Israeli turmoil alarms business leaders: There's 'fear over what happens next'

Important Points

Some CEOs are concerned about the impact of the current turmoil on business in Israel.

Israel has entered a cooling-off period following weeks of protests from large segments of its population against a plan which would weaken the Supreme Court of the country.

Benjamin Netanyahu, the Prime Minister of Israel, announced on Monday that he will delay legislation critics claim would weaken Israel's judiciary. The bill would alter the way Israel’s top judges were approved. It would also allow the Knesset to overturn Supreme Court rulings with a simple majority. And it would stop the court from judging a number of laws passed by the legislature.

Israel's uncertain political situation has a profound impact on the business world. The United States, Europe, and Asia are the main sources of revenue for large Israeli companies, as Israel is a relatively small market in global economic terms. Most of Israel's neighbours have very little or no business with Israel.

Fitch, a ratings service, warned this month that the court controversy "could erode Israel's credit rating." Moody's also made a similar comment, stating that "proposed changes may materially weaken Israel's judiciary." Neither agency has yet changed Israel's rating.

What is the business risk?

Tomer Weingarten is the CEO of SentinelOne, a cyber defense company. "I am in constant contact with investors who are interested in knowing what risk they face," he said. "It has become a place where people are not confident about operating."

SentinelOne employs 300 people in Israel. It has also invested in Israel through its venture capital arm. Weingarten said he could slow down the flow of capital because he is "frightened about what will happen next."

Some Israeli companies are concerned that issues such as taxation, worker's rights, investor's rights and other important matters could be decided on by a Supreme Court appointed by a government of the right, whose views they do not share.

The CEO of Neteera Technologies disagrees. Isaac Litman says he has not seen any impact from external investments despite the fact that he recognizes their importance to his company, and Israel's economic growth.

Litman stated that "people are speaking in the heat-of-the moment, lighting kindling across the country and this has led to major flames." His company closed a funding round recently, but the issue of the judiciary was not raised.

Litman agreed that investors must always evaluate risks. However, he said that he believed that the concerns would be eased within six months. Litman says that the current turmoil is a "stress test" for investors and startups. But "we can handle this," he said.

Weingarten, SentinelOne's CEO, has not seen the video yet but he predicts that some of his employees will want to leave the United States because of the political climate. He said he would consider any request made by an employee.

Weingarten's biggest fear is that Israel will become irreparably divided, in a place where unity was once a given.

Risks for Netanyahu

Two-thirds (or 67%) of Israelis oppose the proposed changes to the legal system, according to recent polls.

Netanyahu announced on Monday that the proposed legislation will be subject to negotiations for about a month. This falls in the middle of Jewish Holidays and the Knesset spring break. Then Israel's Memorial Day will follow, and Independence Day which is Israel's 75th.

According to David Makovsky, Middle East think tank The Washington Institute's Middle East expert, "barring major movements regarding a deal that seems unlikely."

The political struggle has had a major impact on the economy. The shekel is recovering from its lows but has been down 10% against the US dollar in recent months. Tel Aviv Stock Exchange has fallen 20% this year.

Makovsky told CNBC that the survival of the Prime Minister is at stake.

He said that for things to improve, Netanyahu's numbers in the polls must be falling. This would force the Prime Minister to push his right-wing partners in the coalition into a deal more aligned to the citizens of the country.

It's already happening. According to a poll conducted on Monday, if elections were held today Netanyahu's Likud Party would lose seats. It also indicated that it would be impossible for the party to form a coalition of right-wing parties like that which exists currently.

Makovsky stated that if Netanyahu truly wants to save the world, he might have to tell the partners on the right: "You are leading us to Hell." "If you want to remain in power, then you must be in the right place." Makovsky said.

Although it's not clear whether the right-wing coalition members will accept changes to their plan for the justice system. If they refuse to go along, this could mean the end of this government. Israel will have its sixth election in four years.