Saudi Arabia is ordering its citizens to leave Canada, selling its financial assets there and freezing trade between the two countries as part of an extraordinary diplomatic spat that has brought into global view the kingdom’s extreme sensitivity to Western criticism.
The steps follow the Canada’s foreign ministry’s chastising Saudi Arabia for its recent arrest of human-rights activists. Canada’s foreign ministry, in a Twitter message sent on Friday, called on Saudi authorities to “immediately release” the activists.
The Saudi government rejected what it described as Canada’s unacceptable interference in its domestic affairs, and on Monday expelled the Canadian ambassador to the kingdom and recalled its own from Ottawa.
Since then, Saudi Arabia has unveiled measures intended to hurt Canada financially.
Saudi Arabia’s central bank instructed its fund managers to sell off their Canadian holdings, three people familiar with the matter said on Wednesday.
The kingdom has also halted all new business transactions between the two countries; it stopped direct flights to Canada; and it ordered Saudi patients and students to leave the country. Some 7,000 Saudi students are currently enrolled in Canadian universities on government-sponsored scholarships.
The Saudi decision to sell Canadian financial assets is poised to affect hundreds of millions of Canadian dollars of stocks, bonds and cash. The relatively small selloff isn’t expected to carry a major financial impact for Canada, but it marks a sharp escalation of a spat that erupted from a tweet.
The move “sends a very bad signal to foreign investors,” said a Gulf-based banker with knowledge of the matter. “Who will want to invest in a country where such decisions can be taken?”
Representatives of Saudi Arabia’s central bank weren’t available to comment. The kingdom’s energy ministry late Wednesday said “the current diplomatic crisis between Saudi Arabia and Canada will not, in any way, impact Saudi Aramco’s relations with its customers in Canada.”
While the amount at stake isn’t large, a diplomatic dust-up that shows no signs of abating may have financial implications for Canada.
The Canadian dollar swooned for a brief period in Wednesday morning trading on reports of a Canadian selloff ordered by Saudi Arabia’s central bank. The currency largely recovered the losses during the day.
Canadian wheat and barley growers are also set to deal with the fallout. The Saudi Grains Organization, the state agency that buys grains and manages reserves, told Canadian producers it “can no longer accept milling wheat or feed barley cargoes of Canadian origin,” according to an email reviewed by The Wall Street Journal.
Canada sold roughly 70,000 metric tons of wheat to Saudi Arabia in the most recent crop year, a fraction of the 16.2 million metric tons of Canadian wheat growers shipped overseas. Barley producers could face the bigger hit, as Saudi Arabia accounted for 7% of all grain shipped abroad, said Cam Dahl, president of Cereals Canada, an industry association.
Canadian Prime Minister Justin Trudeau on Wednesday said Canadian officials are in talks with Saudi Arabia to resolve the row.
“We don’t want to have poor relations with Saudi Arabia,” Mr. Trudeau said. “We have respect for their importance in the world, and recognize it is making great progress on a number of important issues.”
Still, the Canadian leader reiterated he would continue to champion human rights across the world. “Canadians have always expected our government to speak strongly, firmly, clearly and politely about the need to respect human rights at home and around the world. We will continue to do this.”
Earlier Wednesday, Saudi Foreign Minister Adel al-Jubeir defended the government’s response to Canada’s criticism of its human-rights record.
“The crisis with Canada was imposed on us because of its interference in our internal affairs,” he told reporters in Riyadh. “Canada made a mistake and should correct its wrongdoing towards Saudi Arabia.”
Since May, Saudi authorities have arrested some of the country’s most prominent rights activists, many of whom had campaigned for women’s right to drive. At least 14 remain in jail. The Saudi government has said those arrested are suspected of having conspired with unspecified foreign entities.
Mr. Jubeir said Saudi authorities have been investigating the arrested rights activists as “a matter of national security.”
Saudi Arabia’s regional allies, including the United Arab Emirates and Egypt, have rallied in support of its hard-line stance on Canada. The U.S. has so far declined to take a position.
“Both sides need to diplomatically resolve this together. We can’t do it for them,” U.S. State Department spokeswoman Heather Nauert said during a press briefing on Tuesday.
While others have rebuked Saudi Arabia over the arrest of the activists—including the U.S. and the European Union—the kingdom likely chose to target Canada because it isn’t a vitally important ally and because of the relatively small amount of business at stake, some analysts say. The broader message Saudi Arabia is sending to Western countries is that it won’t tolerate harsh criticism of its domestic policies.
“Saudi Arabia is saying: Our market is opening up, our market provides opportunities, but they can dry up if you are on the wrong side of us politically,” said Hani Sabra, founder of Alef Advisory, a U.S.-based political-risk firm.
Two-way trade between Canada and Saudi Arabia amounted to about $3 billion last year, according to Canadian government data. By comparison, U.S.-Saudi trade in 2016 stood at more than 10 times that level, based on U.S. data.
Canada’s plan to sell $11.5 billion in light-armored vehicles to Saudi Arabia has been met with criticism at home. Nongovernmental organizations have pressed that Canada open a probe on whether Canadian-made vehicles have been used to commit human-rights abuses. It is unclear if the diplomatic spat will affect the deal. Officials at the General Dynamics Land Systems, whose Canadian unit is building the armored vehicles, declined to comment on the fate of the deal.
Saudi Arabia has used economic pressure tactics toward other countries seen as allies. Last year, Riyadh and three Arab allies abruptly cut relations with Qatar and imposed a trade embargo on it, accusing the tiny Gulf country of pursuing a disruptive regional policy. At the time, Saudi government entities either sold off their Qatar holdings or refused to acquire new assets.
And in November, Saudi officials summoned Lebanese Prime Minister Saad Hariri to Riyadh, where he stepped down from his post, citing the dominant role of Hezbollah, an Iranian proxy, in Lebanese politics. This sparked accusations that Saudi Arabia, a longtime patron of Mr. Hariri, was behind the resignation.
After Germany’s then-foreign minister publicly criticized Saudi Arabia for pressuring Mr. Hariri to step down against his will, Riyadh recalled its ambassador from Berlin and quietly suspended new business deals with its European ally.
Write to Margherita Stancati at margherita.stancati@wsj.com, Nicolas Parasie at nicolas.parasie@wsj.com and Paul Vieira at paul.vieira@wsj.com
