Order Code RL33476
CRS Report for Congress
Received through the CRS Web
Israel: Background and Relations
with the United States
Updated July 26, 2006
Carol Migdalovitz
Specialist in Middle Eastern Affairs
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

---

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. Most recently, the Kadima Party placed first in the March 28, 2006,
Knesset (parliament) election, and Prime Minister Ehud Olmert formed a four-party
coalition government. Israel has an advanced industrial, market economy in which
the government plays a substantial role. The economy is now doing very well, and
increased social spending is expected.
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 reached accords with Syria and
Lebanon. 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 resumed contacts after the November
2004 death of Yasir Arafat. Both sides 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
complicated Israeli-Palestinian relations and added impetus to Israeli ideas for
unilateral steps in the West Bank. On June 25, the Hamas military wing kidnaped
an Israeli soldier, provoking Israeli military operations to force his release. Israel
unilaterally withdrew from southern Lebanon in 2000, but Hezbollah occupied the
area and continued to fire rockets from the region into northern Israel. It sparked a
major conflict by kidnaping two Israel soldiers on July 12, 2006. 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 differ on various peace
process 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. Since 1976, Israel has been
the largest recipient of U.S. foreign aid. The two countries also have close security
relations. Current 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 RL33530, Israeli-Arab Negotiations: Background, Conflicts, and
U.S. Policy, CRS Report RL33566, Israel-Hamas-Hezbollah: the Current Conflict,
and CRS Report RL33222, U.S. Foreign Aid to Israel.

---

Contents
Most Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Historical Overview of Israel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Government and Politics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Recent Political Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Current Government and Politics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Current Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Foreign Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Middle East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Iran . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Palestinian Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Egypt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Jordan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Syria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Lebanon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Relations with the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Peace Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Trade and Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Security Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Other Current Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Military Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Espionage-Related Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Intellectual Property Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
U.S. Interest Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
List of Figures
Figure 1. Map of Israel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
List of Tables
Parties in the Knesset, March 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

---

Israel: Background and Relations
with the United States
Most Recent Developments
Israel is in the midst of 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.1 Both attacks occurred on undisputed, sovereign Israeli territory, not
subject to the stalled peace process that began in the 1990s. The Israeli military
campaign and government’s conduct of it have broad public support and backing in
parliament.
Historical Overview of Israel2
The quest for a modern 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
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 II, 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 1960’s, Israel also has dealt with the threat of Palestinian
terrorism. In 1979, Israel concluded a peace treaty with Egypt, thus making another
1 For extensive coverage of these developments, see CRS Report RL33530, Israeli-Arab
Negotiations: Background, Conflicts, and U.S. Policy and CRS Report RL33566, Israel-
Hamas-Hezbollah: the Current Conflict.
2 For more, see Howard M. Sachar, A History of Israel: From the Rise of Zionism to Our
Time, New York, Knopf, 1996.

---

CRS-2
multi-front war unlikely. Israel’s current relations with its neighbors are discussed
in “Foreign 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 incumbent is Moshe Katzav. 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.3 On February 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. The new Chairman of the Constitution Committee, Menachem Ben-Sasson
of the Kadima Party headed by Prime Minister Ehud Olmert, has said that he would
try to advance the cause of the constitution. 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
(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
3 For Basic Laws, see [http://www.mfa.gov.il/mfa/government/law/basic%20laws/].

---

CRS-3
settlements split his Likud Party. In August 2005, Finance Minister Benjamin
“Bibi” Netanyahu resigned from the government to protest disengagement and
became a candidate for Likud chairman, challenging Sharon. In September, Sharon
supporters in the Likud Central Committee narrowly defeated an effort by opponents
of disengagement to call an early party leadership primary to depose Sharon. On
November 7, eight Sharon opponents in Likud joined the opposition to deny Knesset
approval of three new Sharon cabinet appointees; the dissidents considered two of
the appointments compensation for supporting disengagement.
In November, 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
(Forward). 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 MKs,
players in other political parties, and prominent personalities joined Kadima. Former
Labor leader Peres supported Sharon. Kadima’s platform or Action Plan observed
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.4
Netanyahu won a Likud primary to replace Sharon as party leader 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. Olmert set conditions for dealing with Hamas and worked to
get foreign governments to agree with them. On March 8, he 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 he prefers negotiations, if they do not develop in a “reasonable time,”
4 For Kadima’s Action Plan, see [http://kadimasharon.co.il/15-en/Kadima.aspx].

---

CRS-4
then he will 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.5
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.
Current Government and Politics
Parties in the Knesset, March 2006
Seats
Party
Orientation
29
Kadima
Centrist, Pro-disengagement
19
Labor
Leftist, Social-democrat
12
Likud
Rightist, Anti-disengagement
12
Shas
Sephardic Ultra-orthodox
11
Yisrael Beiteinu
Russian-speakers, Nationalist, Against unilateral
(Our Home Israel)
withdrawals, but for exchange populations and
territories to create 2 homogenous states
9
National Union (NU)/
Nationalist, Ashkenazi Orthodox, Seeks to annex
National Religious Party (NRP)
the West Bank (Land of Israel) and transfer Pales-
tinians to Jordan
7
Pensioners’ (GIL)
Single-issue: guaranteed pensions for all
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
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. Likud’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 party appealing to
Russian-speakers, wants borders that exclude Israeli Arabs and their land and include
5 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-5
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 Pensioners’ 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. 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.
On May 4, 2006, the
Knesset (parliament) ap-
proved a new four-party
Key New Cabinet Officers
coalition government of
Ehud Olmert
Prime Minister; Minister of
Kadima
Prime Minister Ehud
Social Welfare
Olmert’s Kadima Party,
Tzipi Livni
Vice Prime Minister;
Kadima
the Labor Party, the Pen-
Minister of Foreign Affairs
sioners’ Party, and the
Shimon Peres
Vice Prime Minister; Negev Kadima
ultra-orthodox Shas
and Galilee Development
Party. It controls 67 out
Amir Peretz
Deputy Prime Minister;
Labor
of 120 seats in the
Minister of Defense
Knesset, has 25 cabinet
Abraham Hirschson
Finance
Kadima
ministers, and Dalia Itzik
Haim Ramon
Justice
Kadima
of Kadima is the first
Avi Dichter
Public Security
Kadima
woman Speaker of the
Shaul Mofaz
Deputy Prime Minister;
Kadima
Knesset. The govern-
Minister of Transportation*
ment’s guidelines call for
Roni Bar-On
Interior
Kadima
shaping permanent bor-
Yuli Tamir
Education
Labor
ders for a democratic
Eli Yishai
Deputy Prime Minister;
Shas
state with a Jewish ma-
Minister of Industry, Trade,
jority.6 The government
and Labor
will strive to negotiate
with the Palestinians, but
*Also in charge of strategic dialogue with the United States.
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 and may create problems if he
does not oblige. 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.
Israel’s 1.2 million Russian language speakers do not have a minister is the
cabinet, although there were several elected to parliament on the Kadima list as well
as on the opposition Yisrael Beiteinu list.
6 For the entire text of the government guidelines, see [http://www.mfa.gov.il/MFA/
Government/Current+Government+of+Israel/Basic%20Guidelines%20of%20the%2031s
t%20Government%20of%20Israel].

---

CRS-6
Olmert had counted on the support of Meretz from outside of the coalition to
support legislation to support a unilateral “realignment” in the West Bank. However,
Meretz party leader Yosi Beilin declared on June 28 that his party would oppose
realignment because it prefers a negotiated agreement with Palestinian Authority
(PA) President Mahmoud Abbas in order for Israel to obtain international recognition
of new borders and Jerusalem as its capital.
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 mem-
bers. Despite limited natural
Basic Facts
resources, the agricultural and
Population
6,276,883 (2005.)
industrial sectors are well devel-
Population
1.2% (2005 est.)
oped. An advanced high tech
Growth Rate
sector includes aviation, com-
— Jewish 80.1% (1996)
Ethnic
munications, computer-aided
Groups
— non-Jewish (mostly Arab)
design and manufactures, medi-
19.9% (1996)*
cal electronics, and fiber optics.
GDP Growth
5.2 (2005 est.)
Rate
Israel greatly depends on for-
eign aid and loans and contribu-
GDP Per Capita $22,200 (2005 est.)
tions from the Jewish diaspora.
Inflation Rate
1.3% (2005 est.)
After economic declines in
Unemploy-
8.9% (2005 est.)
ment Rate
2001 and 2002 due to the ef-
Ratio of debt to
fects of the Palestinian intifadah
101% (2005 est.)
GDP
(uprising) on tourism and to the
Foreign Debt
$74.46 billion (2004 est.)
bursting of the global high-tech
crude oil, grains, raw materials,
bubble, Israel’s economy has
Imports
military equipment
recovered since 2003 and is
cut diamonds, high-technology
growing at a pace not seen since
Exports
equipment, fruits and vegetables
the 1990s. The Finance Minis-
Main Trading
United States, Belgium, Germany,
try forecasts a 2006 gross do-
Partners
United Kingdom
mestic product (GDP) growth
Sources: CIA, The World Factbook, January 2006; and
rate of 5.3%, subject to change.
the Israeli government.
Most economic indicators are
*Within 1967 borders.
positive: inflation is low, em-
ployment and wages are rising,
and the standard of living is
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

---

CRS-7
rates. However, Netanyahu’s critics suggested that his 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%. The new
government’s policies may test these limits, although Olmert has 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. Labor MKs
abstained in cabinet, committee, and Knesset votes on the budget because of cuts in
bread subsidies, failure to address the pension issue in the budget vehicle, and the
defense cuts. Nonetheless, the Knesset passed the budget on June 7 by a vote of 53
to 22, with 45 abstentions. In the end, Labor voted for the budget to sustain the
coalition. Likud, Meretz, and the Arab parties voted against the bill. UTJ, Israeli
Beteinu, and NU-NRP abstained after the government pledged to support
organizations they champion.
Because of large military expenditures for the conflict with Hezbollah in
Lebanon begun in July, the defense budget cut will not occur. Instead, increases in
the budgets for defense and other ministries are expected. Most analysts anticipate
downward revisions in economic growth targets for the year by at least .5% of GDP
due to the closure of industrial plants in northern Israel, inability to work on
agriculture in that region, attendant business and property losses, and the loss of
tourism revenues.
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

---

CRS-8
“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.
Iran has a missile, the Shahab-3, 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.”7 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
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.”8
On April 12, the head of Israeli Military Intelligence, Maj. Gen. Amos Yadlin,
stated that Iran could develop a nuclear bomb “within three years, by the end of the
decade.” Meir Dagan, head of Mossad (the Institute for Intelligence and Special
Operations) had previously offered a two-year estimate. Olmert reportedly has given
Mossad responsibility for the Iran nuclear issue. On May 23, 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.9
Iran also provides financial, political, and/or military support to the Lebanese
Hezbollah as well as to Hamas, Palestinian Islamic Jihad (PIJ), the Al 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. It has compensated families of suicide bombers. In January 2006, then
Defense Minister Mofaz charged that Iran had financed a PIJ suicide bombing in Tel
Aviv. Israeli officials have blamed Iran for Hezbollah’s attack on northern Israel in
July 2006, but they do not plan to expand the war against Hezbollah to include Iran.
7 “PM Olmert, President Qatzav Discuss Iran, Peace Process During News Conference,”
Open Source Center Document FEA20060117017385, January 17, 2006.
8 “23 Apr Cabinet Session; Daily Says Olmert Readying for ‘Swift’ Convergence,” Open
Source Center, Document GMP20060424621005, Jerusalem Government Press Office,
April 23, 2006.
9 Ha’aretz report, May 24, 2006.

---

CRS-9
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 administration 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 Palestinian Authority (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 aspects of implementation of the disengagement plan,
notably 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, which may be more than 90% complete by the end of 2006, is taking the form
of a future border between Israel and Palestine, and will cut Palestinians off from
East Jerusalem.
The Israeli government accepted the Roadmap, the framework for a peace
process leading to a two-state solution, as 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 creates
policy dilemmas for Israel and the international community. Israel has 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. As noted above, Prime Minister Ehud Olmert has
said that he prefers negotiations according to the Roadmap formula; but if they do not
occur, then he will proceed with a plan to withdraw unilaterally from part of the West
Bank and merge isolated settlements into large settlement blocs.
In late May 2006, the Israeli government decided to transfer a limited amount
of weapons and ammunition via Egypt to the PA Presidential guard to help protect
Abbas.
Israel refuses to negotiate with Hamas for the return of Israeli soldiers kidnaped
from a post at Kerem Shalom, Israel, near the Gaza Strip on June 25, 2006. Since the
kidnaping, Israel has arrested 64 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

---

CRS-10
Strip as well as in the West Bank. Israel officially refuses to negotiate with Hamas
for the soldier’s release. However, 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 authorized by Hamas political bureau
head Khalid Mish’al, who is based in Damascus, and not by either Prime Minister
Ismail Haniyah of Hamas or President Mahmud Abbas of Fatah.
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. In July 2006, Egyptian
intelligence chief Omar Suleiman worked, unsuccessfully, 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 League 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.
Egypt deployed 750 border guards to secure the Gaza-Egyptian border after
Israel’s disengagement from Gaza. After one year, the two sides will jointly evaluate
the mission. Israeli officials have expressed satisfaction with Egypt’s monitoring of
the border. 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. An unusual incident occurred along the Egyptian-Israeli border
on June 3, 2006. Israeli soldiers shot and killed two Egyptian police officers. The
Israelis claimed that the men had crossed through a hole in the border fence near
Mount Sagi in Israel’s Negev region and had fired on Israeli troops; a third man fled
back to Egypt. A joint Israeli-Egyptian investigation is underway. During his visit
to Egypt in June, Olmert expressed his regret for the incident and said that he had
instructed security forces to do everything possible to prevent a recurrence.
Egyptian officials are playing a constructive role in seeking a resolution to the
kidnaping of an Israeli soldier by the Hamas military wing and other groups on June

---

CRS-11
25. They also have criticized Hezbollah for its kidnaping of two Israeli soldiers on
July 12.
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 Free Trade Agreement (FTA). 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 2007.10
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 Free Trade Agreement (FTA), although
Jordanian companies are now said to prefer arrangements under the U.S.-Jordan FTA
over the QIZ. Normalization of ties is not popular with the Jordanian people, over
half of whom are of Palestinian origin, although King Abdullah II 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.11 He opposes
unilateral Israeli steps in the West Bank, fearing that it 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 and, 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 Lebanese Hezbollah militia,
which attacks Israeli forces in the disputed Shib’a Farms area of Lebanon and
communities in northern Israel and aids Palestinian terrorist groups. They also want
Asad to expel Palestinian rejectionist groups (i.e., those who do not agree with the
10 See also CRS Report RL33003, Egypt: Background and U.S. Relations, by Jeremy Sharp.
11 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.

---

CRS-12
Israeli-Palestinian peace process). Sharon said that the Golan is essential for Israel’s
security and discussion of withdrawal would be a mistake.12
Since Syria was implicated in the February 2005 assassination of former
Lebanese Prime Minister Rafiq Hariri, international pressure on the Asad regime has
mounted. Israeli officials have said that Israel is not interested in the fall of the
regime, only in changing its policies. Some reportedly fear that anarchy or extreme
Islamist elements might follow Asad and prefer him to stay in power in a weakened
state. On December 1, 2005, Sharon said that nothing should be done to ease U.S.
and French pressure on Syria, implying that Syrian-Israeli peace talks would do that.
His successor, Olmert has indicated that talks with Syria are not on his agenda and
has blamed Damascus for Palestinian terror attacks in Israel.
Syria hosts Hamas political bureau chief Khalid Mish’al and supplies Hezbollah
with Syrian and Iranian weapons. After the June 25, 2006, Palestinian attack on
Israeli forces and kidnaping of an Israeli soldier, Israeli officials specifically
requested the United States to exert pressure on President Asad to induce him to
expel Mish’al, who they believed was responsible for the operation. Subsequently,
after Hezbollah abducted two Israeli soldiers from northern Israel on July 12,
sparking a major Israeli military campaign against Hezbollah in Lebanon, some
rightwing Israeli politicians demanded that it be expanded to include Syria.
However, the Israeli Defense Forces probably do not want to open a third front, and
Defense Minister Peretz has stated that there is no intent to strike Syria. U.S.
officials have sought to have Syria exert its influence on Hezbollah to end the
conflict, but Syrian officials are seeking a broad resolution that would include a
revival of a peace process to produce the return of the Golan Heights.
Lebanon.13 Israeli forces invaded Lebanon in 1982 to prevent Palestinian
attacks on northern Israel. The forces were gradually withdrawn to a self-declared
nine-mile “security zone,” north of the Israeli border. Peace talks in the 1990’s failed
to produce a peace treaty, mainly because of Syria’s insistence that it reach an accord
with Israel first. Israel unilaterally withdrew from southern Lebanon on May 25,
2000. Lebanon insists that the Israeli withdrawal is incomplete because of the
continuing presence of Israeli forces in the Shib’a Farms area, in the region where
Lebanon, Syria, and Israel meet. The United Nations has said that Israel’s withdrawal
from Lebanon was complete and treats the Shib’a Farms as part of Syria’s Golan
Heights occupied by Israel. Lebanon claims that Syria verbally recognized that
Shib’a is part of Lebanon, but will not demarcate the border as long the Israeli
occupation continues. Hezbollah took control of the former “security zone” after
Israeli forces left and attacks Israeli forces in Shib’a and northern Israeli
communities. The Lebanese government considers Hezbollah to be a legitimate
resistance group and a political party represented in parliament. Israel views it as a
terrorist group.
12 See also CRS Report RL33487, Syria: U.S. Relations and Bilateral Issues, by Alfred
Prados.
13 See also CRS Report RL33509, Lebanon; and CRS Report RL31078, The Shib’a Farms
Dispute and Its Implications, both by Alfred Prados.

---

CRS-13
Hezbollah’s kidnaping of two Israeli soldiers on July 12, 2006, provoked Israel
to launch a major military campaign against Hezbollah in Lebanon. In a July 17
speech to the Knesset, Prime Minister Olmert said that military operations would end
with the return of the kidnaped soldiers, the end to Hezbollah rocket attacks into
northern Israel, and the deployment of the Lebanese army along the Israeli-Lebanese
border to replace Hezbollah units. The last item is a requirement of U.N. Security
Council Resolution 1559.14 Israeli officials do not have any illusions that their forces
will be able to disarm Hezbollah completely. Yet, Israeli bombing of Hezbollah
rocket launching sites, airports, and roads, and imposition of a naval blockade show
that they clearly hope to degrade the militia’s military capabilities considerably and
prevent resupplies. Hezbollah demands a cease-fire and a prisoner swap, i.e., that the
Israeli soldiers be exchanged for Lebanese and other Arab prisoners in Israel.
Hezbollah leader Shaykh Hassan Nasrallah claimed that his group will be victorious
if it is still standing when the conflict ends.
Responding to U.S. concern that Israel not destabilize the fledgling Lebanese
democracy, Israeli officials have said that they do not want to harm the Lebanese
government.
Other. Aside from Egypt and Jordan, Israel has diplomatic relations with the
majority-Muslim governments of Mauritania and Turkey and has had interest or trade
offices in Morocco, Tunisia, Oman, and Qatar. The latter four suspended relations
with Israel during the intifadah. Former Foreign Minister Silvan Shalom had
predicted that relations with Arab and Muslim countries would improve due to
Israel’s disengagement from Gaza. The first diplomatic breakthrough was his
September 1, 2005, meeting in Istanbul with the Pakistani foreign minister, although
Pakistani officials asserted that they will not recognize Israel until an independent
Palestinian state is established. On September 14, Pakistan’s President Pervez
Musharraf shook Prime Minister Sharon’s hand in a “chance” meeting at the U.N.
summit in New York. In October, Pakistan agreed to accept Israeli humanitarian aid
after a devastating earthquake. Shalom met the Indonesian, Qatari, Algerian,
Moroccan, and Tunisian foreign ministers at the U.N.
Also in September, Bahrain ended its economic boycott of Israel, a move
required by the World Trade Organization and the Bahrain-U.S. Free Trade
Agreement, but it has vowed not to normalize relations. In September, Tunisian
President Zine El Abidine Ben Ali sent a personal letter to Sharon, praising his
“courageous” withdrawal from Gaza. Shalom attended the World Summit on the
Information Society in Tunisia in November.
Israel has developed good relations with the predominantly Muslim former
Soviet republic of Azerbaijan, which supplies about one-sixth of Israel’s oil needs.
14 For text of U.N. Security Council Resolution 1559, September 2, 2004, see
[http://www.un.org/Docs/sc/unsc_resolutions04.html].

---

CRS-14
European Union
Israel has complex relations with the European Union (EU). Many Europeans
believe that the Israeli-Palestinian conflict is a root cause of terrorism and Islamist
extremism among their own Muslim populations and want it addressed urgently. The
EU has ambitions to exert greater influence in the Middle East peace process. The
EU is a member of the “Quartet,” with the United States, U.N., and Russia, which
developed the Roadmap. EU officials appeared to share Palestinian suspicions that
Sharon’s disengagement plan meant “Gaza first, Gaza only” and would not lead to
the Roadmap process. They observed with concern Israel’s ongoing settlement
activity and construction of the security barrier in the West Bank, which, according
to the Europeans, contravene the Roadmap and prejudge negotiations on borders.
Israel has been cool to EU overtures because it views many Europeans as biased
in favor of the Palestinians and hears some Europeans increasingly question the
legitimacy of the State of Israel. Some Israelis contend that the basis of such views
is an underlying European anti-Semitism. Nonetheless, in November 2005, Israel
agreed to allow the EU to maintain a Border Assistance Mission (EU-BAM) to
monitor the reopened Rafah crossing between the Gaza Strip and Egypt.
To Israel’s dismay, some EU representatives met local Hamas leaders elected
in December 2004 in order to oversee EU-funded local projects. The EU also
authorized its monitoring mission for the January 2006 Palestinian parliamentary
elections to contact the full range of candidates, including Hamas, in order to carry
out its task. EU officials have said, however, that Hamas will remain on the EU
terror list until it commits to using nonviolent means to solve the Israeli-Palestinian
conflict. Israel also demands that the EU include Hezbollah on its list of terrorist
organizations and has protested meetings between European ambassadors and the
Hezbollah minister in the Lebanese cabinet.
The EU agrees with the Quartet’s preconditions for relations with the Hamas-led
government: disavowal of violence, recognition of Israel, and acceptance of prior
Israeli-Palestinian accords. The EU is developing, at the Quartet’s request, a
temporary international mechanism to aid the Palestinian people directly while
bypassing the government.
Israel participates in the EU’s Euro-Mediterranean Partnership Initiative,
otherwise known as the Barcelona Process, and in the European Neighborhood Policy
(ENP). And EU countries combined are Israel’s second trading partner, but the EU
bans imports from Israeli settlements in the occupied territories.15
15 See CRS Report RL31956, European Views and Policies Toward the Middle East, by
Kristin Archick.

---

CRS-15
Relations with the United States
Overview
On May 14, 1948, the United States became the first country to extend de facto
recognition to the State of Israel. Over the years, the United States and Israel have
developed a close friendship based on common democratic values, religious
affinities, and security interests. Relations have evolved through legislation;
memorandums of understanding; economic, scientific, military agreements; and
trade.
Issues
Peace Process. The United States has been the principal international
proponent of the Arab-Israeli peace process. President Jimmy Carter mediated the
Israeli-Egyptian talks at Camp David which resulted in the 1979 peace treaty.
President George H.W. Bush together with then Soviet President Mikhail Gorbachev
convened the peace conference in Madrid in 1990 that inaugurated a decade of
unprecedented, simultaneous negotiations between Israel, Jordan, Syria, Lebanon,
and the Palestinians. President Clinton continued U.S. activism throughout his
tenure in office, facilitated a series of agreements between Israel and the Palestinians
as well as the Israeli-Jordanian peace treaty in 1994, hosted the Israeli-Palestinian
summit at Camp David in 2000 that failed to reach a peace settlement, and sought
unsuccessfully to mediate between Israel and Syria during the same year.
In June 2002, President George Bush outlined his vision of a democratic
Palestine to be created alongside Israel in a three-year process.16 U.S., European
Union, Russian, and U.N. representatives built on this vision to develop the
international Roadmap to a Permanent Two-State Solution to the Israeli Palestinian
Conflict. The Administration remains committed to the Roadmap process despite the
parties’ failure to implement it.17
Secretary of State Condoleezza Rice has not named a Special Middle East
Envoy and said that she would not get involved in direct Israeli-Palestinian
negotiations of issues and preferred to have the Israelis and Palestinians work
together. However, she has traveled to the region several times and personally
mediated an accord to secure the reopening of the Rafah crossing between Gaza and
Egypt in November 2005. The Administration had supported Israel’s disengagement
from Gaza mainly as a way to return to the Road Map. Some Israelis criticized U.S.
insistence that the Palestinian elections proceed in January 2006, with Hamas
participating, which produced a Hamas-led government. The Administration agrees
with Israel’s preconditions for dealing with that government.
16 See [http://www.whitehouse.gov/news/releases/2002/06/20020624-3.html] for text of
President’s speech.
17 See [http://www.state.gov/r/pa/prs/ps/2003/20062.htm]for text of Roadmap.

---

CRS-16
Olmert has said that he would seek U.S. support for unilateral moves to
determine Israel’s permanent borders. On March 30, 2006, Secretary Rice observed,
“I wouldn’t on the face of it just say absolutely we don’t think there’s any value in
what the Israelis are talking about.”18 On May 23, 2006, Prime Minister Olmert met
President Bush at the White House. Although the President stated his preference for
negotiating a two-state solution to the Israeli-Palestinians conflict, he also said that
Olmert’s ideas for unilaterally removing Israeli settlements from the West Bank in
the absence of negotiations were “bold.”
All recent U.S. Administrations have disapproved of Israel’s settlement activity
as prejudging final status issues and possibly preventing the emergence of a
contiguous Palestinian state. On April 14, 2004, however President Bush noted the
need to take into account changed “realities on the ground, including already existing
major Israeli population centers,” (i.e., settlements), asserting “it is unrealistic to
expect that the outcome of final status negotiations will be full and complete return
to the armistice lines of 1949.”19 He later emphasized that it was a subject for
negotiations between the parties.
At times of violence, U.S. officials have urged Israel not to retaliate with
disproportionate force. The current Bush Administration has insisted that U.N.
Security Council resolutions be “balanced,” by criticizing Palestinian as well as
Israeli violence and has vetoed resolutions which do not meet that standard.
Since taking East Jerusalem in the 1967 war, Israel has insisted that Jerusalem
is its indivisible, eternal capital. Few countries agree with this position. The U.N.’s
1947 partition plan called for the internationalization of Jerusalem, while the
Declaration of Principles signed by Israel and the Palestine Liberation Organization
in September 1993 says that it is a subject for permanent status negotiations. U.S.
Administrations have recognized that Jerusalem’s status is unresolved by keeping the
U.S. Embassy in Tel Aviv. However, in 1995, Congress mandated that the embassy
be moved to Jerusalem,20 and only a series of presidential waivers of penalties for
non-compliance have delayed the move. U.S. legislation has granted Jerusalem
status as a capital in particular instances and sought to prevent U.S. official
recognition of Palestinian claims to the city. The failure of the State Department to
follow congressional guidance on Jerusalem prompted a response in H.R. 2601, the
18 “Rice: U.S. Might Back Unilateral Withdrawal from West Bank,” Associated Press,
March 30, 2006.
19 For text of Bush letter to Sharon, see [http://www.whitehouse.gov].
20 P.L. 109-102, November 14, 2005.

---

CRS-17
Foreign Relations Authorization bill, passed in the House on July 20, 2005.21 The
Senate did not pass an authorization bill, and it did not become law.
The United States has never recognized Israel’s annexation of the Golan
Heights, which it views as a violation of international law. However, the current
administration has not attempted to revive Israeli-Syrian peace talks.
Some Israeli officials have questioned possible unintended consequences of the
U.S. democratization policy in the Middle East, believing that it is aiding extremist
organizations to gain power positions and to be legitimized. Alarmed, they cite the
examples of Hezbollah in Lebanon, Hamas in the Palestinian Authority, and the
Muslim Brotherhood in Egypt.22
Trade and Investment. Israel and the United States concluded a Free Trade
Agreement in 1985, and all customs duties between the two trading partners have
since been eliminated. The FTA includes provisions that protect both countries’
more sensitive agricultural sub-sectors with non-tariff barriers, including import
bans, quotas, and fees. Israeli exports to the United States have grown 200% since
the FTA became effective. As noted above, qualified industrial zones in Jordan and
Egypt are considered to be part of the U.S.-Israeli free trade area. The United States
is Israel’s main trading partner, while Israel ranks about 20th among U.S. trading
partners. In 2005, the United States imported $23.8 million in goods from Israel and
exported $27.1 million in goods to Israel.
U.S. companies have made large investments in Israel. In July 2005, the U.S.
microchip manufacturer Intel announced that it would invest $4.6 billion in its Israeli
branch; Israel provided a grant of 15% of an investment of up to $3.5 billion or $525
million to secure the deal. In May 2006, prominent U.S. investor Warren Buffet
announced that he was buying 80% of Iscar, a major Israeli metalworks, for $4
billion.
On June 20, 2006, the House Energy and Commerce Committee by a voice vote
ordered H.R. 2730 (United States-Israel Energy Cooperation Act) to be reported. It
would authorize a grant program of $20 million for each of fiscal years 2006 through
2012 to fund joint ventures between U.S. and Israeli businesses and academics for
research, development, or commercialization of alternative energy, improved energy
efficiency, or renewable energy sources. S. 1862, the Senate version of the bill, was
referred to the Senate Foreign Relations Committee on October 7, 2005.
21 H.R. 2601 (d) requires that “accurate entries be made on request of citizen.” Specifically,
for the purpose of the issuance of a passport to a U.S. citizen born in Jerusalem, the
Secretary of State shall upon the request of the citizen or the citizen’s legal guardian, record
the place of birth as Israel. See also CRS Report RL33530, Israeli-Arab Negotiations:
Background, Conflicts, and U.S. Policy , by Carol Migdalovitz; and CRS Report RL33000,
Foreign Relations Authorization, FY2006 and FY2007: An Overview, by Susan Epstein,
coordinator.
22 For example, head of military intelligence, Maj. Gen. Amos Yadlin, “Ahiya Raved,
“Intelligence Chief: Strategic Threats on Israeli Rising,” Ynetnews, June 20, 2006, Open
Source Center Document GMP20060621746004.

---

CRS-18
Aid. Israel has been the largest recipient of U.S. foreign aid since 1976. In
1998, Israeli, congressional, and Administration officials agreed to reduce U.S. $1.2
billion in Economic Support Funds (ESF) to zero over ten years, while increasing
Foreign Military Financing (FMF) from $1.8 billion to $2.4 billion. The process
began in FY1999, with P.L. 105-277, October 21, 1998. Separately from the
scheduled ESF cuts, Israeli has received an extra $1.2 billion to fund implementation
of the Wye agreement (part of the Israeli-Palestinian peace process) in FY2000, $200
million in anti-terror assistance in FY2002, and $1 billion in FMF in the
supplemental appropriations bill for FY2003. P.L. 109-102, November 14, 2005, the
Foreign Operations Appropriations Act, 2006, provided $240 million in ESF, $2.28
billion in FMF, and $40 million for the settlement of migrants to Israel. H.R. 5533,
the Foreign Operations Appropriations bill, FY2007, passed in the House on June 9,
2006, appropriates $120 million in ESF, $40 million for migration and refugee
assistance, and $2.34 billion in FMF (of which $610 million may be spent for defense
acquisitions in Israel), for Israel. The Senate has not yet passed a bill.
On July 11, 2005, Israeli press reported that Israel was requesting about $2.25
billion in special aid in a mix of grants and loan guarantees over four years, with one-
third to be used to relocate military bases to Israel in the disengagement from Gaza
and the rest to develop the Negev and Galilee regions and for other purposes, but
none to help compensate settlers or for other civilian aspects of the disengagement.
Preliminary discussions were held but no formal request made and, in light of the
costs of Hurricane Katrina, Olmert postponed it. On November 15, an Israeli news
source reported that talks had resumed on a $1.2 billion aid package for the Negev
and Galilee and that $800 million for military aspects of disengagement had been
deleted after a negative U.S. response. In January 2006, Shimon Peres reportedly
discussed the aid package with Secretary Rice. However, neither the FY2005
supplemental nor the FY2006 foreign operations bills appropriated the aid.
On July 14, 2006, during Israel’s war against Hezbollah in Lebanon, the
Pentagon notified Congress that it planned to sell up to $210 million in jet fuel to
Israel. On July 22, it was reported that the Administration is expediting the delivery
of precision-guided bombs that had been ordered by Israel in 2005.
Congress has legislated other special provisions regarding aid to Israel. Since
the 1980s, ESF and FMF have been provided as all grant cash transfers, not
designated for particular projects, and have been transferred as a lump sum in the first
month of the fiscal year, instead of in periodic increments. Israel is allowed to spend
about one-quarter of the military aid for the procurement in Israel of defense articles
and services, including research and development, rather than in the United States.
Finally, to help Israel out of its economic slump, P.L. 108-11, April 16, 2003,
provided $9 billion in loan guarantees over three years, use of which has since been
extended to 2008. As of July 2005, $4.9 billion of the guarantees remained unused.23
Security Cooperation. Although Israel is frequently referred to as an ally of
the United States, the two countries do not have a mutual defense agreement. Even
though there is no treaty obligation, on February 1, 2006, President Bush stated that
23 See also CRS Report RL33222, U.S. Foreign Aid to Israel, by Jeremy Sharp.

---

CRS-19
the United States would defend Israel militarily.24 In May, the President told Prime
Minister Olmert, “In the event of any attack on Israel, the United States will come to
Israel’s aid.”25
On November 30, 1981, U.S. Secretary of Defense Caspar Weinberger and
Israeli Minister of Defense Ariel Sharon signed a memorandum of understanding
(MOU), establishing a framework for continued consultation and cooperation to
enhance the national security of both countries. In November 1983, the two sides
formed a Joint Political Military Group, (JPMG) which meets twice a year, to
implement most provisions of the MOU. Joint air and sea military exercises began
in June 1984, and the United States has constructed facilities to stockpile military
equipment in Israel. In 2001, an annual interagency strategic dialogue, including
representatives of diplomatic, defense, and intelligence establishments, was created
to discuss long-term issues. In 2003, reportedly at the U.S. initiative due to bilateral
tensions related to Israeli arms sales to China, the talks were suspended. (See
Military Sales, below.) After the issue was resolved, the talks resumed at the State
Department on November 28, 2005, and reportedly focused on Syria and
democratization in the Arab world. On January 11, 2006, the JPMG convened in Tel
Aviv also for the first time since 2003.
On May 6, 1986, Israel and the United States signed an agreement (the contents
of which are secret) for Israeli participation in the Strategic Defense Initiative
(SDI/”Star Wars”). Under SDI, Israel is developing the “Arrow” anti-ballistic
missile with a U.S. financial contribution so far of more than $1 billion and
increasing annually. The system became operational in 2000 in Israel and has been
tested successfully, most recently on December 2, 2005, when it shot down a missile
simulating an Iranian Shahab-3 that can be armed with nuclear warheads and reach
Israel. P.L. 109-148, December 30, 2005, the Defense Appropriations Act, Section
8088, provides $132,866,000 for the Arrow program, of which $60,250,000 is
earmarked for missile component co-production and $10,000,000 is earmarked for
a joint feasibility study on a Short Range Ballistic Missile Defense initiative.
In 1988, under the terms of Sec. 517 of the Foreign Assistance Act of 1961, as
amended, Israel was designated a “major non-NATO ally,” affording it preferential
treatment in bidding for U.S. defense contracts and access to expanded weapons
systems at lower prices. Israel participates in NATO’s Mediterranean Dialogue, its
Istanbul Cooperative Initiative, and in Operation Active Endeavor monitoring the
Mediterranean Sea to thwart terrorism.
Other Current Issues
Military Sales. Israel accounts for about 10% of the world’s defense exports,
totaling $3.5 billion in 2004. The United States and Israel have regularly discussed
Israel’s sale of sensitive security equipment and technology to various countries,
24 Interview with Reuters, cited in Glenn Kessler, “Bush Says U.S. Would Defend Israel
Militarily,” Washington Post, February 2, 2006.
25 See [http://www.whitehouse.gov/news/releases/2006/05/20060523-9.html] for text of joint
news conference.

---

CRS-20
especially China. Israel reportedly is China’s second major arms supplier, after
Russia.26 U.S. administrations believe that such sales are potentially harmful to the
security of U.S. forces in Asia. In 2000, the United States persuaded Israel to cancel
the sale of the Phalcon, an advanced, airborne early-warning system, to China. More
recently, Israel’s agreement to upgrade Harpy Killer unmanned aerial vehicles
(UAVs) that it sold to China in 1999 angered the Department of Defense (DOD).
China tested the weapon over the Taiwan Strait in 2004. DOD suspended
technological cooperation with the Israel Air Force on the future F-35 Joint Strike
Fighter (JSF) aircraft as well as several other cooperative programs, held up
shipments of some military equipment, and refused to communicate with the Israeli
Defense Ministry Director General, whom Pentagon officials believed had misled
them about the Harpy deal.
On August 17, 2005, the U.S. DOD and the Israeli Ministry of Defense issued
a joint press statement reporting that they had signed an understanding “designed to
remedy problems of the past that seriously affected the technology security
relationship and to restore confidence in the technology security area. In the coming
months additional steps will be taken to restore confidence fully.”27 According to the
Israeli newspaper Ha’aretz, Israel will continue to voluntarily adhere to the
Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use
Goods and Technologies, without actually being a party to it. On November 4, in
Washington, Defense Minister Mofaz announced that Israel would again participate
in the F-35 JSF project and that the crisis in relations was over. In March 2006, the
new Defense Ministry Director General Jacob Toren said that an interagency process
had begun approving marketing licenses for Israeli firms to sell selected dual-use
items and services to China, primarily for the 2008 Olympic Games, on a case-by-
case basis.
On October 21, 2005, it was reported that Israel would freeze or cancel a deal
to upgrade 22 Venezuelan Air Force F-16 fighter jets, with some U.S. parts and
technology. The Israeli government had requested U.S. permission to proceed, but
it was not granted.
Espionage-Related Cases. In November 1985, Jonathan Pollard, a civilian
U.S. naval intelligence employee, and his wife were charged with selling classified
documents to Israel. Four Israeli officials also were indicted. The Israeli government
claimed that it was a rogue operation. Pollard was sentenced to life in prison and his
wife to two consecutive five-year terms. She was released in 1990, moved to Israel,
and divorced Pollard. Israelis complain that Pollard received an excessively harsh
sentence. Israel granted him citizenship in 1996, and he remains a cause celebre in
Israel. Israeli officials repeatedly raise the Pollard case with U.S. counterparts, but
26 Ron Kampeas, “Israel-U.S. Dispute on Arms Sales to China Threatens to Snowball,”
Jewish Telegraphic Agency, June 8, 2005, citing a U.S.-China Economic and Security
Review 2004 report.
27 “U.S. Israel Agree to Consult on Future Israeli Weapons Sales - Nations Affirm Joint
Commitment to Address Global Security Challenges,” U.S. State Department Press Release,
August 17, 2005.

---

CRS-21
no formal request for clemency is pending.28 Pollard’s Mossad handler Rafi Eitan,
now 79 years old, is head of the new Pensioners’ Party. On June 8, 2006, the Israeli
High Court of Justice refused to intervene in efforts to obtain Pollard release.
On June 13, 2005, U.S. Department of Defense analyst Lawrence Franklin was
indicted for the unauthorized disclosure of classified information (about Iran) to a
foreign diplomat. Press reports named Na’or Gil’on, a political counselor at the
Israeli Embassy in Washington, as the diplomat. Gil’on has not been accused of
wrongdoing and returned to Israel. Then Foreign Minister Silvan Shalom strongly
denied that Israel was involved in any activity that could harm the United States, and
Israel’s Ambassador to the United States declared that “Israel does not spy on the
United States.” Franklin had been charged earlier on related counts of conspiracy to
communicate and disclose national defense information to “persons” not entitled to
receive it. On August 4, 2005, two former officials of the American Israel Political
Action Committee (AIPAC), Steven J. Rosen and Keith Weissman, whom AIPAC
fired in April 2005, were identified as “persons” and indicted for their parts in the
conspiracy. Both denied wrongdoing. On October 24, their attorneys asked the court
to summon Israeli diplomats to Washington for testimony. On January 20, 2006,
Franklin was sentenced to 12 years, 7 months in prison. Rosen and Weissman are the
first nongovernment employees ever to be indicted under the 1917 Espionage Act for
receiving classified information orally and argue that they were exercising protected
free speech. Their trial has been postponed at least until October.
Intellectual Property Protection. The “Special 301” provisions of the
Trade Act of 1974, as amended, require the U.S. Trade Representative (USTR) to
identify countries which deny adequate and effective protection of intellectual
property rights. In April 2005, the USTR elevated Israel from its “Watch List” to the
“Priority Watch List” because it had an “inadequate data protection regime” and
intended to pass legislation to reduce patent term extensions. The USTR singled out
for concern U.S. biotechnology firms’ problems in Israel and a persistent piracy
affecting the U.S. copyright industry. In November 2005, U.S. Ambassador to Israel
Richard H. Jones urged the Knesset to put Israel in line with Organizations for
Economic Cooperation and Development (OECD) countries with copyright law.
(Joining the OECD is an important Israeli foreign policy goal.) On December 15,
then-Minister of Industry Olmert and then-USTR Rob Portman agreed to
negotiations on the issue. On April 28, 2006, however, the USTR decided to keep
Israel on the Priority Watch List due to continuing concern about copyright matters
and about legislation Israel passed in December 2005 that weakened protections for
U.S. pharmaceutical companies.29 As they had in 2005, Israeli officials criticized the
USTR decision as discriminatory.
28 See CRS Report RS20001, Jonathan Pollard: Background and Considerations for
Presidential Clemency, by Richard Best and Clyde Mark.
29 For U.S. government explanation of Israel’s listing on the Priority Watch List, see Full
Version of the 2006 Special 301 Report, 04/28/2006, accessible at [http://www.ustr.gov]

---

CRS-22
U.S. Interest Groups
An array of interest groups has varying views regarding Israel and the peace
process. Some are noted below with links to their websites for information on their
policy positions.
American Israel Public Affairs Committee: [http://www.aipac.org/]
American Jewish Committee:
[http://www.ajc.org/site/c.ijITI2PHKoG/b.685761/k.CB97/Home.htm]
American Jewish Congress: [http://www.ajcongress.org/]
Americans for Peace Now: [http://www.peacenow.org/]
Anti-Defamation League: [http://www.adl.org/]
Conference of Presidents of Major Jewish Organizations:
[http://www.conferenceofpresidents.org/]
The Israel Project:
[http://www.theisraelproject.org/site/c.hsJPK0PIJpH/b.672581/k.CB99/Home.htm]
Israel Policy Forum: [http://www.israelpolicyforum.org/]
New Israel Fund: [http://www.nif.org/]
Zionist Organization of America: [http://www.zoa.org/]

---

CRS-23
Figure 1. Map of Israel
UNDOF
LEBANON
Zone
Israel
International Boundary
GOLAN
Armistice Line, 1949
HEIGHTS
S Y R I A
District Boundary
(Israeli
National Capital
occupied)
Haifa
Major Cities
Nazareth
Israeli occupied with current status
* subject to Israeli-Palestininian
Interim Agreement.
1967
0
50 Km
Ceas e - Fire J
0
50 Miles
Line
orda
Tel-Aviv Yafo
n
WEST BANK* Rive
M e d i t e r r a n e a n
r
S e a
Ashdod
Jerusalem
Ashqelon
1949
D e a d
Gaza
Armistic e
S e a
GAZA STRIP
Line
Beersheba
1950
Armistic e
Dimona
J O R D A N
Line
I S R A E L
E G Y P T
G u l f o f
SAUDI
A qa b a
ARABIA
Source: Map Resources. Adapted by CRS. (K.Yancey 6/15/06).

---