It must be serious news to make Israel's ultra-hawkish foreign minister turn conciliatory. Yet Avigdor Lieberman described Egypt's April 22 cancellation of its deal to supply Israel with natural gas as "a trade dispute," minimizing the political repercussions of the end to the most significant economic tie between the two erstwhile adversaries. "To turn a business dispute into a diplomatic dispute would be a mistake," Lieberman counseled.
At first sight, the deal's cancellation is a blow to Israel. During normal times, 40 percent of its gas needs were met by Egypt. In the deal's absence, Israel's utility company has raised its rates by a third and has turned to burning expensive, dirty fuel oil. Even so, there are fears of blackouts this summer.
The formal cutoff was only the postscript to a long series of interruptions to the gas supply. The pipelines in the Sinai Peninsula have been bombed some 14 times since Egypt's revolution as law and order has broken down and Bedouin tribes have revenged their grievances against the government. Gas flowed to Israel for only 140 days last year, and 25 days in the first three months of this year.
Other Israeli politicians were not as sanguine as Lieberman. Finance Minister Yuval Steinitz worried that the cancellation was "a dangerous precedent which casts a shadow on the peace agreements and the peaceful atmosphere between Egypt and Israel."
Yet the cancellation is neither a challenge to the Camp David Accords nor a purely commercial matter. The decision is instead a product of Egypt's muddled domestic politics, which means short-term pain for Tel Aviv but a longer-term strategic defeat for Cairo. As for the law, it's at least debatable: The 1979 peace treaty obliges Egypt and Israel to maintain normal economic relations, but the gas deal is dealt with in a 2005 memorandum of understanding referencing the treaty. Such memoranda are generally considered nonbinding in international law.
The gas deal with Israel has long been deeply unpopular in Egypt. Quite apart from the unpopularity of trading with a regional pariah, the deal is seen as a giveaway. The price for the gas was initially as low as $1.25 per million British thermal units (MMBtu) and was reportedly increased to $4 in 2008 -- the same as Egyptian industries pay. In the absence of a regional benchmark at the time of the deal in 2005, the price might have been defensible, but it now seems very low compared with the $7 to $10 Egypt earns for exports to Southern Europe.
The Egyptian Natural Gas Holding Company (EGAS), the Egyptian company that canceled the deal, explained its decision by saying that the East Mediterranean Gas Company (EMG), the Egyptian-Israeli joint venture that runs the pipeline, had failed to pay for the gas. But EMG had already last October launched arbitration proceedings against EGAS, with total claims amounting to some $8 billion, due to the repeated interruptions in supply caused by pipeline bombings. So it seems likely that's not the whole story.
Still, the timing of the cutoff is strange, as the gas contract has in recent months not been high in the public's consciousness. It is also hard not to speculate how the tumultuous politics in Cairo played into this decision. If it was sanctioned by the ruling Supreme Council of the Armed Forces (SCAF), was the aim to take credit for a popular initiative ahead of the presidential election -- and if so, why has SCAF not claimed responsibility? Or was the intention to remove a potentially thorny issue from the agenda of the new president, or alternatively to deny him such a populist victory? Given the tumultuous and often opaque political scene in Cairo nowadays, observers can do little more than wonder.