Israel-Saudi Deal Offers Economic Promise But Nuclear, Defense and Palestinian Hurdles Loom

Reports have emerged in recent weeks of clandestine talks between Israel, Saudi Arabia and the United States over a potential normalization agreement between the longtime adversaries. While such a deal promises major economic benefits for both countries, significant obstacles remain around Saudi demands for nuclear technology, arms purchases and progress on Palestinian issues.

For investors, breakthrough cooperation between the Middle East's two largest economies could unlock massive infrastructure and energy projects. However, geopolitical risks around nuclear proliferation, defense ties and regional stability may temper market enthusiasm.

Saudi Vision 2030 Driving Normalization Push

At the heart of Saudi interest in ties with Israel lies Crown Prince Mohammed bin Salman's Vision 2030 plan to reduce the kingdom's economic dependence on oil exports. Transitioning to renewable energy sources like solar and nuclear power are key pillars of the vision. Saudi Arabia has set ambitious goals for solar power generation but currently lags far behind Israel and other states. Cooperation with Israel's more advanced solar energy industry could help the kingdom ramp up capacity. Nuclear know-how from Israel could also aid plans for domestic nuclear reactors for electricity production. Access to Israeli cleantech expertise and potential infrastructure links between the countries are other economic drivers for the Saudis. For the United States, bringing its two closest regional allies together would help counter the influence of rivals like China and Russia. It would also potentially give Washington more sway over global oil markets by aligning Israeli and Saudi interests. From an energy perspective, a normalization deal could ultimately pave the way for U.S. oil companies to invest directly in the kingdom.

Obstacles Around Nuclear Enrichment, Arms Sales

A major Saudi condition for normalization is reportedly the right to enrich uranium for civil nuclear power generation. This raises alarms around the kingdom utilizing such technology for covert military purposes in the future. Israel is believed to currently maintain a monopoly on nuclear weapons in the Middle East. The Saudis are also seeking access to advanced U.S. fighter jets like the F-35, which Israel has objected to out of concern about eroding its Qualitative Military Edge in the region. The U.S. has so far refused to sell the aircraft to any Arab states besides the United Arab Emirates. For the U.S. and Israel, granting Saudi Arabia sensitive nuclear or military technology could enable future scenarios where a less friendly regime in Riyadh shifts cooperation with rivals like China and Russia. This could potentially endanger both Israeli and Western strategic interests.

Progress Needed on Palestinian Issue

Given Saudi Arabia's 2002 Arab Peace Initiative which conditioned normalization on a Palestinian state, the kingdom insists Israeli-Palestinian progress is needed to sell a bilateral deal domestically. This would likely entail at least halting Israeli settlement expansion for a prolonged period. However, with Israeli politics shifting rightward and the end of Mahmoud Abbas' rule in the Palestinian Authority approaching, the prospects of substantial progress on the Palestinian issue in the short-term appear slim. This could hamper efforts by the U.S. and Saudi Arabia to finalize a trilateral agreement.

Shared Economic Interests May Prevail

While the geopolitical hurdles are significant, the shared economic interests between Israel and Saudi Arabia may prove enough to carry normalization efforts forward. Israel likely recognizes that some concessions on security matters are worthwhile to unlock the enormous investment potential of ties with the Arab world's largest economy. Saudi Arabia's bleak economic outlook and need for diversification could also compel King Salman and the Saudi public to accept previously unthinkable cooperation with Israel, despite the lack of Palestinian progress.

For investors, the technological synergies and infrastructure links possible between two of the Middle East's most dynamic economies are too substantial to ignore. While a normalization deal may take years to materialize, the long-term trajectory of Israel-Saudi ties appears headed for greater integration, assuming shared interests prevail over divides.