Israel’s legal crisis worries some business leaders

Israel is in a cooling period after weeks of intense protests by large segments of the population against a plan that would significantly weaken the country’s Supreme Court.

On Monday, Prime Minister Benjamin Netanyahu said he would delay legislation that critics say would weaken the justice system: it would change the way Israel’s top judges are vetted; allow the Knesset (Israeli parliament) to overrule Supreme Court decisions by a simple majority; and would prevent the court from trying many laws enacted by the legislature.

The uncertainty surrounding Israel’s political situation extends deeply to the business sector. Large Israeli companies derive most of their income from the United States, Europe and Asia, because in terms of the global economy, Israel is a small market. And most of Israel’s neighbors have little or no trade with Israel.

This month, ratings service Fitch warned that the court controversy “could weaken Israel’s credit profile”. Moody’s made a similar statement, saying “the proposed changes could significantly weaken the strength of the judiciary and as such have negative credit.” So far, however, neither agency has changed Israel’s credit rating.

“I’m constantly in talks with investors who want to know what the risk is,” said Tomer Weingarten, CEO of cyber defense firm SentinelOne. “It’s become an environment where they’re not sure they’re comfortable operating.”

SentinelOne has 300 employees in Israel. It also has a venture capital arm that invests in the country. Weingarten says he might be slowing down that flow of capital out of “fear of what happens next.”

Some Israeli companies fear that issues concerning taxation, workers’ rights, investors’ rights and other big issues will be decided by a supreme court appointed by a right-wing government whose beliefs they do not share.

But the CEO of Neteera Technologies, a digital health company and CNBC Disruptor based in Jerusalem, disagrees. Isaac Litman saw no impact on outside investment, although he acknowledges that it is crucial to his business and Israel’s economy.

“People are talking in the heat of the moment, lighting kindling all over the country, and it’s caused major fires,” Litman said. His company, which is not listed on the stock exchange, recently closed a financing round, and the fight for the judiciary “has not happened once”.

Litman said he agrees investors still need to weigh the risks, but he thinks concerns will be assuaged in six months. The current turmoil is “kind of a stress test for startups and investors,” Litman said, but “we’re resilient, our economy and our workforce are strong, and we can weather it.”

Although he hasn’t seen it yet, SentinelOne’s Weingarten predicted that the political climate will cause some of his employees to want to leave the country. “I will consider any request from any employee,” he said.

Weingarten’s great fear is an irreparable division in Israel, a country where a high degree of unity was once taken for granted.

Recent polls show that two-thirds of Israelis are against plans to change the justice system.

Netanyahu said on Monday he would allow about a month for negotiations on the bill. However, this takes place in the midst of Jewish holidays and Knesset spring recess, followed by Memorial Day and Israel’s Independence Day, which will be the 75^e.

All are traditionally times of unity, but according to David Makovsky of the Middle East-focused think tank The Washington Institute, “unless there is a major move on a deal, that seems unlikely.”

The economy has been hit hard by the political struggle. The shekel has recovered from its lows, but was down 10% against the dollar in recent weeks. The Tel Aviv Stock Exchange is down 20% since the start of the year.

Makovsky told CNBC it all comes down to the prime minister’s political survival.

“For things to improve, Netanyahu’s polls must be in freefall,” he said. Such a drop would prompt the prime minister to push his right-wing coalition partners toward a deal more aligned with the citizens of the country as a whole.

There are signs starting to happen. A poll released on Monday indicated that if elections were held today, Netanyahu’s Likud party would lose seats and be unable to forge a right-wing coalition like the one that currently exists.

“If Netanyahu really wants to save the day, he may have to tell his right-wing partners, ‘You are driving us to hell,'” Makovsky said. “‘If you want to stay in power, you have to be where the country is.'”

It is unclear, however, whether the right-wing members of the coalition will accept any changes to their plan for the justice system. If they don’t follow, it could lead to the fall of this government and new elections – Israel’s sixth in four years.