Riskified, an Israeli fin-tech firm valued at $1 billion, is transferring $500 million out of Israel in advance of what CEO Eido Gal referred to as “a meaningful and prolonged economic downturn in Israel.”
In an email sent to employees on Wednesday, Gal announced the move to pull Riskified’s funds from Israel and offered relocation support to employees interested in moving to the firm’s R&D site in Lisbon.
“The laws being passed can lead to the dismantling of our independent judicial system. In high likelihood, this will lead to a meaningful and prolonged economic downturn in Israel. More importantly, this will result in Israel changing from a democracy with liberal values into a more authoritarian state. I believe that only bad outcomes will come from this ‘reform,’” Gal wrote.
Not the first to go
Riskified is the latest in a series of firms, companies and entrepreneurs who have decided to remove their wealth from the Israeli economy in response to the government’s planned judicial reform.
January saw Papaya Global and Disruptive Technologies Venture Capital announce their flight from Israel’s economy, followed by Verbit founder and serial entrepreneur Tom Livne in February announcing his intention to leave Israel and stop paying taxes in protest of the reform.
“Following Prime Minister [Benjamin] Netanyahu’s statements that he is determined to pass reforms that will harm democracy and the economy, we made a business decision at Papaya Global to withdraw all of the company’s funds from Israel,” Papaya Global CEO Eynat Guez tweeted. “In the emerging reform, there is no certainty that we can conduct international economic activity from Israel. This is a painful but necessary business step.”
What’s the fuss about?
For the last few months, rating agencies, experts, academics, Nobel Prize-winning economists and an international chess grandmaster have raised serious concerns regarding the Israeli government’s intention to revolutionize Israel’s judicial system and the effect it will have on Israel’s economy.
They argue that the reform would severely undermine the authority of Israel’s High Court and allow the Knesset to independently pass legislation with little-to-no resistance, thereby destabilizing its institutions and increasing its risk to investors. This would in turn lead to a reduction in Israel’s foreign direct investment — a key source of funding for the Israeli hi-tech industry, which accounts for more than 50% of Israel’s exports.
On Tuesday, Moody's Investor Service cautioned that Israel's credit rating outlook may be lowered from positive to stable and its capacity to attract investment may be harmed if the Israeli government implements the proposed judicial reforms.
“If implemented in full, the proposed changes could materially weaken the strength of the judiciary and as such be credit negative,” the agency stated. “The planned changes could also pose longer-term risks for Israel's economic prospects, particularly capital inflows into the important hi-tech sector.”
“To [allow for] a tiny majority that can suddenly make sweeping changes with permanent effects is no way to run a country. and investors are certainly not going to like it,” said Harvard professor and former chief economist of the International Monetary Fund Kenneth S. Rogoff, during the Economic Consequences of the Judiciary “Reform” conference held at Tel Aviv University on Thursday night. “And it's not just the foreign [investors] that will suffer — all investors and entrepreneurs in Israel which have helped the economy tremendously are going to be scared by this as well.”