For SNC, threat of Canada-Saudi rift looms over Mideast operations
Tuesday, October 16, 2018 – Print Edition, Page B1

There is no Canadian company that fears a renewed diplomatic clash between Canada and Saudi Arabia more than SNC-Lavalin Group Inc., the Montreal engineering and construction giant that is one of the biggest foreign players in the Middle East.

The first clash, in August, triggered by a tweet from Foreign Affairs Minister Chrystia Freeland, sent the company's shares tumbling. The alleged assassination inside the Saudi consulate in Istanbul of Saudi journalist and Washington Post columnist Jamal Khashoggi could erupt into another row if the Saudis go on the diplomatic offensive.

Saudi Arabia is crucial to the prosperity of SNC and its turnaround plans under Scottish engineer Neil Bruce. Mr. Bruce was appointed chief executive in 2015 with a clear mission: Overhaul and refocus the scandal-ridden company - it and some former executives face criminal charges in an ugly set of corruption cases - and push it in into the upper ranks of the world's diversified engineering groups.

The Saudi market was and remains crucial to Mr.Bruce's effort. SNC has been a corporate fixture for 50 years in Saudi Arabia, where it now has 9,000 employees, a third of whom are Saudi nationals. Slightly more than 10 per cent of its revenues, which reached $9.3-billion in 2017, come from Saudi contracts.

In an interview last month with The Globe and Mail, Mr. Bruce called Saudi Arabia "a huge growth area."

During the first three years of Mr. Bruce's reign, the Saudi narrative worked like a charm for SNC. A young Saudi royal named Mohammed bin Salman, who is the son of King Salman, was appointed deputy crown price in 2015 and became the all-powerful Crown Prince two years later. Prince Mohammed billed himself as a social and economic modernizer.

He would reinvent the country's economy, create an entrepreneurial class and gradually reduce the state's overwhelming reliance on oil revenues and Saudi Aramco, the world's biggest oil producer and exporter. His strategy was called Vision 2030.

The narrative was supported by Donald Trump, whose first official visit as U.S. President was to Saudi Arabia. His son-in-law, Jared Kushner, became a close friend and adviser to Prince Mohammed, even though Saudi Arabia's grim human-rights record got no better, and was perhaps even worsening, under the power-hungry heir apparent to the King.

Saudi Arabia's status as an American ally, and a Canadian ally by extension, seemed secure. Justin Trudeau's Liberals made it clear that the $15-billion deal to supply light-armoured vehicles to the Saudi military, struck in 2014 by the then-Conservative government, would go ahead in spite of the country's human-rights record and the deepening humanitarian crisis in Yemen, where a Saudi-led coalition is fighting Houthi militias. The American and Canadians took the view that a moral position doesn't pay the bills.

The Saudi contracts rolled in fast in recent years for SNC, whose international capabilities by then had been bolstered by the purchase of Kentz, an Irish contractor specializing in the oil and gas sector, and Britain's Atkins, a big engineering and project-management consultancy. SNC was nailing Saudi business in oil and gas, infrastructure, mining and clean power. Under the Vision 2030 plan, more contracts would inevitably fill SNC's work-order sheet.

Saudi Arabia and other Middle East countries would play a crucial role in Mr. Bruce's plan to boost profit by 50 per cent or more by 2020, or so he'd expected.

SNC's Saudi fantasy was suddenly punctured on Aug. 2, when Ms. Freeland criticized Saudi Arabia's human-rights record in a tweet; specifically, she called for the release from prison of Saudi dissidents Raif and Samar Badawi. The Saudi reaction was swift and brutal. The Canadian ambassador to Saudi Arabia was expelled and Saudi students at Canadian universities were ordered to leave Canada. (Saudi medical students were later given a reprieve.) Saudi flights to Canada were stopped, and the Saudi Treasury was ordered to liquidate Canadian investments. SNC shares sank. Although none of its Saudi contracts were cancelled, SNC appears to be in the doghouse, with the bidding on a few new contracts in oil, infrastructure and mining frozen.

"The Saudis stated they would stop working with any Canadian company," Mr. Bruce said. "Although the situation is unresolved, our priority is our over 9,000 dedicated professional employees - over one-third Saudi nationals. Stability for them to continue to do their work is foremost in our minds."

The Khashoggi affair threatens more complications for SNC's life in Saudi Arabia. Minimizing the potential damage will prove one of Mr. Bruce's greatest challenges as CEO and would-be turnaround artist. As Turkish officials alleged they have evidence a Saudi hit squad assassinated Mr. Khashoggi and dismembered his body in the Saudi consulate, Mr. Trump and other world leaders went on the offensive. Mr. Trump on Saturday vowed "severe punishment" if the Saudi regime's involvement in Mr. Khashoggi's alleged assassination was confirmed. Meanwhile, a small army of CEOs, including JPMorgan Chase boss Jamie Dimon and Ford Motor chairman Bill Ford, said they would not attend Saudi Arabia's marquee investment conference, known as "Davos in the Desert," later this month.

The reaction from the Saudis, who deny Mr. Khashoggi was assassinated, was equally forceful. It said that any punishments meted out by foreign governments, including economic sanctions, would be met with "greater action" by the Saudi regime. The unsubtle message was that Saudi Arabia, the major swing producer in the Organization of the Petroleum Exporting Countries cartel, would cut oil exports, sending prices soaring, if it felt its regime or the Saudi economy was being undermined.

If Mr. Khashoggi is found to have been murdered and Canada vows to punish the Saudis, all bets are off for SNC's fortunes in Saudi Arabia. So far, the Canadian government is treading carefully, as Riyadh is enveloped in a diplomatic crisis. Mr. Trudeau has said only that he has "serious issues" with the reports alleging Mr.Khashoggi's assassination. Mr.Trudeau appears to be letting Mr.Trump take the lead on threatening Saudi punishment.

SNC's Saudi operations could still emerge largely unscathed if the results of the Khashoggi investigation triggers an epic Saudi blowback. Mr. Bruce could argue that the Saudis need SNC and its highly skilled engineersmore than ever if foreign investors pull out or are forced out of Saudi Arabia. He could argue that a company that has been part of the Saudi corporate fabric for half a century is just as Saudi as it Canadian. The reality is nothing is certain until we learn whether Mr. Khashoggi was murdered.

SNC could become the unwitting victim of the diplomatic war that is already hitting Riyadh.

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