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Iran rapprochement marks a return to Saudi pragmatism

The biggest question mark is over the US's attitude on the new power balance

Saudi budget deficit Reuters/Ahmed Yosri
Saudi Arabia's finance minister Mohammed Al Jadaan said that the budget deficit will increase over the next two years due to an increase in spending

The China-brokered resumption of relations between Saudi Arabia and Iran has certainly changed the shape of geopolitics in the Middle East. But there are many ways the complex plot could play out – and no certainty as to the outcomes.

The most optimistic prognosis sees a new era of trade and prosperity between the Islamic Republic and the kingdom, with Saudi investment into Tehran heralding a trans-Gulf partnership between the two biggest powers in Islam.

The pessimists (or maybe realists) see an artificial construct that papers over the huge historic differences between the two countries, but is likely to fall apart with the first Houthi drone attack on Saudi, or any escalation of hostilities in Lebanon, Syria or Iraq.

In between those two possibilities, there is a host of variables that make prediction exceedingly difficult.

One concerns the new role China will play in the region. Beijing has already reaped the kudos for the ‘peace deal’, although informed reporting suggests the heavy lifting was done in Iraq and Oman in a series of lower-level meetings between Saudi and Iranian officials, before Beijing was called in to provide diplomatic gravitas.

China is the biggest importer of oil from both countries, which gives it a big say in economic relations between them. But Saudi Arabia is probably in the stronger position, tied in with long-term contracts with Chinese government agencies, in contrast with the more ad hoc oil trading arrangements between Tehran and Beijing.

Another complicating factor is the existence of punitive American sanctions on Iran, which has had the unintended consequence of reinforcing China-Iran trade. In 2021 the two countries signed a 25 year strategic partnership.

“China is a friend for hard times,” the Iranian foreign minister said.

That partnership also brought the dubious benefits of the Chinese Belt and Road Initiative to Iran.

As countries in Africa and Asia have found to their cost, ‘debt trap’ diplomacy gives China the whip hand in the economic relationship – Iran has literally nowhere else to go to ease its economic problems.

That could, in theory, all change with the Saudi rapprochement. The kingdom’s finance minister Mohammed Al Jadaan held out the prospect of large-scale investment in Iran after the Saudi-Iran deal was announced, but it is hard to see how Vision 2030 style projects can be undertaken in Iran.

Energy co-operation between Saudi Arabia and Iran should not be ruled out, however. China could do with some of the Saudi’s expertise in energy technology, for example in the development of South Pars gas fields, which has been bedevilled by sanctions-related problems, and in oil-related investment.

Some energy analysts have suggested that Iran might now be able to resume full participation in the Opec quota system from which it is excluded because of US sanctions on its oil industry.

The influence of the US

The other variable is the role of the UAE in the new cordial relationship.

The Emirates never had the problems that Saudi Arabia experienced after it withdrew diplomatic contacts with Iran in 2016. But it has had to deal with the consequences of US sanctions that have hampered its ability to benefit from the historically strong trading relationship with Iran.

With the UAE now seeking to get off the grey list of countries that face heightened regulatory restrictions (imposed by the US and Europe) it will have to tread carefully in any effort to ramp up Iranian trade.

The biggest question mark over the whole issue of Arab-Iran relations remains what attitude the US will take on the new power balance in the Middle East.

There has been some quite hysterical reaction that the deal, and the role of China in clinching it, sounds the death-knell of American influence in the Middle East. But that is not how more astute observers see it.

Author Kim Ghattas, writing in the Financial Times after the deal was announced, said the entente shows that “the kingdom appears to be returning to the more measured pragmatism that once defined Saudi foreign policy”. Saudi Arabia would now take part in “extreme balancing” between east and west, she suggested.

That is surely the way to go for the kingdom. Whether Washington likes it or not, the world of 2023 is multipolar, and Saudi Arabia has the right to choose in its own national self-interest. The buzzword in Riyadh is ‘non-alignment’, not ‘realignment’.

Until that process works its way through, it is surely better, as Sir Winston Churchill observed, to “jaw jaw than to war war”.

Frank Kane is AGBI’s Editor-at-Large