From an earlier answer of mine

When Israel approached the four-powers, and by extension the two Germanys, with a call for restitution in 1950, it did not leave the GDR out of the picture. The Israeli's initial call for $1.5 billion in compensation split between $1 billion for the FRG and $.5 billion from the GDR. The split was predicated upon the idea that it was a proportional share of population and resources between the two states, but the lesser share also was to make such a concession more palatable to Berlin and Moscow. Of the two parties, the Israelis realized that it was the Kremlin that had the power to countenance GDR reparation and the Israeli's tailored their request to suit the USSR's Soviet agenda. This hope proved fruitless as neither Moscow nor Berlin was willing to part with compensation money.

Moscow's reluctance to engage with the Israeli offer partly stemmed from the fact that it was continuing to extract reparations itself from the GDR. Adding to this burden would only hurt the GDR's ruling SED party which was having trouble not only making these repayments, but also with imposing its own brand of socialism on the country. Israeli diplomats tried to use the Soviet's self-identification as the guardian against the victims of fascism and framed their notes to the Foreign Ministry in those terms, but this elicited only a boilerplate rejection from Moscow. The 1953 Revolt in East Berlin gave further proof that the GDR could not be asked to give up more treasure and resources towards Israel as restitution.

Although rejection of compensation claims did damage the Soviet's public relations image, rejection fit in with the wider Soviet and GDR stances on German division and the Cold War. The Soviet position was that the Potsdam Agreement meant that there needed to be a final peace treaty between the Allied powers and a united, single German government. The Israeli demand was thus premature in that there was no single German government yet and the separate nature of it gave de facto recognition that there were two German states. Moreover, the disparity between the claims signified that of the two, the Soviet client state was the poorer Germany despite scientific socialist management of the economy. Accepting the Israeli claim would have undermined this position which was common both in Moscow and Berlin during the 1950s.

The SED itself was arguably even more amnesiac about the Nazi past than the FRG. Although the state media kept Nazi atrocities in the public focus, especially those against Soviet and Eastern European nationalities, it was careful to cite blame for these actions not on the German people, but upon monopoly capital and its fascist allies. State media obsessively reported on former Nazis regaining their position in the FRG such as Globke and the prominence of former Wehrmacht officers in FRG rearmament. Nazism became an ideological "other" inside the GDR, even though a good many SED leaders were skeptical of its population's commitment to building socialism. Far more so than the FRG, the GDR posited that it was a fundamentally different entity than the Third Reich. As such, there was little pressure for the state to acknowledge Nazi crimes. The GDR had already in 1951 adapted a law confiscating all foreign-owned property inside the state, which made it even harder for German Jews to reclaim stolen property or demand restitution. Israel's negotiators recognized that there was little hope on achieving restitution from this avenue and maintained them after the Luxembourg Agreement only as a gamble in case they paid off or as a latent threat to Bonn lest they back out of their commitments.

The GDR media's condemnation of the Luxembourg Agreement was a signal that reparations would not emanate from this quarter. The official stance of the GDR on the Luxembourg was a highly charged ideological attack in which the FRG's capitalist leaders made an agreement with Israeli capitalists to support Israeli expansionism under the guise of pretending to make amends for the Nazi period. It bears mentioning that the GDR was not completely wrong on this account. The negotiations for the Luxembourg agreement also included secret military aid from the FRG to Israel, a fact that Adenauer kept secret and would come to light in the 1960s and create a mini-scandal for his successor Ludwig Erhard. But this was just an additional bonus for the GDR and the main imperative behind the invective was to increase the GDR's, and by extension, the Eastern bloc's political and public standing in the Middle East.

Just as some within the FRG Foreign Ministry and Bundestag feared that the Luxembourg Agreement would harm the Hallstein Doctrine, a number of SED figures counted on this to occur. Although the Soviets had toyed around with sponsorship of Israel at its inception, by 1950 it was becoming clear that Middle East countries held more promise for international communism. The SED banked that closer FRG-Israeli ties would lead to states like Egypt and Syria to reject the Hallstein Doctrine and give full acceptance towards the GDR. Such recognition would not only give luster to the GDR's status as the better Germany, but also give it trading partners with the Third World. But these hopes proved only half-fulfilled in the period 1951-1966 as many Middle Eastern states still valued German engineering and expertise and would not court an open break with Bonn lest they lose this connection. It was only after the Bonn's formal recognition of Israel in 1965 that this stratagem began to bear fruit, but by this time the Hallstein Doctrine itself was increasingly in tatters. By the mid-1960s, the GDR had become one of main non-Soviet arms suppliers for the Middle East, but such MiG diplomacy accrued few direct benefits for the GDR economy.

The GDR's stance on Israel was thus something akin to a photo negative of the FRG's approach towards the Jewish state. Adenauer and his successors recognized that good relations with Israel meant it could act as a placeholder for the worldwide Jewish community. Restitution and other forms of recognition were thus a sign that this Germany was coming to terms with what it had done to the Jews in the past. In contrast, the GDR disassociated Jewry from Israel, treating it as a normal country, and the Holocaust did not factor in its non-relationship with Israel. Thus while the SED did acknowledge Nazi crimes against Jews (although as with other communist countries, Jewish suffering could never displace communist suffering), it contended that Israel's existence had little connection to the Holocaust. Instead state media presented Israeli military actions as imperialistic and framed in much the same terms as it described Nazi aggression or American actions in Korea and Vietnam. Antizionist campaigns were common both in the GDR as well as throughout the Eastern bloc, especially as the Arab-Israeli Wars reached their peak in the late 1960s and 70s. It was only in the mid-1980s that the SED moderated its tone, but by then the SED was on borrowed time.

In hindsight, the Israeli overture towards Moscow and Berlin likely was doomed to failure. Giving into Israeli demands for restitution offered neither party anything that they could conceivably want out of the exchange. Israelis could not broker either a final settlement of the German question or leverage a favorable peace treaty. Israel's parallel diplomacy with the FRG also meant that it would preserve some aspects of the Hallstein Doctrine, so that was also a non-starter for the SED. This stood in stark contrast to Israel's successes in gaining reparations from the West. Austria, for example, was able to pay Israel a lump sum in exchange for Israel's affirmation of Vienna's line that it was among the first victims of Hitler and Austrians bore no responsibility for Nazi crimes. The FRG could not be excused so easily, but the exculpatory elements of reparations was something Bonn wanted out of such an arrangement. Luxembourg took some of the public pressure off of Bonn's mass amnesties of convicted war criminals and general abandonment of denazification. The GDR felt no such imperative to wash away the guilt of Nazism and saw no immediate geopolitical benefit to be gained from paying for the crimes of the Third Reich.