Israel is almost certainly the only country that deceives the global community every time one of its citizens crosses an international border. It does so because the passports it issues contain a fiction.

When a border official opens an Israeli passport for inspection, he or she sees the passport holder’s nationality stated as “Israeli.” And yet inside Israel, no state official, government agency or court recognizes the existence of an “Israeli” national.

This month the highest court in the land, Israel’s Supreme Court, explicitly affirmed that it could not uphold an Israeli nationality. Instead, the judges ruled, citizenship and nationality in Israel should be considered entirely separate categories, as they have been since Israel’s founding in 1948. All Israelis have Israeli citizenship, but none enjoys Israeli nationality.

This fiction of Israeli nationality, contained in Israeli passports and presented to the international community, is not simply a piece of legal eccentricity on Israel’s part. It is the keystone of Israel’s existence as a Jewish state – and much depends on it.

From this simple deception, Israel has been able to gerrymander its population by excluding Palestinian refugees from their land and homes while allowing millions of Jews to immigrate. And the same deception has served to veil a system of segregation in legal rights – a form of apartheid – between Israeli Jews and the country’s Palestinian minority, who comprise a fifth of the total population.

The need to maintain the state’s Jewishness at all costs, meanwhile, is emerging as the chief obstacle erected by Israel to prevent a peace agreement with the Palestinians from being reached.

So how does this Israeli magician’s trick work? Perversely, nationality in Israel is based not on a shared civic identity, as it is in most places, but on one’s ethnic identity. That means for the overwhelming majority of Israeli citizens, their nationality falls into one of two categories – Jewish or Arab. That is why Israel must lie on its passports: no border official would allow in a person bearing a passport that declared simply that they were “Arab” or “Jewish.”

The peculiarity of this classification system is further underlined by its anomalies. What does Israel do with the small number of non-Jews who marry an Israeli and then choose to naturalize? The answer is that the state can select from more than 130 nationalities. ‘Misfits’– those who are neither Jewish nor Arab – are typically assigned the nationality they held before they naturalized, such as French, British, American, Georgian, Ukrainian, and so on.

A great deal is at stake in this arcane system, which is why since 1948 the Israeli Supreme Court has on three separate occasions ruled against groups of Israeli citizens who have demanded the right to be identified as Israeli nationals.

This month, faced with a petition from a group called “I am Israeli,” the judges argued that recognizing such a nationality would threaten the state’s foundational principles. In the words of Justice Hanan Melcer, uniting Israeli citizenship and nationality would run “against both the Jewish nature and the democratic nature of the state.”

Anita Shapira, a professor emeritus of Jewish history at Tel Aviv University, concurred, saying that the petitioners were making a “revolutionary” demand.

However, Aeyal Gross, a Tel Aviv law professor, took a different view. The ruling, he wrote in the Haaretz newspaper, “will continue to obscure the possibility of having real democracy in Israel.”

So why the court’s aversion to an Israeli nationality? A clue is provided by the concept of citizenship in Israel. Another uncomfortable fact is that Israel has not one, but two citizenship laws: the famous Law of Return of 1950 gives every Jew in the world the right to come to Israel and instantly receive citizenship; the much less known Citizenship Law, passed two years later, confers citizenship, in very restricted circumstances, to non-Jews.

The primary purpose of the 1952 Citizenship Law was to give citizenship, belatedly and reluctantly, to the small proportion of Palestinians who managed to remain inside Israel in 1948 and their descendants. Today they are a substantial minority, and a growing one.

But as Israel has no immigration policy beyond the Law of Return, which applies only to worldwide Jewry, the 1952 law is also the only route by which a non-Jew can naturalize. In practice, that applies only to the tiny number of individuals who marry Israeli citizens each year and are prepared to enter a lengthy and usually antagonistic naturalization process. An additional law prevents most Palestinians outside Israel as well as Arab nationals from naturalizing, even following marriage to an Israeli.

The purpose of all this legal chicanery is to maintain Israel’s existence as a “Jewish state” – meaning the state of the Jewish people. It is, in other words, designed to perpetuate a system that has two main goals: ensuring a commanding Jewish majority inside Israel; and enforcing segregation in citizenship and legal rights based on ethnic belonging.

This segregation is possible because Israel, in addition to recognizing only ethnic nationalities, confers national rights on one national group alone – Jews. From that legal distinction flows much of the structural discrimination in Israel: Palestinians who try to claim equality, even in the courts, face a legal system in which their civic rights, as citizens, are always trumped by the exclusive, and superior, national rights enjoyed by the Jewish population.

Were the government or courts to decide that an Israeli nationality existed, all of that would come to an end. Recognition of an Israeli nationality, as government officials and the courts understand only too well, would entail equality between citizens – or a “state of all Israeli citizens,” a liberal democracy, as Israel’s Palestinian minority have been demanding at the ballot box for nearly two decades.

The reality is that a Jewish state requires structural segregation: in allocation of land, 93 per cent of which has been nationalized for the Jewish people, and resources like water; in residency, with Jews and Palestinian citizens living almost entirely apart; in education, where Jews and Palestinian citizens have separate and unequal schools; in employment, where vast swathes of the economy are defined as security-related, including the water, construction and telecommunications industries, and therefore open only to Jews.

But additionally and equally problematic, a Jewish state also privileges Jews who are not citizens, those living in Brooklyn or London, over Palestinians who actually hold citizenship. It does so through the bifurcation of citizenship and nationality.

Because from Israel’s point of view they are included in its definition of a Jewish national, Jews anywhere in the world – even those who have never stepped foot in Israel – can buy property from the state in much of the 93 per cent of territory that was nationalized, and much of it seized from Palestinian refugees. Palestinian citizens, on the other hand, are mostly restricted to living on the 3 per cent of the land they have so far kept out of the state’s grasp.

In short, Israel conceives of itself as not chiefly representing Israeli citizens, nor even of representing Israeli Jewish citizens but as representing Jews all around the world – those who have citizenship as well as those who have yet to take advantage of it by immigrating under the Law of Return.

What does this have to do with the peace process? As international pressure has mounted on Israel in the past few years to concede a Palestinian state, Israel has raised a new precondition for successful talks: the Palestinian leadership must recognize Israel as a Jewish state.

Most observers have assumed that this relates to Israel’s desperate need to prevent millions of Palestinian refugees claiming a right of return. They are partly right, but for the wrong reasons.

The future of the refugees has long been part of the final-status issues to be decided in talks. Even most Palestinians doubt that the Palestinian National Authority will insist on more than a symbolic return of a few, mainly elderly, refugees to Israel. So raising this again, in terms of recognizing Israel’s Jewishness, is largely redundant.

Israel’s logic is slightly different. Israel needs the Palestinian leadership’s acceptance of its Jewishness as a way to subvert any future claims for equality from Israel’s Palestinian minority. Were the Palestinian minority able to gain equal citizenship – by ending Israel’s strange conception of nationality – then they could make demands to reverse the perverse realities entailed by Israel’s definition as a Jewish state.

Foremost would be the demand to end the special immigration privileges enjoyed by Jews. The Palestinian minority would insist on an equal immigration law, giving their exiled relatives the same rights to become Israeli citizens as Jews around the world currently enjoy. And that would mean a right of return by other means.

So in shutting the door on an Israeli nationality this month, Israel’s Supreme Court also played another role: pushing the hopes of a peace agreement that bit further out of sight.