SNC-Lavalin’s $1.24-billion writedown an example of the cost of Ottawa’s foreign policy

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For most Canadians, television footage of 18-year-old Saudi asylum seeker Rahaf Mohammed walking through Toronto’s airport on the arm of Foreign Affairs Minister Chrystia Freeland was a feel-good moment.

For Neil Bruce, chief executive of SNC-Lavalin Group Inc., the political photo opportunity was a symbol of what has become a multibillion-dollar headache at the country’s largest engineering firm. Montreal-based SNC now faces the prospect of a sweeping restructuring, partly because of decisions made in Ottawa. One of those decisions was to escalate a diplomatic row with Saudi Arabia, the home of 9,000 SNC employees.

SNC took a $1.24-billion writedown Monday on its oil and gas business, which accounts for approximately one-third of the company’s revenue. The hit reflects a deteriorating relationship between the Canadian government and the royal family that runs the kingdom. SNC has been doing business in Saudi Arabia for 50 years; Saudi contracts accounted for 11 per cent of its $9.3-billion in annual sales in fiscal 2017, and the country has been an area of growth. But that’s over.

The Saudi relationship took a beating last August, when Ms. Freeland tweeted her support for jailed dissidents. The Saudi regime hit back, suspending new trade and investment ties with Canada. Things have been frosty ever since. While Mr. Bruce tried to be diplomatic in his comments on Monday, he made it clear that SNC’s prospects in the region grew bleaker this month when the Foreign Minister personally welcomed Ms. Mohammed, who has renounced Islam and denounced her country’s oppressive treatment of women.

“I don’t really want to comment on the ins and outs and the rights and wrongs of the relationship between the two countries. But the relationship, and certainly KSA [kingdom of Saudi Arabia] with regards to Canada, has not been helped by the recent position with regards to the asylum seeker,” Mr. Bruce told analysts on a conference call. “That, from a Saudi perspective, has not gone down very well at all.”

Mr. Bruce said SNC is now considering selling or spinning out its Saudi operations to deal with the political uncertainty surrounding the business, a process that began last fall. And SNC brass also continues to deal with the fallout from a failed attempt to settle federal criminal charges of fraud and bribery, stemming from the company’s operations in Libya under now-deceased leader Moammar Gadhafi. Again, the problem stems from a policy decision. Lawyers for the federal government and SNC struck a draft agreement that involved fines and specific undertakings by the company – a blueprint that works in British and U.S. markets – only to see the settlement shot down by federal director of public prosecutions Kathleen Roussel.

This series of setbacks has sparked speculation that SNC is a takeover target. While no offers have emerged, Quebec Premier François Legault is taking the company’s problems seriously, floating the prospect of the provincial government’s investment agency getting involved to protect SNC from a foreign takeover.

SNC’s experience is an extreme example of the uncertainties that government policies are creating for Canadian companies looking outside the border for growth. Privately, many Canadian CEOs are worried about the growing cost of the Trudeau government’s geopolitical strategy. It’s increasingly difficult to do business in China in the wake of the legal circus surrounding the government’s decision to detain Huawei chief financial officer Meng Wanzhou, who faces extradition to the United States. Even the new North American trade agreement, seen by some as a success for Ms. Freeland, might have worked out better if the government had not aligned Canada’s fortunes so closely to Mexico’s early in the negotiations, some corporate leaders believe.

The Liberals have consistently promised progressive social policies alongside a business-friendly agenda that benefits the middle class. Only half that promise is being kept. SNC’s market capitalization fell by 27 per cent on Monday, or $2.4-billion. Real wealth is being destroyed and real jobs are being put at risk. Perhaps a focus on behind-the-scenes negotiations, rather than photo ops, would better serve Liberal ambitions on international trade.