BACKGROUNDER

Israel judicial overhaul: How protesting tech execs became public enemy number one

Netanyahu is unbothered by dying democracy and human rights violations, but economic damage from 'reforms' has him worried

Members of the Israeli security forces face off with striking tech company workers in Tel Aviv, protesting against the Israeli government's controversial plans to overhaul the judicial system, 24 January 2023 (AFP)

By Lily Galili in Tel Aviv, Israel
Published date: 15 February 2023 

“It’s the economy, stupid.” The iconic slogan Bill Clinton’s strategist coined for his 1992 presidential campaign can be easily applied to the current turbulent situation in Israel.

Drunk on power, the far-right government is easily playing down the dramatic regime change - officially marketed by the government as “judicial reforms” - and the unprecedented wave of mass protests by people terrified by the changing nature of their country.

Authorities couldn't care less about Israel’s dying democracy and the violations of human rights. The only thing they are afraid of is the damage to the economy embedded in the reforms. It scares all involved, but most of all Prime Minister Benjamin Netanyahu, who prides himself on being “Mr Economy”, a nickname he earned in the international media for his time as minister of finance in 2003-05.

Though the economy is indeed strong, hundreds of thousands of poor Israeli Jews and Palestinian citizens still struggle to make ends meet.

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Israel exports 165bn shekels ($47bn) annually - with tech responsible for half of that - and gets 456bn shekels ($129bn) income from taxes, but 21 percent of the population lives below the poverty line, according to a National Insurance Institute 2021 report, with the elderly and Palestinians hardest hit. And yet, the "Israeli economy has been highly praised by international economic institutions", according to a recent INSS (Institute for National Security Studies) report.

Not anymore. It took Israelis a few weeks to understand the link between the “judicial reforms” and their impact on the economy.

The other implications were easier to internalise: the end of democracy and pending dictatorship are abstract notions everybody can charge with a meaning of their own. The economy is the hardest to get, until you’re personally hit by its implications. Then it finally sinks in, and suddenly there's no way to control the negative effects snowballing.

Day after day, sometimes just hours apart, names of companies or major investors pulling money out of Israel are being published. And there is no longer a price tag of shame attached to doing so. The leadership without shame has erased that sentiment among its citizens - soon to become its subjects.

Even shaming them for lacking Zionist instincts doesn’t work anymore, coming from a government including many members - such as the minister of national security and finance - who evaded military service or served just a symbolic few months. Israel is a country where military service is still the ultimate proof of loyalty and Zionist dedication. Judging by this criterion, this is the least Zionist government ever, thus one not taken seriously when that card is played.

‘Background noise only’?

Netanyahu sensed it coming before it actually did. He made a targeted effort to put out the fire threatening to break out in a series of interviews with foreign media. He hardly talks to Israeli media, and certainly not about the economy. He talked to CNN and Fox News in lengthy, soothing interviews, promoting supportive articles in the Wall Street Journal and Newsweek written by writers who are fond of him. The message was meant for both the international and the domestic scene. The Israeli economy, he kept insisting, was not only safe, but in fact going to get stronger based on the new judicial reforms - just wait and see.

But nobody waited, neither world economic institutions, nor Israeli companies. In an avalanche gaining momentum by the day, the Israeli economy has become both the central issue and the most powerful weapon in the fight against the regime change imposed by the country’s most far-right, racist, government ever.

The first one to issue a warning was Amir Yaron, the governor of the Bank of Israel. In an urgent meeting he initiated on 25 January, Yaron warned Netanyahu that his government’s sweeping judicial reforms could damage the country’s economy. Like all those who followed, he was swiftly rebuffed.

'It’s my right and my duty to move the money to banks in democratic countries'

- Eynat Guez, CEO of Papaya Global

Five days later, Netanyahu proudly announced that JP Morgan, a global leader in financial services with headquarters in Israel, had claimed the risk to Israel’s economy was low, and that they see the judicial reforms as “background noise only”. In fact, just four days later, on 3 February, JP Morgan issued an official warning about the increasing danger of investing in Israel.

“The judicial reform has raised concerns regarding institutional strength and the investment climate in the country,” the report said. “There may also be a risk to Israel’s sovereign credit rating.”

At the same time, leading Israeli economists - about 300 of them - warned that the proposed reforms would do longterm harm to the Israeli economy. Though many of them were Netanyahu’s former allies - some even his personal appointments - they were immediately labelled as politically motivated, borderline enemies of the state.

Heads of all Israel's major banks met on Thursday with minister of finance Betzalel Smotrich. They warned him they sense first signs of a crisis: tremendous growth in investor enquiries about transfering money to foreign banks. Ten times more people. Smotrich warned them in return on Channel 12 against self-fulfilling their prophecy, adding that he has never seen them at protests against Oslo or disengagement from Gaza.

The seeds of looming economic disaster have already been planted. In an interview with Reuters in January, S&P Global Ratings director Maxim Rybnikov said:"If the announced judicial system changes set a trend for a weakening of Israel's institutional arrangements and existing checks and balances this could in the future present downside risks to the ratings. But we are not there yet.”
The ‘destruction of Israeli tech’

This global climate, combined with domestic unrest, including deadly attacks in East Jerusalem, has had an immediate impact on the Israeli business sector. The same sector that is often tarnished for being detached from the Israeli political and social scene, and labelled as self-serving and self-centred.

Now, with the country’s economy in jeopardy, the business sector is taking centre stage in the struggle. Israeli tech, nicknamed “the locomotive of the Israeli economy”, is now the engine of the mass protest movement. Numerous tech businesses gave staff the day off to protest on Monday, even arranging shuttle buses.

In an op-ed article in the financial Israeli newspaper Calcalist, Adam Fisher, a partner at the Israeli branch of leading American venture capital firm Bessemer, explained that the process has already started: “Since I opened the Israeli branch 17 years ago, we invested $1.5bn in 75 Israeli start-up companies. Now people ask me if foreign investors will pull out their money and leave Israel. That’s the wrong question. In fact, investors will not have to leave Israel - the Israeli entrepreneurs will do it first.

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"The investors will follow them. As they see the deterioration towards an authoritarian regime and uncertainty for their businesses, so they will choose to start their companies elsewhere.

“The pullout in the hi-tech industry will be based on individual and personal decisions,” he continued. “Another form of leakage now that Israel enters the age of non-liberalism will be Israeli entrepreneurs starting their businesses in Israel but incorporating them in the United States or in Britain... Such a step will be perceived as cautious, and in fact the investors will demand it.

“Other start-up companies will reverse their status to a subsidiary of an American company and thus divorce themselves from their country of origin and their dependence on the Israeli branch. The legacy of this government will be not only destruction of democracy but also of Israeli hi-tech.”

The first signs of that process are already showing. And with 25 percent of Israeli annual income tax coming from tech companies, the stakes are high.
Tens of millions pulled out

The one to throw the first stone was Eynat Guez, CEO of Papaya Global, a payments platform unicorn. Just like that, in a tweet, she announced her company was to pull its money out of Israel. “Under the upcoming reform, there is no certainty we can conduct business activity out of Israel. It’s a painful, but necessary, step.”

She later explained the move was an answer to a demand posed by her board of directors. “It’s my right and my duty to move the money to banks in democratic countries,” she said. Papaya, established in 2016, has raised over half a billion dollars, mostly from foreign investors. It is one of the most successful tech companies in Israel, with 600 workers worldwide.

Others were quick to follow. Following a similar move by local venture capital fund Disruptive AL, Wiz, a unicorn worth around $6bn, is pulling tens of millions of dollars out of Israeli banks because of the judicial plans. Two weeks before the move, founder Yinon Costica participated in a protest of tech executives who oppose the overhaul.

This is all in a private sector that has survived wars, difficult security situations and economic slowdowns, under the protection of democracy and a strong judicial system. Now both are weakened, if not totally disrupted.

The last one to publicly pull money out of Israel caused a minor uproar because of his surname. Shaul Olmert, co-founder and CEO of Piggy, a content creation startup, is the son of former PM Ehud Olmert, who was once Likud and now stands in ardent opposition to Netanyahu. Shaul has been one of the leading figures in the tech protests against the judicial overhaul. Piggy recently pulled 70 percent of the company's money out of Israel. “It's not meant to harm the country, it’s just the right risk management at this point,” Shaul said.
Enemies of the state

This rational explanation does not work with the fiercest supporters of this government. In several private discussions with Likud supporters, they admit they are worried by what even they perceive as regime change, but hate - and an urge to take revenge - trump all logic.

Tech entrepreneurs and leaders in the business sector who follow financial reasoning - supported by the precedent of similar situations in Poland and Hungary - are now officially enemies of the state. They have replaced those who refuse to serve in the army or in the occupied territories as the worst kind of traitors.

They are portrayed not as victims of the situation but as its real perpetrators. All those who speak in the name of the government are instructed to say that they are in fact the ones creating the panic and the chaos driving investors and money out of Israel.

High-tech company workers block a road as they strike for an hour in Israel's coastal city of Tel Aviv, 24 January 2023 (AFP)

Tom Livne, CEO of Verbit - one of Israel’s most successful tech unicorns - declared on camera recently that he was leaving the country and ceasing to pay taxes in protest over the judicial overhaul. Livne, whose company has been valued at $2bn, urged other tech executives to follow suit. All hell broke loose.

The government is terrified of people who pay tens of millions of dollars in taxes - and companies that pay hundreds of millions - leaving Israel. Disdainful pro-government voices call them “the privileged”. This may be true, but they are also the engine of the Israeli economy. Almost 100,000 of these “privileged” people took a day off - many unpaid - to protest on Monday outside the Israeli parliament, as the Knesset legislative committee passed the first stage of the legal shake-up.

For some it may be the last such day, as the government wants to curb the right to strike. But this is just the beginning of this battle between tech executives and the government. In early February, the CEO of a public company - Arbe Robotics - called on all responsible CEOs to transfer half of their capital abroad to be ready for any scenario. He himself did it a week ago.

“It should not be taken for granted that things will continue as they were,” Ori Hadomi told Calcalist, “and whoever thinks so is delusional. Unfortunately, this apocalyptic vision is becoming a reality much faster than I thought."