Saudi Arabia, Iran, and the Middle East

(Originally published in January 2017, as part of LSE’s Political Risk and Investment Society Spotlight Blog)

Saudi Arabia and Iran are the two most pivotal powers in the Middle East; they are the bridge between regional and global politics. Both states have used and contributed to regional strife in an attempt to build its own power and weaken the other’s. At the end of 2016, Iran has the clear upper hand. It will be moved to press its advantage while the Saudis look desperately for their own win. This will lead to both states increasing rhetorical and proxy volatility, but will be unlikely to lead to direct confrontation.

The nuclear deal with Iran opens its freedom of action. After a decade of sanctions and international isolation, Iran can once again become a fully functioning member of the international community. The country will see an economic boom: international trade and investment should flow into the country, it will increase its oil production, and over $100 billion in frozen assets will be unfrozen. Iran’s already diversified economy (relative to much of the Middle East) is well positioned to benefit from the relaxing of sanctions[1]. Whether Tehran uses this newfound wealth to purchase arms or invest in its economy, Iran will be in a much stronger position than before the deal[2]. The US, however, retains the power to replace these sanctions if it considers Iran in breach of the agreement. Yet, even if the US does so, its partners may not follow. Even before the US approved the deal, EU politicians and business leaders were moving to reopen ties with the Iranian economy, and are unlikely to sever them again if the US does[3].

Iran has also been courting Russian cooperation. The two countries cooperated extensively in Syria supporting the Assad regime, both critique American actions in the Middle East, and both share the goal of a more multipolar world[4]. While the alignment is shaky at best, the regimes in Moscow and Tehran have proven themselves able pragmatists. With Iran, Russia gets a far more stable and able partner in the region than its previous best, Syria. With Russia, Iran gets a partner with global reach capable and willing to resist the United States[5]. While this alignment may not last, we should expect it to develop in importance over the next year.

In nearly direct contrast to the Iranian victories on sanctions, cooperation with Russia, and the Assad regime’s now nearly assured victory in Syria, Saudi Arabia has suffered a series of mirrored setbacks. First, the recent OPEC deal required the Kingdom to make large cuts in its oil production while allowing Iran to increase production[6].  Riyadh’s attempts to diversify the economy in the face of decreasing oil revenue is by no means guaranteed to work and confronts stiff opposition from both government agencies and social groups that have relied on state largess. Second, Assad’s victory in Syria means that the Saudis spent untold sums on funding the rebels[7]. Third, the Saudi-American alliance is in uncertain territory. President Obama openly questioned the Saudi’s value to the US, and the Congress passed, over a presidential veto, a law allowing citizens to sue the Saudi government for the 9/11 terror attacks[8]. For their part, the Saudis view the US as an uncertain ally at best, and see Washington as openly courting Tehran at worst. With these setbacks, Saudi Arabia desperately needs a win.

China may be that win. While the Saudi-Chinese relationship is based on energy, both are looking for better political ties. Leaders of both countries have made symbolically important visits, and Chinese arms sales to Riyadh now top $700 billion, more than half of US arms sales to the country[9]. Further, the Chinese are not critical of the Kingdom’s government style, a recurring sticking point in the US-Saudi relationship. China’s commitment to strengthening ties to Saudi Arabia will provide Riyadh room to maneuver as it reevaluates its relationship with the United States[10].

With Iran’s position improving and Saudi Arabia’s deteriorating, we should expect both to make important moves in the next year: Iran to press its advantage and Saudi Arabia to shore up its advantages. This will be most evident in continued proxy wars. While the Syrian war is likely to be a victory for Tehran, it was not a total lesson in defeat for Riyadh. It took five years and direct Russian intervention for the Assad regime to break the stalemate. The Kingdom is trying its luck with a mix of proxy and direct war in Yemen. Iran is funding its own proxies, but Yemen is less important to both Iran and the West, so international intervention should not be as forthcoming as it was in Syria, giving the Saudis a freer hand. We should look for continued use of proxy war in Syria, Yemen, and Iraq, which will further destabilize those areas.

Apart from the purely regional, we should also expect more great power competition in the Middle East in part due to the Iran-Saudi split. While neither China nor Russia are willing to risk their ties over an Arab-Persian conflict, both can see the usefulness of having a strong client in the region. Moreover, with an uncertain US policy in the region over the next few years, a security gap will emerge which Russia and China will be happy to fill, at least in part. We should expect increased Russian and Chinese activism in the region, with Russia acting in coordination with Iran and and China exerting influence through Saudi Arabia.

[1] http://www.cnbc.com/2016/05/19/how-oil-sanctions-may-have-helped-irans-economy.html

[2] http://www.bbc.co.uk/news/world-middle-east-35342439

[3] https://www.theguardian.com/world/2015/aug/05/nuclear-deal-with-iran-europeans-scramble-for-persia

[4] http://www.ecfr.eu/publications/summary/iran_and_russia_middle_east_power_couple_7113

[5] http://www.aei.org/publication/iran-russia-relations/

[6] https://www.bloomberg.com/news/articles/2016-09-29/the-biggest-winners-and-losers-from-opec-s-oil-deal

[7]http://www.nytimes.com/2016/01/24/world/middleeast/us-relies-heavily-on-saudi-money-to-support-syrian-rebels.html

[8] https://www.foreignaffairs.com/articles/united-states/2016-06-13/future-us-saudi-relations

[9] http://thediplomat.com/2016/09/china-and-saudi-arabia-a-new-alliance/

[10] http://nationalinterest.org/feature/saudi-arabias-new-best-friend-china-13761

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