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Persian Empire vs Kingdom of Saudi Arabia: Trends to watch

Persian Empire vs Kingdom of Saudi Arabia: Trends to watch

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Structural reform in the Sunni kingdom

For the first time in decades deep structural reform is on the table for Saudi Arabia, due largely to its dependence on a devalued commodity and new and ambitious crown prince keen to prove his mettle.

In 2015 oil suffered a spectacular fall, dropping from over $100 a barrel to $30 perpetuated somewhat by Saudi Arabia’s policy to maintain supply and protect its dominant market share by squeezing out higher cost producers. The Saudi state, which lags just behind it’s Shi’a cousin, Iran in GDP terms, has the largest proven oil reserves in the world but is also one of the least diversified economies in the region with Forbes putting the petroleum sector at 80% of budget revenue and 45% of GDP. The young and ambitious crown prince Muhammad bin Salman, favoured son of the 80 year-old King Salman, is seeking to capitalize on this uncertainty and stamp his power over the House of Saud and domestic economy.

Prince Salman seems to be taking Rahm Emanuel’s advice to “never let a crisis go to waste [as] it's an opportunity to do things you think you could not do before.” He has grabbed headlines with his proposal to IPO what could be the world’s largest company, Aramco, but major reform has been promised before in the kingdom without follow through. Plugging the budget hole created by falling oil revenues through encouraging foreign investment while simultaneously slashing expenditure by as much as 10% is merely high rhetoric until Saudi markets are opened and the populace accepts the new state of affairs.

Can a rentier economy re-write its social contract with a population who have enjoyed subsidies, handouts and free services in exchange for their submission and non-involvement in politics? If you take with one hand, you must give with another. Given Saudi’s influence in the region and on global oil prices, the question on everyone’s mind is what Saudi Arabia will give to secure these reforms. The House of Saud must choose wisely to ensure their rule does not collapse under social pressure and revolution as many other absolutist regimes in the region have.

Awakening the sleeping Persian giant

The unwinding of global sanctions against Iran in January marked a seismic shift in diplomatic relations with the Islamic Republic. However, the lifting of sanctions will be an impetus for Iranian officials to focus internally on stimulating the domestic economy rather than pursuing radical social reform of the type facing Saudi Arabia.

Iranian assets frozen overseas are valued at as much as $100bn and will supposedly be put to work battling the double-digit inflation, low productivity and high unemployment experienced over the past decade. A portion of these funds will also go towards restructuring the banking sector, which struggled in its isolation from the rest of the global financial system. Similarly, the transport and energy sectors are set for growth as European companies line up to grab their share. Iran and Airbus recently signed a $25bn deal for 118 planes while Peugeot-Citroen plan to re-enter what was their second biggest market.

Iran’s holds the largest natural gas and fourth largest oil reserves in the world however sanctions have stifled investment. With future investment now on the cards, as well as the regime’s stated goals of increasing oil production by 50% to 1.5bn barrels a day, we may see further oversupply in the oil markets and another arena for Iran and Saudi to flex their influence and engage in economic tit-for-tat. We will have to wait and see whether Iran follows the agreement reached by Russia, Saudi Arabia and Venezuela to freeze supply at January levels in a bid to add stability to the oil price.

While sanction relief will have far-reaching impacts for Iran, 2016 is likely to be more about economic reform at home and capitalizing on the increased access to foreign firms’ expertise and investment with its diversified economy negating any need for radical reform. However, with elections looming next year, the relatively liberal President Rouhani may have to take action and win over hardline officials and voters.

Sunni & Shi’a tensions – My enemy’s enemy is my friend

Although relations between Saudi and Iran have soured somewhat,  it would be trite to say it is the result of any one factor, or execution. The Islamic Republic of Iran is the preeminent Shi’a state while Saudi Arabia claims the purest of Sunni credentials from its Wahhabist roots, a reality that groups like IS are quick to exploit. Through the use of its surprisingly effective and extensive social media propaganda, IS has been able to showcase its resistance against Shi’a and Iranian backed groups. This directly challenges Saudi’s position as protectors of Sunni Muslims and forces The Kingdom into a tricky situation where it must act or face questions of its religious legitimacy. Saudi will have to play its diplomatic cards right and may have to accept the fact that your enemy’s enemy may sometimes be your friend.

Tension in the region has been growing but 2016 may see it come to a head if trying conditions persist. Low oil prices cause economic and political friction between OPEC member states. Religious extremism and sectarian violence may force each administration into overt acts of aggressive foreign policy to protect their political and religious legitimacy at home and across the region. Toppled states and regimes create power vacuums, bringing uncertainty and yet another arena for the Iran v Saudi proxy war to take root.

How can the West help stablise the region?

Most people in the region will suggest that the West has already ‘helped’ enough. The hard questions must be faced before charging blindly into action. Had we really asked whether Bashar al-Assad would prefer 4 years of civil war and a pyrrhic victory rather than surrender to spending the rest of his life in self-exile, would we have been so quick to support an armed insurgency? If we had interrogated whether there was an administrative government platform strong enough for Iraq to function in the power vacuum left by our ousting of Saddam Hussein, would we have done so?

These are not questions of whether western actions in the Middle East were right or wrong in a moral sense, support should always be given to the weak and oppressed. These are questions relating to what the practical reality will be on the ground given our intervention (or non-intervention). Idealism has its place but Colin Powell was right about the pottery barn, if you break it, you have to be prepared to fix it.

The opinions expressed here by Dearin & Associates contributors are their own, not those of Dearin & Associates.

About Tim Harley

Tim Harley is an investment banking analyst with experience in geopolitical risk and business strategy consulting for the Middle East and North Africa (MENA) region. In his spare time and as a research contributor for Dearin & Associates, he deep-dives into Middle Eastern politics and geo-analysis.

Having lived, studied, worked and travelled through the Middle East, he is fascinated by the collision of history, culture and politics that permeates all aspects of life in the region.

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