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In The Middle East, `Peace Is Now Irreversible'


International Business: ISRAEL

IN THE MIDDLE EAST, `PEACE IS NOW IRREVERSIBLE'

Benny Gaon, CEO of Koor Industries Ltd., Israel's largest conglomerate, was pitching a $150 million stock offering to a group of investors in upstate New York on Nov. 4 when the news broke that Israeli Prime Minister Yitzhak Rabin had been felled by a right-wing assassin. Gaon stopped everything and flew back to Israel for his old friend's funeral. But hours later, the saddened Gaon was returning to the U.S. to continue his road show. "Despite the tragedy, we must move ahead," says Gaon.

The shock of Rabin's assassination demonstrates once again how volatile Middle East politics can be. But, as Gaon's determination to get back to business shows, the powerful political and economic forces driving the peace process are unlikely to ease up. The presence of such leaders as President Clinton, Egypt's Hosni Mubarak, and Jordan's King Hussein underscored the point. And business leaders are getting the message. "Peace is now irreversible," says Zeyad O. Salah, a Jordanian industrialist who runs one of his country's largest construction companies. Salah--an ethnic Palestinian, like most of Jordan's 4 million people--has been busy cultivating his Israeli business contacts in recent months. "We have to ensure that the process will be even stronger than before."

NO OPTION. Investors reckon governments in the region don't have any real alternative to peace. That's one reason Jordan's stock exchange dipped less than 1% in the three days after the shooting. The Tel Aviv exchange went down 3% the day after the murder, but bounced back.

Arab governments, especially, are hoping for a peace dividend. As Israel has boomed in recent years, war-weary states such as Jordan and Egypt realized that they could no longer afford ruinous levels of defense spending and that they would fall hopelessly behind if they didn't attract foreign investment.

Still, the loss of Rabin, a tough-talking ex-general, will be hard to overcome--because Israelis trusted him not to give too much away to the Arabs. Acting Prime Minister Shimon Peres, considered too dovish by many Israelis, faces a formidable challenge in pursuing negotiations with the Palestinians and trying to cut a deal with Syria's President Hafiz Al-Assad. To bolster his credibility, Peres is likely to install Ehud Barak, a former Israeli army chief of staff and current Interior Minister, as Defense Minister. He is also likely to bring back to the Cabinet Haim Ramon, the popular Histadrut chief who walked out of the government two years ago.

FULL-PAGE ADS. One group Peres can count on for support is Israel's increasingly influential and powerful business community. In the days leading up to the peace rally in Tel Aviv where Rabin was shot, for example, top business leaders such as Gaon, Africa-Israel Investment chief Shlomo Grofman, and Bank Hapoalim CEO Amiram Sivan placed big newspaper ads in support of the peace process. Many more turned up at the rally itself.

Business support for an entente with the Arab world is not surprising. Opportunities arising from the process helped produce white-hot economic growth, which this year will hit 7% in Israel. "In the long term, everything depends on continuation of the peace process," says Galia Maor, the recently appointed head of Tel Aviv's Bank Leumi.

No one has pulled back from a business project in Israel as a result of Rabin's murder. Intel Corp., for example, is pressing on with plans to build a $1.6 billion flash-memory-chip plant in Israel, one of the company's largest investments outside the U.S. "Ironically, the assassination will lead to further economic breakthroughs to move the peace process along," says Dov Frohman, general manager of Intel Israel Ltd., which already has two other operations in the country.

Within hours of Rabin's killing, Inventech Industrial Ventures, a Tel Aviv high-tech group, received faxes from partners at Japanese consumer-electronics giant Kenwood Corp. expressing condolences and confirming that they wanted to go ahead with a $20 million Israeli venture-capital fund. "They wanted to reassure us that they were still committed," says Amiram Shore, an Inventech partner.

The powerful trade relationships that Rabin and Peres helped forge with countries such as China, India, Japan, and South Korea--all of which once scorned the Jewish state as a pariah--will probably get stronger. A Rabin-led delegation of Israeli politicians and business leaders to Seoul late last year, for example, induced Korean chaebol Samsung Group and Hyundai Corp. to set up shop in Israel. This year, Israeli exports to Korea will probably top $250 million, up from almost nothing just three years ago.

Despite these encouraging developments, one nagging problem has been that only Israel has reaped any economic benefits so far from the peace process. But that's starting to change. Nasser I. Abdelhadi, a young West Bank Palestinian businessman who has been bitterly opposed to Israeli occupation, is starting to see a payoff at Arab Hotels Co., which he founded early this year. At the company's Al-Qasr Hotel in the West Bank town of Nablus, once a hotbed of the intifada, rooms are overbooked by 70%, as businesspeople come pouring in. With $300 million in aid starting to flow through the regions controlled by Yasser Arafat's Palestinian National Authority, this feverish activity is bound to increase. Abdelhadi is currently overseeing $60 million in hotel investments in the West Bank and Gaza Strip.

EUROPEAN HELP. Washington is still backing the establishment of a Middle East Development Bank, which should support Palestinian business initiatives with loans in the coming years. International donors have pledged more than $2 billion in assistance to the Palestinians.

A further upbeat sign is the European Union's four-year, $12 billion financial-aid program for North Africa and the Middle East: Approval is expected this month. The aid will give Europe's southern flank a shot of the same economic help that Eastern Europe has enjoyed from Brussels since the collapse of communism in 1989. Free-trade agreements between Europe and key Middle Eastern states are likely to be signed over the next few years, leading to a surge in exports from the region.

So, while Rabin's death was a vicious blow to the peace process, a wide range of governments and businesses now has a big stake in moving ahead. That is why Rabin's assassination won't succeed in its aim of stopping the clock.By John Rossant and Neal Sandler in Jerusalem, and Kirk Albrecht in Amman


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