Saudi Arabia is at nexus of Prime Minister Saad Hariri’s two big problems: his political future and the looming collapse of his company

Saudi Arabia is at the nexus of Lebanese Prime Minister Saad Hariri’s two big problems: his precarious political future and the looming collapse of his construction empire, a business built on decades of support from the Saudi royal family.

Saudi Oger, a Riyadh-based construction company wholly owned by the Hariri family, closed operations across Saudi Arabia this summer after the Saudi royal family slashed spending on lavish construction projects. The firm is now relying on the Saudi government—its main client—to pay millions of dollars in wages owed to the company’s former workers, say former employees. Saudi officials are also investigating the company’s finances, said a former senior manager at the company.

Spokesmen for Mr. Hariri, Saudi Oger and the Saudi government didn’t respond to requests for comment.

Saudi Oger’s troubles are a measure of the influence Riyadh wields over Mr. Hariri and a sign of his fraying relationship with the Saudi government, a shift with implications for Lebanon as well.

On Nov. 4, Mr. Hariri stunned Lebanon when he appeared on Saudi state television in Riyadh to announce he was stepping down as prime minister. In his appearance, Mr. Hariri, who is a dual Saudi-Lebanese citizen and leads Lebanon’s Sunni bloc, said he blamed Iran and its Lebanese proxy Hezbollah for what he called their destructive role in the Middle East and said he feared for his life.

The Saudis pressured Mr. Hariri to resign, according to people close to Mr. Hariri and the Saudi government. Riyadh, which backs Lebanon’s Sunni bloc, wants Mr. Hariri to take a more forceful stand against Hezbollah in the regional struggle to counter the influence of Shiite Iran.

Mr. Hariri then remained in Saudi Arabia for most of the next two weeks, fanning accusations from Lebanese political figures that the Saudis were keeping him there against his will. A spokesman for the Saudi government has denied any role in Mr. Hariri’s resignation and has said Mr. Hariri was free to move about.

Since then, he has traveled to Paris, Cairo and Cyprus to meet with leaders. After returning to Lebanon Tuesday evening, Mr. Hariri said he would hold off handing in his resignation at the request of Lebanese President Michel Aoun so that the two men can discuss it.

The political forces buffeting Mr. Hariri arise from his family’s longstanding ties to Saudi Arabia, analysts say. That relationship has for years played a key role in Lebanon’s sectarian political system, which divides power among Sunnis, Shiites and Christians, each composing about a third of the population.

Mr. Hariri’s family owns the construction company Saudi Oger, which last year was building these two towers in Riyadh. The company was buffeted by Saudi Arabia’s reduction of spending on multibillion-dollar construction projects.
Mr. Hariri’s family owns the construction company Saudi Oger, which last year was building these two towers in Riyadh. The company was buffeted by Saudi Arabia’s reduction of spending on multibillion-dollar construction projects. PHOTO: FAYEZ NURELDINE/AGENCE FRANCE-PRESSE/GETTY IMAGES

Starting with Saad Hariri’s father, Rafiq, who founded Saudi Oger and became Lebanese prime minister, the family has for decades helped Riyadh to project influence in Lebanon, analysts say.

“The Saudis gained influence over not just the Sunni community, but also the direction of the country,” said Hannes Baumann, a specialist in Middle East politics at the University of Liverpool who wrote a biography of Rafiq Hariri.

The troubles facing Mr. Hariri’s business began nearly three years ago as Saudi Arabia started to grapple with the impact of lower oil prices on its public finances, bankers who have worked with the company say. Mohammed bin Salman, who was deputy crown prince at the time and became crown prince this summer, led an effort to tighten spending on multibillion-dollar construction projects that underpinned Saudi Oger.

Short on cash, the company stopped paying workers starting in 2015. As the salary delays persisted, thousands of migrant workers, mostly from South Asia, left their jobs to return home, according to the bankers and former employees. The workforce, once numbering 50,000 people, shrank almost to zero by the end of July, they say.

French engineers who relocated to Saudi Arabia to work on these projects say they went more than a year during the 2015-16 period without having their salaries paid.

“We believed in the company, and we were ripped off,” said one of those former employees, Vincent Lesage, a Frenchman who worked for seven years in Riyadh for Saudi Oger and left because he wasn’t being paid.

Saudi Oger’s payment problems prompted escalating complaints to Mr. Hariri from the French government, according to letters seen by The Wall Street Journal.

“The payment of back salaries is becoming urgent, and our authorities are concerned that the promises you made to us a few weeks ago have not been honored,” the French ambassador to Saudi Arabia wrote to Mr. Hariri in June 2016. Mr. Hariri had repeatedly told French diplomats that his company was working to pay the late salaries, the letters show.

With Saudi Ties Fraying, Lebanese Premier’s Construction Empire Crumbles

To contain the diplomatic fallout from Saudi Oger’s problems, the Saudi government stepped in that September and paid the company’s French employees the equivalent of nine months of wages, costing the kingdom millions of euros, according to the employees and French officials.

Caroline Wassermann, a Paris-based attorney for roughly 80 of the former employees, said Saudi Oger still owes nearly €20 million ($23.5 million) in remaining back pay and social security taxes for her clients. In talks with French officials on the subject, Saudi authorities have said that the government is preparing to pay the workers the rest of their unpaid wages, French officials say.

Meanwhile, the Saudi Ministry of Finance in 2016 demanded reams of documents from Saudi Oger about its spending practices and hired the accounting firm PwC to help with an audit, said Hubert Babay, who headed Saudi Oger’s cost control division at the time. PwC didn’t respond to a request for comment.

Bankers who worked with Saudi Oger say they have floated various scenarios to save the firm, ranging from a debt restructuring to Saudi Arabia taking a minority stake in the firm or nationalizing it. Saudi Oger has sold its stake in a Jordanian bank for about $1 billion to raise cash. But the bankers now see little chance that the company will restart its operations. French courts placed Oger International, the group’s international affiliate based in the Paris area, under judicial administration in September 2016.

Mr. Hariri’s supporters rallied outside his residence on Wednesday as one held a Saudi flag. The prime minister is a dual Saudi-Lebanese citizen who leads Lebanon’s Sunni bloc.
Mr. Hariri’s supporters rallied outside his residence on Wednesday as one held a Saudi flag. The prime minister is a dual Saudi-Lebanese citizen who leads Lebanon’s Sunni bloc. PHOTO: BILALA HUSSEIN/ASSOCIATED PRESS

Saudi Oger was started by Rafiq Hariri after he moved to Saudi Arabia from Lebanon as a teenager. The company grew rapidly, fed by multibillion-dollar construction contracts handed out by the Saudi royal family. That allowed it to become a multinational construction giant in the 1980s.

Rafiq Hariri returned to Lebanon a rich man and entered politics, becoming prime minister for the first time in 1992. There, he used his wealth to fund his campaign, while his backing from the Saudi royal family helped him build support among Lebanon’s Sunni Muslim community.

Saad Hariri took over Saudi Oger after his father was assassinated by a car bomb in 2005. With oil prices soaring at the time, the Saudi government embarked on a construction spree, handing the company a new round of valuable contracts. Those projects include the Princess Noura Abdul Rahman university for women, the Saudi king’s personal medical clinic and the Ritz Carlton hotel in Riyadh.

Write to Matthew Dalton at Matthew.Dalton@wsj.com and Nicolas Parasie at nicolas.parasie@wsj.com

Appeared in the November 25, 2017, print edition as ‘Lebanese Strife Has Saudi Roots.’

THE WALL STREET JOURNAL