Beyond the headlines, Britain and Israel – the First Industrial Nation’ and the ‘Start-Up Nation’ – are drawing closer together and creating an economic nexus. Bilateral trade has soared to an estimated £5 billion a year making the UK Israel’s third biggest trading partner after the United States and Hong Kong. The old colonial power Britain and its former Middle East protectorate are finding new common ground, but there is still some heavy historical and political baggage to deal with.
As one of the most open economies in the world, Britain lives by its trading relationships. Together the 27 countries of the European Union constitute the UK’s biggest market. But there is no escaping the fact that Europe’s share of Britain’s trade is slowly shrinking and once again the UK looks to the rest of the world for its commercial relationships.
Britain’s relationship with Israel is complex. It is partly framed by the troubled colonial past of the British mandate and in more recent times by negative images of Israel in the UK media. As two countries which by necessity look outwards rather than inwards for their economic future, both nations are largely guided by free market principles. Indeed, economic liberalism, a belief in laissez-faire economics and free trade are central tenets of Toryism in Britain and successive rightist governments in Israel headed by Benjamin Netanyahu.
Israel’s membership of the Paris-based Organisation for Economic and Development (OECD) since 2010 means that it is part of the economic elite of 34 industrialised nations. But it has also brought with it obligations in terms of opening up markets, removing structural barriers to trade and labour markets. It has set Israel on a policy course that draws it more into the international community and replicates a model of which post-Thatcher Britain is considered an exemplar.
Britain is often described as the world’s first industrial nation because it was on these shores that modern manufacturing industry was born in the Victorian age. The Britain of dark satanic mills and gin-swilling masses is, of course, a thing of the past. The great feature of the 20th century and early 21st century has been deindustrialisation: in this former manufacturing economy, services now constitute more than 70 per cent of national output. Financial and business services have never been more important; the creative industries contribute up to 10 per cent of GDP and Britain, in its own inimical way, is becoming Europe’s high-tech hub. The London Stock Exchange and its junior AIM market have become favourite centres for launching start-ups particularly in the financial technology area known as FinTech. Silicon Valley giants including Google, Facebook and Amazon are building campuses in London and establishing European headquarters despite public squabbles over taxation.
This is where the interests of 21st century Britain and Israel come together. Israel, as is widely recognised, has earned the title ‘Start-up Nation’, a term popularised by the 2009 volume by Dan Senor and Saul Singer. Indeed, Israel is now regarded as the world’s second most important tech hub after Silicon Valley in California. Most of the high tech giants have set-up shop in Israel. Facebook, for instance, now lives in a new tower bock on Rothschild Boulevard in the trendiest part of Tel Aviv. In an interview with me, Michael Moritz of Sequoia Capital – one of the financiers behind Google, Facebook and countless other high-tech launches – described Israel as the best place to invest in technology outside of California.
The common interest of Britain and Israel in high-technology (across a range of areas) is drawing them together economically, politically and diplomatically. Bilateral trade has soared to an estimated £5 billion a year, making the UK Israel’s third biggest trading partner after the United States and Hong Kong.
The UK-Israel trading relationship does, however, carry quite heavy historical and political baggage. The mandate history means there is much in Israel that has resonance in the UK from the civil legal code to the rich colonial architecture of police stations, post offices, former stations and other public buildings. However, Britain’s ties with the Arab world also require it to tread a careful path when dealing with Israel. The UK is the largest arms supplier to Saudi Arabia and the aerospace and defence giant BAE Systems keeps 6,000 of its own engineers in the country to keep the Saudi air force in the skies. Similar close defence and arms export ties have developed across the Gulf. Qatar is a key supplier of liquid natural gas (LNG) to Britain’s power grid.
The UK government also needs to navigate public opinion with polls not always showing Israel in a favourable light. The Foreign & Commonwealth Office is never slow to condemn settlement activity, a frequent source of diplomatic tension. It remains a strong advocate of the two-state solution and was clearly frustrated by the breakdown of the John Kerry led Israel-Palestinian peace process in 2014 which has left a vacuum in the region.
With diplomacy on hold, partly as a result of a leadership vacuum in Ramallah, the UK-Israel dialogue has become much more focused on commercial ties. This is a healthy development at a moment in history when the UK is seeking to establish bridgeheads with fast growing economies outside of the EU. Both Britain and Israel, for instance, are looking to China and India for new markets and away from the sluggish eurozone.
David Cameron’s government has been robust in the face of the boycott, divestment and sanctions (BDS) movement in the UK. It has stood firm against efforts by local authority pension funds to divest themselves of companies doing business in Israel. So far only one major company, the Co-operative, boycotts Israeli goods. That policy may soon be reversed now that reformed management at the Co-op is severing relations with the Labour Party and political activism.
Britain’s vibrant financial markets are a draw for Israeli corporations. The City of London is Europe’s and arguably the world’s most important financial centre. As well as being the home to more than 250 foreign banks it is the globe’s biggest centre for foreign exchange trading with trillions of dollar passing across exchanges each day. It hosts the world’s biggest investment banks, leads the world in syndicated loans and offshore funding for American and European companies and exports £90 billion in services to the world each year.
The year 2014 saw 37 acquisitions, mergers and initial public offerings (the conversion of private firms to public) among UK and Israeli firms and Israeli companies floated in London. There was more progress in 2015 with some nine Israeli companies choosing to launch initial public offerings in London including two on the main market, Matomy Media Group and Barak Capital.
Matomy is a leader in digital advertising, which has become critical as commercials migrate from traditional media to online. Israel has played a leading role in the digitalisation of British media for some time. Rupert Murdoch’s News Corporation was a key investor in Israeli founded NDS which provides essential encryption technology for the ‘cards’ inside Sky boxes around the world. In 2012 NDS was sold by News Corporation and its private equity partner to Cisco of the US for £3.2 billion. It has been one of Britain and Europe’s best kept secrets that it is Israeli technology that delivers its Premiership and La Liga football to the their television alongside multi-channel viewing.
A second prominent Israeli firm quoted in London last year is Barak Capital. It is a powerful investment concern which is a leader in developing advanced computerised, semi-automatic and automatic trading systems. Indeed, Israeli technology is highly desired in Britain’s fast growing FinTech centre. At the fringe, Israeli companies have been instrumental in putting spread betting, which overlaps into financial trading, online. Playtech, founded by financier Teddy Sagi and quoted on the London market, is the principal supplier of knowhow to William Hill and Ladbrokes as they have moved to online platforms.
The UK itself is a pioneer in moving finance from traditional banking channels to online. Durham based Atom Bank was the first online financial group to be licenced by the Bank of England. The new Tesco and Sainsbury banks, both based in Edinburgh, largely deploy online banking platforms. Worldpay, floated on the London Stock Exchange in 2015 for £6 billion, is a leader in electronic payment systems. It operates most of the terminals in restaurants, stores across Britain and Europe. All the major banks have moved to online and mobile banking applications and in the process find themselves increasingly exposed to cyber-attacks. In the process they have turned to battle hardened Israeli concerns, with models based on national security needs, to provide the digital barriers to such attacks from outside. As Britain leads the way in developing online payment and banking systems, adopted around the world and finds itself a new financial niche, Israel is an essential part of the equation.
Cyber security has become one of the hidden hands of UK-Israel trade and as more finance moves online it will become of increasing importance. The combination of Israeli code writing knowledge and its first class cyber security and Britain’s leadership in global finance and innovation looks as if it will become an increasingly powerful combination. It will help to underpin Britain’s leadership in FinTech and draw the UK and Israeli skills in finance and investment closer together.
The strengthening of Britain’s high tech ties to Israel has much to do with the work of Britain’s former ambassador to Israel Matthew Gould, now back in London. Gould recognised that the UK-Israel relationship needed a new narrative and found it in technology. He founded the UK-Israel tech hub. David Cameron has, for instance, noted the contribution of Israeli technology in ‘protecting British and NATO troops in Afghanistan.’
FinTech is just one manifestation of how Britain’s post-industrial society and Israel are working together ever more closely. Britain’s military spending is among the highest in the EU at 2 per cent of gross domestic product and increasingly focused on avionics, cyber security and high tech weapons systems and defences.
The UK’s Ministry of Defence is working with Israeli arms firm Elbit Systems on a £1 billion programme known as Watchmaker, which is developing drones modelled on the Hermes unmanned aerial vehicles. This high profile collaboration has naturally raised the hackles of non-governmental organisations, such as the Campaign Against the Arms Trade. It argues that such co-operation between the two countries risks British complicity when and if Israel goes to war in Gaza or elsewhere.
The reality is that Israel is an important partner for the UK in delivering modern high-tech weapons systems. BAE’s Israeli offshoot ROKAR International is key provider of electronic countermeasures, GPS navigation systems, test equipment and armament control systems. The Israeli offshoot is the software brain behind many British defence systems.
The UK-Israel trade relationship reaches far beyond technology and arms. Israel fresh produce is still to be found on the shelves of all the major supermarkets. A surprising proportion of Marks & Spencer undergarments and lingerie originates from Israeli firms. And one in seven pills dispensed in the NHS derives from the Israeli pharmaceutical industry.
The sectors where British and Israeli skills coincide most are financial, gaming and arms technology. These are areas where the skills of a post-industrial Britain and a start-up nation most usefully come together. The UK’s strength in finance and Israel’s obvious knowledge in high-tech and cyber defences provide the basis for much greater working together not just in bilateral trade but with third countries. Both Britain and Israel are reaching at the same time to India and China. The old colonial power Britain and its former Middle East protectorate Israel have found new common ground. There will be continued efforts by NGOs and the BDS campaign to drive a wedge into this relationship. However, despite the political distractions, the ties between the first industrial nation and start up nation are becoming ever closer.
 Start-Up Nation: The Story of Israel’s Economic Miracle, Dan Senor and Saul Singer, New York, Twelve, 2009.