Saudi-Iran detente offers dubious economic benefits, say analysts

Al-Monitor – Saudi Investment Minister Khalid al-Fatih claims he is “optimistic” about the economic potential of the detente announced March 10 between Saudi Arabia and Iran, brokered by China.

In an interview with CNBC earlier this week, the minister said he was “very hopeful” that Saudi Arabia’s normalization with Iran will go beyond the two countries and address the concerns the international community has expressed to Tehran.

Fatih said that Saudi enterprises could also help the Iranian market “catch up” from the periods of closure and sanctions. He said “it’s to our advantage on all fronts” to see Iran and Saudi Arabia — longtime foes in the region perennially locked in proxy conflicts — agree to normalize ties. Iran wants to reach $1 billion in annual bilateral trade with Saudi Arabia in the short term and $2 billion in the medium term, an ambitious goal given US sanctions.

‘Dangling the carrot’

Experts that spoke to Al-Monitor say that Fatih’s tone was more optimistic than the economic reality of the detente, with the sanctions and high tensions with Washington as the elephant in the room. With the rapprochement, the two powers want to try to take advantage of waning American influence in the region and strengthen relations with Beijing.

Sanam Vakil, director of Chatham House’s Middle East and North Africa program, told Al-Monitor that the move is more about public relations than results. “Riyadh is dangling the carrot of investing in Iran knowing full well that sanctions will preclude any serious efforts,” he said. “Because Riyadh assumes that Iran will break the terms of the deal, it is looking to demonstrate good intentions to China and beyond while it also hopes incentives can over time build a more solid foundation.”

Saudi Foreign Minister Faisal bin Farhan Al Saud visited Iran Saturday to open the kingdom’s embassy, according to Iranian state media outlets.

But Jason Brodsky, a nonresident scholar at the Middle East Institute, told Al-Monitor, “The Saudis are under no illusions that the Islamic Republic’s malign behavior is the source of instability in the region.”

“The minister speaks with soaring rhetoric and optimism, but he does mention Iran having to meaningfully address its malign conduct,” he added. “And concessions, especially on missiles, drones and the [Islamic Revolutionary Guard Corps], is just not on the menu with the current Iranian leadership. US sanctions remain in place and the kingdom is well aware of that dynamic.”

Ensuring economic stability

Riyadh is focused on implementing Vision 2030 and is trying to de-escalate tensions as much as possible. A threat of a cross-border attack on the kingdom from Iran or one of its proxies in Yemen or Lebanon would only derail the multi-million-dollar projects that are helping Saudi Arabia diversify its economy away from oil. The business incentives will be significant if Saudi Arabia is able to demonstrate to the international community it is a secure destination for long-term foreign direct investment.

“That comes with these overtures to Tehran. But that will be a tall order given the Islamic Republic’s revolutionary mindset,” Brodsky added.

Henry Rome, a senior fellow at the Washington Institute, said that in the near term, US sanctions are a significant barrier to growth, as is Iran’s poor business environment that has been stymied by decades of sanctions.

“That said, over time, Saudi Arabia and other Persian Gulf states may be more willing to test US limits, as the UAE has done with Iranian oil exports, especially if it seems to buy calm from Tehran,” Rome told Al-Monitor.

Kimberly Donovan, director of the economic statecraft initiative at Atlantic Council, raised the question of what the pact might mean for the the Middle East’s efforts against money laundering and to counter the financing of terrorism, which she termed AML/CFT.

“Over the past 20 years, the United States invested heavily in Saudi Arabia to help them build their AML/CFT capacity and implement joint US-Saudi designations to counter Iranian-backed terrorist groups like Lebanese Hezbollah,” she told Al-Monitor. “Thawing relations between Iran and Saudi Arabia bring Saudi Arabia’s intentions regarding AML/CFT into question.”

She noted that Iran remains on the Financial Action Task Force’s blacklist.  

“So, beyond US sanctions against Iran, which come with secondary sanctions, is Saudi Arabia willing to risk its reputation and security of its financial sector in order to allow Iran access to its financial system to facilitate transactions between the countries?”

The agreement will likely increase opportunities for Chinese economic investment in the region, which could irk Washington.

Diversifying relations away from Washington

Ali Alavi, a lecturer in Middle Eastern and Iranian Studies at SOAS, University of London, believes that the normalization agreement — which was negotiated over two years — could ensure the free flow of energy in the Persian Gulf and bring other business opportunities.

“Saudi Arabia is diversifying its connections and defining its interests beyond its relations with the White House,” Alavi said, adding that Iran is seeking to broaden its relations beyond Moscow’s window.

“The region will benefit from such détente, particularly Iraq and Syria that are recovering from war and instability,” Alavi said. “If the détente is successful, the Middle East could reach its potential to be the hub for business and development in post-Ukraine war.”

He said that as the United States is heading toward another election, it is likely the Biden administration will remain hesitant to significantly reduce the sanctions on Iran despite the talks mediated by Oman for a mini deal. Those sanctions were reintroduced by former President Donald Trump, who will fun for a second term in the White House in 2024.

The sanctions will significantly impact any trade between Riyadh and Tehran. “However, the political and psychological impacts of rapprochement mitigates the American sanctions and the private sectors on both sides can play a role in lessening the colors of sanctions,” Alavi said.