In Saudi-Israel Deal, Palestinians Pose Serious Challenge

Talks have been in flux over economic incentives for the Palestinians to get on board with what would be a historic realignment in the Middle East. With the U.S. helping broker the deal, those incentives have broadly included upgrading infrastructure in the West Bank, such as roads and telecommunications, while providing more work permits for Palestinians to work in Israel and freeing up hundreds of millions of dollars in Saudi aid.

“The main idea is how to ease the lives of the Palestinian people," said an Israeli official with knowledge of Netanyahu’s thinking.

Money alone might not satisfy Palestinian leaders who are trying to influence the shape of the deal. The Wall Street Journal has reported that some in the Palestinian leadership want Israel to relinquish control over small parts of the occupied West Bank and tear down some Israeli settlements there.

But while that’s a more modest demand than creating a separate Palestinian state, which had been the default position of both the Palestinians and the Saudis in the past, Netanyahu’s partners in his ruling coalitions are already pushing back.

Netanyahu came back to power late last year in a coalition with far-right parties that were once on the fringe of Israeli politics, and support the complete takeover of the West Bank by Jewish authorities. They are especially opposed to anything that would resemble the 1993 Oslo Peace Accords, which created the Palestinian Authority and laid out a path toward creating an independent state.

“Our government won’t come within a kilometer of anything that even smells like Oslo," said Israeli Finance Minister Bezalel Smotrich in public remarks earlier in September.

Palestinian Authority President Mahmoud Abbas is unlikely to welcome any deal that doesn’t have a clear political component, said Ghassan Khatib, a former Palestinian official and now a lecturer of international studies at Birzeit University, located in the West Bank.

“No matter how big the financial component will be, it will not be enough. Without a political component, no Palestinian leadership, including Mahmoud Abbas, can bless a deal," Khatib said.

The Biden administration wants Israel to take measures that will preserve the possibility of establishing a Palestinian state next to Israel in the future, the Israeli official said, but offered no details on what those steps might be.

The unknown element is how much the Saudis care.

Khatib said the Palestinians’ demands won’t be a “make or break issue" for Saudi Arabia. Privately, Saudi officials have said they need a significant concession to the Palestinians for them to formally recognize the existence of the Israeli state—but it isn’t yet clear what such a concession could entail.

If Netanyahu can’t thread the needle, he would have to decide between rejecting a deal that would rank among the most significant legacies of his three decades in public life, or pushing it through with the support of his opponents in Israel’s parliament, the Knesset, potentially causing his government to collapse.

Those dynamics have made the Israeli-Palestinian conflict one of the thorniest issues in a multilayered deal in which the Saudis also want a formal U.S. defense pact and American help building a nuclear-power program.

“I think the Palestinian component is the most complicated part of the deal," said William Wechsler, senior director of the N7 Initiative, a Washington-based organization that is working on regional integration in the Middle East.

He said the U.S. has had success negotiating with Saudi Arabia on potential uranium enrichment and defense, while its spotty record on Israeli-Palestinian peace showed how tough the issue is.

The U.S. and Saudi Arabia haven’t said what concessions they would accept for the Palestinians. Netanyahu also hasn’t publicly commented on the matter, except to say that any concession wouldn’t hurt Israeli security. He has also said the Palestinians should be a part of the deal but shouldn’t have any veto power over it.

Saudi Arabia’s de facto ruler, Crown Prince Mohammed bin Salman, told Fox News last week that the Palestinian issue is important to the kingdom but stopped short of demanding the creation of a Palestinian state, as Saudi Arabia had insisted before.

Instead, he said he hoped a deal would “ease the life of the Palestinians," mirroring some of the Israelis’ language.

Smotrich and other Israeli lawmakers, including many from Netanyahu’s own Likud party who oppose territorial concessions, would also back economic concessions to the Palestinians.

An aide to Smotrich said he sees improving the lives of Palestinians as a shared interest and would support projects such as improving refugee camps, sewage and water infrastructure, and the establishment of trade and commerce centers.

Smotrich’s ascent to power has coincided with a sharp turn in the larger Israeli public against ceding land for peace with Palestinians, a trend that began after a violent Palestinian uprising known as the Second Intifada that lasted from 2000 to 2005.

The idea lost further traction after Israel uprooted its settlements in the Gaza Strip, and the Palestinian enclave was quickly taken over by U.S.-designated terrorist organization Hamas, which has fired tens of thousands of rockets into Israel since. Polling conducted in March and April by the Pew Research Center found that support among Israeli Jews for a two-state solution was 35%, down from 46% in 2013.

The Palestinians weren’t a part of the previous normalization deals between Israel and four Muslim-majority states in 2020, known as the Abraham Accords. They also rejected out-of-hand a peace proposal from the Trump administration that Palestinians considered heavily biased in favor of Israel.

Anat Peled contributed to this article.

Write to Dov Lieber at Dov.Lieber@wsj.com