Geopolitical realities, energy make Iran-Saudi coop. worthy

After about a decade-old tensions, Iran and Saudi Arabia started rapprochement negotiations in 2021 and held several rounds of negotiations in the Iraqi capital of Baghdad. Back in March this year, they clinched a détente deal after several days of intensive negotiations hosted by China. The agreement obliged the two to restore their diplomatic relations and re-open embassies within two months. 

Several Iranian and Saudi officials have hailed the rapprochement as a source of benefit for not only the two countries but also the entire region.

Leading a senior economic team, Iran’s Economy Minister Ehsan Khandouzi arrived on Thursday in the Saudi city of Jeddah to attend the Islamic Development Bank (IsDB) Group’s Annual Meetings, as the first Iranian minister to visit Saudi Arabia after the signing of the agreement. 

To know more about the Saudi-Iranian rapprochement, we reached out to Mehmet Öğütçü, former Turkish diplomat and chairman of the London Energy Club.

What are the immediate impacts of the Saudi-Iranian rapprochement?

The Iranian-Saudi rapprochement, unexpectedly brokered by China, is indeed a game-changer in the Middle East [West Asia], bringing an end to the decades-old tension and proxy wars, and opening a new chapter in trade, investment and finance between Iran, Saudi Arabia and other Persian Gulf economies. Whether this will be sustainable over the long run or not we have to wait and see because it is not that easy to quickly heal the old wounds and relaunch a relationship poisoned by mutual mistrust. 

The Beijing agreement ushering as it does a new historic era in the Saudi-Iranian relationship will likely contribute to managing or even resolving, some of the conflicts elsewhere in the Middle East [West Asia] such as Yemen, Syria, Lebanon and Iraq. It might even pave the ground for a security and economic dialogue among the Persian Gulf states, Iran and Iraq. 

Some of the smaller Arab states had previously been reticent about expanding their engagement with Tehran if Riyadh did not first mend ties, so in that sense, the deal opens the door to wider opportunities. 

What economic gains do you foresee for Iran?

As Iran is facing not only diplomatic pressure but also its currency and economy are under intense pressure from US sanctions, more importantly, one of Tehran’s principal motives is to step up fresh economic support from its rich Arab neighbors, led by Saudi Arabia. As a member of the Saudi-led OPEC oil cartel, Iran wants to be able to sell more of its crude but is limited by US sanctions. The deal could expand investment and trade ties with Saudi Arabia, the region’s biggest economy, and attract more FDI flows.

The Iranian minister of economic affairs and finance Ehsan Khandouzi said Tehran aims to raise annual trade with Riyadh to $1 billion in the first step of resuming economic ties. Given that Iran and Saudi Arabia are both seriously determined to resume bilateral cooperation, the launch of the joint chamber of commerce must be on the agenda to expand trade from very low levels. Trade and investment delegations must be exchanged, and new finance possibilities must be made available to traders and investors.

At the current juncture, what Tehran needs is an investment, and the Kingdom has recognized this. Saudi Arabia’s Finance Minister Mohammed Al-Jadaan said, “There are a lot of opportunities for Saudi investments in Iran. We don’t see impediments if the terms of any agreement would be respected. When people really stick to the principles of what was agreed, I think that it could happen very quickly”.

Although it is not clear how far the Saudis are willing to go in developing ties with Iran, the government in Tehran is encouraging expectations of a big windfall. The only concrete hope Tehran can have is easing financial and commercial restrictions by the United Arab Emirates, a close ally of Saudi Arabia, for potential Iranian attempts to circumvent US banking sanctions. Washington will be certainly watching the situation, but any Saudi acquiescence in helping Tehran indirectly break sanctions could be a blow to the US pressure policy on Iran.

There are significant disparities between Iran and Saudi Arabia. Let me give a couple of hard facts to compare them: Population 85 million vs 34 million, GDP $352 billion vs $1,1 trillion, GDP per capita $4,151 vs $32,487. Much remains to be done on both sides.

Evidently, de-escalation will reduce the cost of regional security for all parties and free up more potential for trade and cross-border investments and partnerships that the region needs. Crown Prince Mohammed bin Salman Al Saud had in 2021 signaled to Iran’s President Ebrahim Raisi that normalization of ties could entail up to $20 billion in Saudi investment.

Will there be energy investments?

Yes, for the two major oil producers, the energy sector is another potential area for collaboration. Though conventional wisdom holds that the scope for cooperation between two competitors is limited, new geopolitical and energy sector realities could make collaboration worthwhile. 

A primary economic concern of Iran is to find new technology, production methods and partners (as well as financiers) to enhance its oil and gas exploitation in addition to CNPC, Sinopec, Gasprom and Rosneft of China and Russia, which caused so much deterioration in Iran’s hydrocarbon reservoirs over the past two decades.

Beyond direct bilateral cooperation, there is plenty of scope for mutually beneficial collaboration involving third parties. One tangible project would be to finalize a trilateral agreement between Kuwait, Saudi Arabia and Iran on the offshore Dorra/Arash natural gas field, which would be a win-win-win example for the region. One major stumbling block to such collaboration was removed last year when Kuwait and Saudi Arabia agreed to develop the field. Though Iran objected to the arrangement based on its exclusion, it can reasonably be argued that the scope for a trilateral accord is higher today than it was in 2022. 

Notably, there is precedent for how to approach such a shared resource; building not only on the Kuwaiti-Saudi accord but also by looking at how Iran and Oman are developing the Hengam field. There are similar opportunities in Qatar and the United Arab Emirates.

Connecting the respective electricity grids would also have major advantages for Riyadh and Tehran. The bridge to bring about interconnectivity would be Iraq, which relies on Iranian electricity to meet some 10 percent of its demand, and Iranian gas to generate about a third of its supply. As the Iraqi grid is set to be connected to that of the PGCC next year, integrating Iran into the arrangement would be very feasible. 

Such connectivity would introduce opportunities in power trading between the various players, with different peak times for consumption paving the way for meaningful trade in the electricity sector.

It looks as though China is the winner in this new “game-changing” episode, do you concur?

No doubt about it. I believe that this deal augurs a geopolitical shift that will see China assume a larger role in a region where the United States has long been dominant and been losing clout.  The deal has serious political and economic significance for China. Although the US is still by far the biggest foreign military force in the region its attention has increasingly turned toward containing Russia and China. 

Persian Gulf states have expressed concern that the US cannot be trusted to defend them against Iran. While the US remains Saudi Arabia’s top security partner, the Kingdom does not have any intention to side with the US against China or Russia.

A major buyer of oil and gas from both countries, China has ambitions to increase its clout in the region. That poses a challenge to the US, traditionally the biggest foreign power and dealmaker in the Mideast. Iran and Saudi Arabia have benefited tremendously from Beijing’s thirst for hydrocarbons; as the world’s largest importer of oil, China leans heavily on the two major producers to meet its needs. 

Saudi Arabia has long been one of China’s major suppliers, and Iran is fast catching up, thanks to its significant reserves of oil and lack of other importers. 

China might economically and diplomatically sponsor a de-escalation between Iran and Saudi Arabia, but it doesn’t necessarily mean that Beijing will intervene if things do not go the way as planned. 

Indeed, China’s emphasis on building economic ties with the Persian Gulf states has cast it as an impartial arbiter and strong alternative to the United States, whose relationship with the region is exemplified by deep security partnerships. 

More than 30 percent of Iran’s total foreign trade is with China, and the two countries finalized 16 memoranda of understanding on cooperation within the framework of their 25-year, $400 billion strategic agreement. 

Do you think that this deal will shape the security architecture in the region?

For any deal to be viable, it has however to be a win-win for both sides. Each country has its own reasons for wanting to de-escalate tensions now.

Saudi Arabia’s de-escalation with Iran is part of a larger foreign policy focus on supporting its socio-economic development plan, known as “Vision 2030”. The Kingdom is investing billions of dollars to implement the plan, and an escalation with Iran would threaten the project’s funding, deter much-needed foreign investment, and dash Saudi dreams of becoming a regional and global hub, especially for diplomacy, trade, industry, cloud computing and logistics.

Saudi Arabia’s Crown Prince Mohammed bin Salman wants to end the years-long war in Yemen. The war has cost tens of thousands of Yemeni lives and saw Saudi cities, airports and oil facilities.

A permanent ceasefire between the Houthis, Saudi Arabia and other warring parties would free up Saudi Arabia to focus more on the Crown Prince’s many mega-projects inside the Kingdom, which are intended to create millions of new jobs for young Saudis and diversify the economy away from oil.

Riyadh also hopes to de-escalate tensions in the Horn of Africa near Saudi Arabia and to ease potential domestic unrest in the eastern provinces where the Shia population is dominant.

The Saudi-Iranian rapprochement is already giving diplomatic, security and economic dividends, at least in reducing tensions in Yemen. 

An end to open Saudi-Iran animosity has the potential to calm conflicts and power struggles in Syria, Lebanon and Iraq. Already, countries like the United Arab Emirates, Bahrain and Egypt are improving their ties with Iran. But how far the peace-making goes or lasts depends on whether the two regional powers can truly mend ties. 

What are the major hurdles?

Turning the page on the conflict between Saudi Arabia and Iran will not be easy, even if the two countries respect the rules that they agreed on in Beijing. Riyadh will need to manage the complex link between Iran’s expectations for economic dividends from de-escalation with Saudi Arabia and the escalation of US-led sanctions on economic cooperation with Iran. 

It will also need to mitigate potential spill-over from Israel’s shadow war with Iran, Iran’s competing relationship with the United Arab Emirates, and adverse actions from Iran and Iranian-backed proxies across the region. 

There are also hardliners on each side that oppose deeper engagement and rapprochement. Additionally, Israel’s continued strikes against Iranian targets, including in Syria, remain a source of uncertainty.

Mindful of the barriers to engagement with the Iranian market, the initial wave of Saudi investments could take shape in non-sanctioned industries, such as food and pharmaceuticals, followed by other sectors where creative banking and financial solutions would be put in place. 

Riyadh could potentially also seek waivers from Washington to realize strategically significant projects, including investments to address regional environmental challenges such as water scarcity and the effects of climate change.

Because both sides are engaged in economic diversification, there are additionally several opportunities in other sectors. One such sector is the mining industry. Of note, Iran has ambitious investment projects in the sector and Saudi investors could certainly profit from the availability of several mineral products in their diversification drive.

For the time being, it seems that both governments in Riyadh and Teheran are determined to move closer,  but both sides should be cautious that one major incident, instigated deliberately by a power against the Saudi-Iranian rapprochement, might derail the entire process.

Interview by Zahra Mirzafarjouyan

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