Business, politics, and pragmatism: Malaysia’s interactions with Israel and the Rothschild Dynasty, 1957–1980s

Dr Shakila Yacob, Founder Director of Policy Works and former Professor of History, University of Malaya

With the passing of the Abraham Accords Protocol by the United States in 2020, several Middle Eastern and North African countries normalized relations with the State of Israel. The first to do so was the United Arab Emirates, next Bahrain, and then Morocco and Sudan. Although Egypt and Jordan had already established diplomatic relations with Israel after the signing of the Camp David Accords in the late 1970s, other Arab states had maintained a distance. In May 2022, a group of Israeli businessmen and leaders visited Saudi Arabia and were allowed to visit areas once closed to non-Muslims (Berman, 2022). These developments suggest that the Arab world may be gradually moving towards de-linking Palestinian statehood as a condition for normalizing relations with Israel. As Arab states begin to engage with Israel, attention can be expected to shift to countries like Malaysia, which severed ties with Israel some 50 years ago in support of Arab demands for Palestinian statehood as a prerequisite for normalizing ties.

Malaya/Malaysia maintained trade and business links with Israel under first Prime Minister Tunku Abdul Rahman. In the decade after independence in 1957, the country’s foreign policy was largely driven by its security and defence needs. Faced with a more than decade-long communist insurgency after the Japanese occupation ended in 1945, and an external threat posed by Indonesia’s policy of Konfrontasi, in opposition to the creation of the Federation of Malaysia, from January 1963 until August 1966, these defence ties were critical for the young nation. By the mid-1960s, however, with growing demands from a segment of the Malaysian population and based on the need to join the non-aligned movement to gain Arab support and cooperation to counter Indonesia’s belligerent campaign, the nation shifted its foreign policy, including a re-assessment of interactions with Israel.

This article gives an account of the political and trade interactions between Malaya/Malaysia and the State of Israel in the early years of the former country’s nationhood. The Konfrontasi with Indonesia, coupled with internal political pressures, eventually led to a change in the country's foreign policy and direct trade links were discontinued. However, Malaysian policy separated Israel as a political entity and Jewishness as a religion, with its political and business leaders engaging N. M. Rothschild & Sons , despite being on the Arab anti-Israel 'blacklist', to try to help realize the New Economic Policy (NEP) corporate ownership goal.

Early trade and business ties with Israel

During the early days of his administration, Tunku Abdul Rahman was open to fostering ties with Israel as the latter had expressed support for Malaya’s independence. In 1956, Tunku, then Chief Minister, welcomed the Israeli Prime Minister, Moshe Sharett, to the county. The outcome was positive, with the possibility of Israel setting up a consulate in Kuala Lumpur among the topics discussed. However, Tunku informed Sharett that approval had to come from the British foreign office as Malaya still had no control over its foreign policy (Yegar, 2006). In February 1957, when the foreign office was approached by the Israeli ambassador in London, the latter suggested that this matter be brought up once the Federation of Malaya achieved its Independence (Yegar, 2006).

On 26 August 1957, just five days before Malaya achieved independence, Tunku received a congratulatory letter from Prime Minister Ben Gurion with a suggestion that Israel was ready to set up an ‘appropriate representation’ in Kuala Lumpur (Yegar, 2006). Yet despite several diplomatic overtures on behalf of Israel, an Israeli consulate did not materialize (Podoler, 2017, p. 1821).

Although Tunku was indebted to Israel for its vote to admit the newly independent Federation of Malaya into the United Nations in 1957, he later saw that diplomatic relations with Israel were almost impossible with the rise of Islamism in his country. The Pan-Malayan Islamic Party (PMIP) strongly supported the Palestinian cause and there was also a need for the newly independent country to foster ties with the Arab states. In 1960, PMIP brought a motion to withdraw the recognition of the State of Israel in parliament. Apart from Tunku, the four-hour debate attracted the participation of prominent parliamentarians, namely Asri Muda, Dr Ismail Abdul Rahman, Onn Jaafar, and S. P. Seenivasagam. In the end the matter was considered more a Malay-Muslim matter rather than a national issue (Government of Malaysia, 1960, pp. 3067–3116; Karuppannan, 2018, p. 80, footnote 152). Onn Jaafar rejected the motion (Government of Malaysia, 1960, pp. 3085–87). He said:

Tunku Abdul Rahman, Malaysia's first Prime Minister, 1957–1970
Source: https://www.britannica.com/

My understanding is that, under International Law, once you recognise a state, you cannot withdraw that recognition. What you can do is to severe diplomatic relations with that particular State—an act which could be construed as an act of war. Now, this Government is pledged to be on good terms with all countries in this world. And in severing diplomatic relations with the State and Government of Israel, I submit that the Government will not be upholding its very principle of friendship and goodwill. I fail to see any advantage to the Federation in not recognising Israel.

He went on:

… we are definitely interested in the present status quo, in the present de jure and de facto position of the State of Israel.

A more balanced view, which took into account the arguments of the PMIP members of parliament, intriguingly came from S. P. Seenivasagam of the People’s Progressive Party. He acknowledged that the government of the State of Israel was wrong in encroaching onto further territories and causing suffering among Palestinians, and he endorsed the firm action by President Nasser of Egypt. However, he claimed that:

… a more positive approach would be a stern warning to the people of Israel that unless they decide to throw in their lot with the Arab peoples, it is more than likely that the story of the wandering Jew may be repeated all over again.

Arthur Lurie, the Israeli ambassador to the United Kingdom, met Tunku on 25 November 1961 during his visit to London. He expressed an interest to appoint a consul for Malaysia. Tunku reiterated that the government was under pressure from pro-Arab groups in Malaya and the Arab states, in particular Egypt, not to recognize the State of Israel. Instead, Tunku suggested that a consulate in Singapore would be ideal for commercial relations to continue (Yegar, 2006).

The government acknowledged the legitimacy, or de jure statehood, of Israel but not to the extent of establishing diplomatic relations (Government of Malaysia, 1964, p. 2639). This meant that Malaya/Malaysia would not engage with the government, its institutions, and peoples who were identified with the State of Israel. As a young nation upholding non-intervention, the government viewed the Arab-Israeli conflict as one best resolved by the affected states, and did not regard it as a foreign policy priority. And business, as well as sporting engagements, were seen as separate from politics. Thus, the government was tolerant in its stance to maintain bilateral ties with Israel in the areas of trade, education, and travel, including congratulatory messages on both countries’ national day celebrations.

The Israelis for their part were keen to foster political and trade ties with Southeast Asian countries. Seeking export markets for their manufactured goods, Singapore was seen as a ‘jewel in trade’ by the Israelis. As early as 1956, the Israelis had envisioned a shipping line linking Israel with Malaya. President Nasser of Egypt had blocked Israeli ships from using the Suez Canal and the Israelis resorted to disguising their activities by chartering foreign vessels for their trade with the Far East. They joined hands with a Japanese shipping firm, Kyosei Line, as evident in various Singapore-based newspaper adverts, to penetrate Southeast Asian markets. With the expansion of their fleets, their new route to the Far East was through Mediterranean and Black Sea ports (The Straits Times, 1956, p. 14).

Several Israeli trade missions passed through Singapore from the early 1960s to the 1970s, presenting Singapore with vast opportunities, especially in the diamond and gem trade where Israel was the world’s leading manufacturer (The Straits Times, 1971, p. 25; The Straits Times, 1979, p. 24). In 1961, Benjamin Sheba, the managing director of a Tel Aviv–based company, Astraco Asia Trading Co. Ltd., on a trade promotion visit was keen to import raw materials such as rubber, tin, and lumber in exchange for Israeli products such as steel, polished diamonds, chemicals, pharmaceuticals, building materials, and foodstuffs. Israel was a significant buyer of Malaysia’s tin and rubber in the 1960s. There was a 19-fold surge in rubber exports to Israel, from M$ 30,370 in 1963 to M$ 599,380 in the first half of 1964 (Government of Malaysia, 1964, p. 2627). (Astraco was a subsidiary of the Zim Israel Navigation Co. owned by the Israeli Nation Federation of Trade and Government—The Straits Times, 1960, p. 12.)

After a market survey in 1959, the company set up a branch in Bangkok in February 1960, and in Singapore in September that year (The Straits Times, 1961, p. 14). Astraco (Malaya) Sdn. Bhd., established in Kuala Lumpur in 1963 and known as Interasia Trading Company, functioned as a sole distributor for more than 50 Israeli companies (The Straits Times, 1962, p. 16). It was active in the domestic economy. Among others, Astraco Asia Trading Co. Ltd. partnered with two Japanese firms, Daishowa (Malaysia) Wood Products and Shigyo Company of Japan, in the woodchip industry to set up a plant in Port Dickson (The Straits Times, 1968a, p. 16; The Straits Times, 1967, p. 12). After the success of this plant, Daishowa Paper Manufacturing Co. of Japan was assigned by the Malaysian government, represented by the Federal Development Industrial Authority (FIDA) and Malaysian Industrial Development Finance (MIDF), to conduct a feasibility study for an integrated pulp and paper industry in Malaysia (The Straits Times, 1969a, p. 11; The Straits Times, 1968b, p. 13; The Straits Times, 1969b, p. 1)

Konfrontasi changes Malaysia’s trade and business ties

The Indonesian-Malaysian Konfrontasi was an undeclared war 1963–1966
Source: Sabah Times, 4 September 1963

Trade interactions with Israel continued unhindered until Indonesia launched Ganyang Malaysia (Malaysia Confrontation) in protest at the formation of Malaysia in 1963. The Sukarno administration gained support from most Arab nations and painted a negative image of Malaysia as the ‘Israel of the Far East’ (Karuppannan and Shakila Yacob, 2020). With the ongoing Konfrontasi, the Malaysian government was pressed to sustain ties with Arab nations, as seen in the decision to expel Moshe Yegar in 1966. The manager of Interasia Trading Company was called up by the Home Minister, Dato Dr Ismail Abdul Rahman, on 7 December 1965 and told to leave the country because ‘he had interested himself in political matters’ (Government of Malaysia, 1966, p. 6789).

Moshe Yegar had served as a second secretary at the Israeli embassy in Burma (now Myanmar). He met Tunku in 1960 when representing Israel at the Asian Football Confederation Congress in Kuala Lumpur. Prior to this, Yegar, a career diplomat, was allowed to manage the Astraco branch operated by the Israeli foreign ministry. For two years, this trade office served as a disguise for the Israeli diplomatic mission in Kuala Lumpur (Karuppannan, 2018, p. 83).

After his weekly Cabinet meeting, Tunku told reporters that Yegar was attempting to ‘create trouble between Malaysia and the Arab nations’ (Straits Budget, 19 January 1966, p. 13). Obviously annoyed, Tunku asserted that Yegar ‘had caused a lot of embarrassment to our government. We don’t object to anybody doing business, but we don’t want any trouble’ (Straits Budget, 19 January 1966, p. 13).

Yegar alleged that three forces—the PMIP, the Egyptian embassy, and the British High Commission—had played a hand in his being expelled from Malaysia and the termination of Israeli presence in the country (Yegar, 2006).

While the Malaysian government adopted laissez-faire economic policies, it drew a line when these policies jeopardized its domestic political standing. In order not to attract more negative attention, Yegar was allowed to leave the country with his family without any expulsion order against him by the Malaysian authorities (Government of Malaysia, 1966, p. 6789). This incident shows that although Tunku was grateful to Israel for its support for Malaya’s independence, he was prepared to sever ties with that state to protect Malaysia’s survival during the Konfrontasi.

Malaysia continued to observe its policy of separating Israel as a political entity and Jewishness as a religion. This meant not doing business with Israel, companies registered in Israel or its citizens. But Jews who were citizens of other countries and companies owned by Jewish people outside Israel were not barred.

With the end of the Konfrontasi in 1966, Malaysia began to impose restrictions on trade with Israel. Nevertheless, even as late as the early 1970s, Israeli products ranging from diamonds to potassium chloride could be found in Malaysia. By 1974, trade with Israel was fully prohibited and Israelis were no longer allowed to enter the country.

A pragmatic approach

Malaysian political and business leaders were pragmatic in exploiting trading and business networks. They carefully observed the official policy of separating Israel as a political entity and Jewishness as a religion. They maintained this position when they engaged N. M. Rothschild & Sons Limited—the London bank of a European Jewish banking dynasty—to help achieve the 1971 NEP goal of increasing Malay and other Bumiputera share ownership through corporate restructuring.

Moshe Yegar meeting with Tunku Abdul Rahman in 1960
Source: Wikipedia

Triggered by the 13 May 1969 race riots, the government introduced the NEP to end, among other things, Malaysia’s ‘subservience to big British businesses’ (White, 2004). ‘Malaysianization’ came swiftly, and by 1990, state-owned and government-linked companies had acquired most foreign-owned companies operating in the country. N. M. Rothschild & Sons Limited had played a significant role in indigenizing several large British-owned multinational enterprises, by assisting government-linked investment companies, such as Perbadanan Nasional (PERNAS) and Permodalan Nasional Berhad (PNB), to acquire large British companies.

N. M. Rothschild & Sons Limited of London had established a solid footing in Singapore and was waiting for the right time and opportunity to invest in Malaysia (Shakila Yacob, 2007a). The company came to Malaysia when Tun Abdul Razak, Malaysia’s second prime minister (1971–76) entrusted Tengku Razaleigh Hamzah, Chairman of PERNAS (1970–74), to lead several initiatives to help boost Malaysia’s economic growth, including setting up Bank Bumiputra Berhad. In 1972, Tun Ismail Ali, governor of Malaysia’s Central Bank (1962–80, and PNB's chairman, 1978-96), and Sir Evelyn de Rothschild worked together to establish Bumiputra Merchant Bankers, a joint venture between Bank Bumiputra and Rothputra Nominees (a subsidiary of N. M. Rothschild & Sons Limited)—a rare occurrence where the British company agreed to be the minority shareholder (Shakila Yacob and White, 2010, p. 36).

Razaleigh was introduced to Sir Evelyn de Rothschild, who served as financial advisor to the central bank, by Abdul Razak with the help of Ismail Ali—well known among international bankers through his annual visits to the International Monetary Fund and the World Bank in Washington DC. Razaleigh, as chairman and director of Bank Bumiputra Berhad, forged a close friendship with Sir Evelyn de Rothschild, who served as the bank manager at N. M. Rothschilds’ of London. The latter had suggested that Malaysia should take control of its assets abroad, an idea that Razaleigh shared with Ismail Ali and Raja Mohar Raja Badiozaman, the government's economic advisor (Shakila Yacob, 2022a).

On another occasion, Razaleigh worked closely with N. M. Rothschild of London to secure a previously failed takeover (known as the Haw Par imbroglio) of London Tin Company (LTC) and Sime Darby a rubber and palm oil conglomerate. With the help of N. M. Rothschild & Sons, PERNAS eventually gained control of LTC and Sime Darby in 1976. LTC merged with Charter Consolidated to form the Malaysian Mining Corporation (70 per cent of its shares were owned by PERNAS), the world’s largest mining company (Shakila Yacob and White, 2010).

To manoeuvre board control of Sime Darby, Rothputra Nominees, a subsidiary of Bumiputra Merchant Bankers, capitalized on the ASEAN concept:

Sime Darby has its roots in the ASEAN region, and is important for the region just as the region is important to Sime Darby. ... it is only appropriate that the board directing the company’s policy should combine the experience and knowledge of leading and respected residents of the region with the skill of the board’s professional managers. Since ... economic nationalism is a dirty phrase in the international investment community.

This move by Rothschild of London and PERNAS was deemed clever when competing to take control of Sime Darby (Davenport, 1976, p. 39). Three new directors—Tunku Ahmed Yahaya (nephew of Tunku Abdul Rahman), Sixto Roxas (president of Bancom banking and investment group), and Wee Cho Yaw (chairman of United Overseas Banking)—were nominated, wresting control of Sime Darby board from the British directors. PERNAS acquired Sime Darby 'without having to spend hundreds of millions of dollars on buying shares on the stock market' (Davenport, 1976, p. 39).

Tun Ismail Mohd Ali, Governor, Central Bank of Malaysia, 1962 to 1980, and Chairman of PNB
Source: The Star, 9 October 2018

Similarly, when Guthrie and Company, a large British oil palm and rubber plantation conglomerate, was ‘brought home’ in 1981, within a few years PNB had recouped Guthrie’s purchase price of £282 million through the sale of its non-Malaysian interests (Shakila Yacob, 2007a). Again, it was both Rothschild of Singapore and London that were functioning behind the scenes during the notorious Guthrie ‘dawn raid’ of 7 September 1981. Within four hours, Guthrie fell into the hands of PNB. The major players, Ismail Ali and Khalid Ibrahim (PNB'S chief executive officer, 1979–94), worked hand in hand with Rothschild's executives in determining the success of the dawn raid (Shakila Yacob, 2022b).

Conclusion

The Arab-Israeli conflict contributed to changing the direction in Malaysia's foreign and business policies in the 1960s and 1970s. Internal and external threats forced the government to review and adapt its policies towards Israel. The Konfrontasi influenced Malaysia’s relations with the Arab states, which were developing a policy of ‘Muslim Brotherhood’. And a more ‘vigilant’ approach towards Israel was adopted.

Malaysia's official policy was to separate Israel as a political entity and Jewishness as a religion, and its leaders continued to engage N. M. Rothschild & Sons to help realize Malaysia's NEP corporate ownership goal. The bank played a major role in ‘bringing Malaysia's assets home’, boosting the country’s wealth.

Malaysian political and business leaders skilfully exploited their networks when it came to the country's political and economic sovereignty. The government allowed N. M. Rothschild & Sons to support its political and economic aims, despite being on the Arab anti-Israel 'blacklist' and banned from operating in Arab countries because of its dealings with Israel. At the same time, Malaysia was sympathetic to the Arab cause and enjoyed favoured nation status with Arab states.