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Rising Tensions Between Iran And Saudi Arabia Will Have Economic Consequences

Iran_Saudi_Arabia_Locator.svgThe year began with an escalation in tensions between Iran and the kingdom of Saudi Arabia. They are the two most powerful countries in the Middle East and form the foundation of the Sunni-Shia conflict in its present form. This schism has plagued the region since the 600s. The existing rift will not only prevent a wider peace in the area, it could easily expand into a struggle that will plunge the entire vicinity into an internecine war, that will devastate most of the Middle East.

The two branches of Islam have co-existed for many centuries. They share many central beliefs and practices. They differences between the Shiites and Sunnis lie mostly in the theology and religious organization of the two sects. The divergences can be mostly seen in the exercise of doctrine, law, and various cultural rituals.

Shia Islam

Shia Islam

The immediate cause of the latest crisis was the execution of 47 convicts on charges of terrorism by the government of Saudi Arabia. That it included the prominent Shia religious leader Nimr al-Nimr was what caused the outrage in Iran. That same day, the Saudis announced a unilateral withdrawal from the ceasefire agreement in neighboring Yemen.

The attack and burning of the Saudi Arabian embassy in the Iranian capital of Tehran and the Saudi consulate in Mashhad, resulted in a severing of diplomatic relations between the two countries. The royal government felt it had little choice in breaking ties with Iran, following the mob assault on their outpost. It has resulted in the worst crisis between these regional rivals in decades.

Embassy of Saudi Arabia in Tehran

Embassy of Saudi Arabia in Tehran

Although Iranian President Hassan Rouhani officially criticized the attack on the embassy, it is the responsibility of the host government to provide security to foreign diplomats.

The response of the President, does indicate how complicated politics inside Iran have become. No one can seriously believe that a crowd of protesters was allowed these kinds of actions, inside a strictly regulated country like Iran, without the acquiescence of the government.

Although a direct war between Iran and Saudi Arabia is not imminent at this time, there has occurred a diplomatic chain reaction. The Arab countries of the Middle East have quickly aligned themselves based on their traditional loyalties.

A number of Muslim countries followed Saudi Arabia’s lead in cutting ties with Iran. These included Bahrain, Djibouti and Sudan, followed by the announcement that Kuwait, Qatar and the United Arab Emirates (UAE) were recalling their ambassadors. Bahrain is in a precarious situation due to the fact that the population is mostly Shia, but their monarchy is Sunni.

Saudi Arabian pilgrims in Nishapur, Iran

Saudi Arabian pilgrims in Nishapur, Iran

Sunnis comprise 85% to 90% of all Muslims. Most Shiites are concentrated in the Middle East and form the dominate population in just a few countries including Bahrain, Iran , Iraq and Lebanon.

The UAE is a major trading partner of Iran, so there will be immediate economic consequences. Bahrain is the present home of the United States Naval 5th Fleet. It places American policy makers truing to stay neutral in the growing dispute, in an awkward position.

The United States along with a number of European countries, have recently tried to improve relations with Iran. The international nuclear agreement is evidence of this. Longstanding international sanctions were to be removed, in exchange for an Iranian commitment to forestall their nuclear development.

Unfortunately the attempted improving relations with Iran by the major powers of the world, has been viewed by Saudi Arabia and its Arab allies as an existential threat.

Reinforcing a long time relationship, Bashar Al Assad of Syria with Russian President Dmitry Medvedev

Reinforcing a long time relationship, Bashar Al Assad of Syria with former Russian President Dmitry Medvedev

Russia which returned to the region in a major way last year in defense of their ally Syria, has even offered to mediate between Iran and Saudi Arabia. Up to this point the other two regional powers Egypt and Turkey, have not joined in the downgrading of diplomatic ties with Iran.

China on the other hand, is mostly concerned in preserving access to oil and the growing trade relationship with the region. In the last 10 years, Chinese trade with the region has grown by 600% reaching $230 billion USD (United States dollar).

One of the first casualties of the rising tensions between Iran and Saudi Arabia, will be the ability to broker a peace agreement in Syria. This will be regardless of the rhetoric on both sides to the contrary. The other victim will be any possible accord, in relation to the ongoing civil war in Yemen. The country on the border with Saudi Arabia, will continue to serve as a proxy war. The Saudis and the Iranians back rival factions in both Syria and Yemen.

Soldiers in Yemen

Soldiers in Yemen

The Islamic State also known as ISIS, will benefit from the rising antagonism between the two leading powers. It certainly complicates the international effort against this growing threat to regional stability. ISIS occupies large swaths of territory in both Iraq and Syria.

The Iranian-Saudi rift has led to the bombing of three mosques in the mixed Sunni-Shite province in Iraq. Iraqis Shiites have already condemned the execution of Nimr and thousands were on the streets, demanding the closure of the newly reopened embassy of Saudi Arabia. The present situation makes a reintegration of the state of Iraq already difficult, now next to impossible.

The Gulf states have developed a more assertive foreign policy over the past few years for two reasons. One is the growing threat of Iranian interference in regional conflicts through the use of proxies. This can be seen in Iraq, Lebanon, Palestine, Syria, and Yemen. The other is the lack of confidence they share in the present conduct of American foreign policy. The Obama Administrations tilt towards Iran and the Shia is unmistakable, in the minds of Arab leadership.

Cartoon of Hezbollah, Iran, Hamas, with Iran as puppetmaster.

Cartoon of Hezbollah, Iran, Hamas, with Iran as puppet master.

Many officials in the Arab world are far more concerned about the Iranian support of the terrorist groups Hamas, Hezbollah and the Shia Houthi rebels in Yemen. The nuclear threat although troubling in their opinion, is not immediate.

Other leaders are already taking steps to acquire more advanced weaponry including covertly, nuclear capability in response to the provocations of Iran. They as a whole express little confidence in the ability of President Obama, to contain the growing military might of Iran. They are not convinced that the United States will ultimately stop the Iranian missile and nuclear programs.

Saudi Arabia also has a problem with its own Shiite population. They account for near 10% of the population of the kingdom’s 28 million inhabitants. More troubling, they are concentrated in the industrial and oil producing regions of the country. This region is largely responsible for the $300 billion USD revenues generated last year by the kingdom. Clashes between demonstrators and police are rising and a number of protesters have been recently killed.

Crude oil prices originally increased as tensions mounted, but have since declined. The reason being that investors determined that Saudi Arabia will keep production levels high, as a way to undercut Iranian output. To stay profitable, Iran needs prices in crude oil to be more than double the present level.

The Saudi Arabian government for now, seems more than willing to take the economic hit in keeping the international price of oil low to achieve geopolitical objectives.

King Salman bin Abdulaziz Al Saud inherited power in 2015.

King Salman bin Abdulaziz Al Saud inherited power in 2015.

The economic impact of lower oil prices is already taking a toll. In 2015, Saudi Arabia ran a fiscal deficit of $97.9 billion USD. The national budget for 2016 is due to contract by as much $86 billion USD. Lower government spending will likely trigger more unrest in the kingdom.

Spending an ever greater share of foreign exchange reserves (still in excess of $500 billion USD) cannot proceed indefinitely. The domestic economy will have difficulty in maintaining the projected 2.6% growth in 2016 after 3% in 2015.

However, if the escalating dispute leads to an attack on the Saudi oil fields or any aspect of their energy production, global prices for oil would be impacted enormously. Crude futures would quickly recover all the financial losses from 2014 and 2015.

It would speedily bring slowing growth in many regions of the world, to a state of contraction. A recession would likely result in most of the economically developed parts of the globe.

The Strait of Hormuz (red arrow) connects the Arabian Sea and Persian Gulf.

The Strait of Hormuz (red arrow) connects the Arabian Sea and Persian Gulf.

This would include any Iranian attempts to interfere with the flow of oil and other traffic in the Persian Gulf. It is especially poignant in the narrow Straits of Hormuz, which Iran could easily disrupt. The international insurance rates for shipping, have already increased and are due to move higher. These added costs will eventually need to be passed onto the wider economy.

Gold and silver prices are increasing daily, partly as a result of the growing chaos in the Middle East. It is only being exacerbated by the deterioration of Iranian and Saudi diplomatic relations.

Economic activity in the region at large will suffer, with any further escalation in tensions between Iran and Saudi Arabia. Foreign investors have been withdrawing from the region for years. This process will only accelerate, as the effects of war and economic dislocation will now spread to the Gulf States. The recent volatility in world markets will only increase as tensions rise.

Regional investors have already become far more cautious with investments in infrastructure and economic development. This is partly due to the plunging prices for crude, but also a growing concern over security matters. More entrepreneurs from the area may well hedge their bets further, by relocating an ever greater share of their assets far away from the Middle East.

1 Comment

  1. After I read this it made me understand things that were mixed up in my mind but thankfully I my mind think the correct way. There is still one thing that is buzzing in my mind why did this start in the first place. I really think about this topic because it hearts many people even the ones that just read it.

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