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Another week, another round of fateful news from Libya. On Tuesday, June 12, a vehicle carrying Britain's ambassador to Libya was attacked with rocket-propelled grenades in Benghazi. The attack came days after a bomb went off just outside the U.S. mission in the eastern city. Earlier this month, an armed militia cut the fence at Tripoli’s international airport, drove onto the tarmac, and briefly occupied the country's main airport without opposition. As one Libyan activist put it, giving voice to what must be the feeling of many, “Where is the state?”

As usual, the news from Libya registered little in Israeli headlines, already weighed down with Iran, Syria, Egypt, the Palestinians, and the ins and outs of domestic politics. But we Israelis would do well to keep a watchful eye on developments in Libya. These, too, could give telltale signs of Israel’s coming security challenges.

With the fall of the Qaddafi regime, Libya has sunk into a state of ongoing turmoil. Formally, the country is governed by the National Transitional Council, a body established during the war. As the recognized government of Libya, the NTC controls the country’s bank accounts and can access its US$180 billion in foreign reserves—potentially, a significant political card to play. Still, in practice, much of the country has devolved into the hands of local militia groups. These groups became armed by taking weapons from Libyan military depots during the war. Now, guns in hand, reports consistently say that the militias wield power on the streets in many parts of the country. Alongside the militias is a motley crew of Islamist groups, ostensibly interested in taking power for the sake of Islam and not personal financial gain.

In simple terms, the dominant dynamic in Libya is a de facto negotiation between the National Transitional Council and the militias. One is a centralizing force, the other a force for fragmentation. One controls the money, the other the streets. One is a roster of internationally recognized leaders, the other largely unknown. In these negotiations, it seems the militias, on the whole, have the upper hand. But the current state of these de facto negotiations may be less important than the basic fact that their outcome is unsettled. Libya lacks—at least in the short term—a recognized political leadership that also controls the country’s territory. That, almost literally, is a definition of a failed state.

That instability has led, according to intelligence sources, to weapons smuggling into Sinai and Gaza. But the weapons smuggling is not the only lesson Israel can draw from developments in Libya. Rather, events in Libya may serve as signals of trends we may see in other Arab countries. Other parts of the region, too, are torn by conflict between a central government and local forces seeking to weaken the state. From Libya, then, a few potential lessons:

The Role of Gulf States: Reportedly, some Gulf states have armed and funded militias and moderate Islamist groups in the Libyan periphery. While the West has supported the NTC and the forces of centralization, some Gulf states have taken the opposite tack. In their attempts to project power, these Gulf states seem to have concluded that their fastest route to influence in Libya is through the periphery, not the center. This bodes ill for the NTC’s prospects. More importantly, it may signal these Gulf states’ policies toward other parts of the region—Syria, potentially—where the tussle between centralization and fragmentation may yet play out. For other regional powers (including Israel), the question will be whether to encourage the Gulf states’ moves or to negotiate with Gulf governments in an attempt to neutralize them. These Gulf states could be seen as spoilers—or, if assuming that fragmentation is inevitable, as a preferable patron to Iran.

Is Mali a Precedent? After Qaddafi’s fall, groups of Tuareg militants who fought on the regime’s behalf filtered across the border into Mali. There, the militants reinforced existing Tuareg groups who stepped up separatist violence against the government. That has already led to a military coup and a move to partition the country. Once a fragile African democracy, Mali flipped within months into a basket case. The situation in Mali demonstrates how state failure can become contagious and spread from country to country. The question is whether Mali serves as an example of what might happen elsewhere. Around Libya itself, both Egypt and Tunisia have significantly different political dynamics than Mali. In other parts of the region, though, fragmentation in one state could lead to Mali-like turmoil in a neighbor. In analyzing the Arab world’s tumult, analysts would do well to keep this dynamic in mind.

How Important Is Money? The situation in Libya might look as if headed straight toward state failure but for one crucial number: US$180 billion. The NTC has access to that amount in foreign reserves. If used shrewdly, the funds could do much to corral the militias and centralize the country; even oil-rich Gulf governments would have difficulty competing financially. On the other hand, the money could become a source of inefficiency or corruption. Few Arab governments have at their disposal such commanding sums of money. In many parts of the region, though, money could become a factor in stabilizing regimes. Already, Saudi Arabia has used government spending to quell dissent. The Libyan example might tell us further whether money can play a meaningful political role in deciding the struggle between centralization and fragmentation.

Libya plans to hold elections, now scheduled for July 7. Those polls provide the next best chance to assess the country’s direction. In the months ahead, look to see whether the money and legitimacy of the NTC is pulling the periphery toward the center. On the other hand, keep in mind that the combination of grassroots activism and outside help might tip the balance toward the militias of the periphery. The trends in Libya may tell us much about how political dynamics will affect events elsewhere in the region.