told an interviewer that peace with the Palestinians could also start with “cooking contests,” akin to U.S. President Richard Nixon’s ping-pong diplomacy, is gaining some significant diplomatic experience, but is keeping his conclusions to himself.

Neither Kahlon’s or Hamdallah’s offices responded for this report.