Iran poses an economic challenge to Saudi Arabia

The Middle East remains as mired as ever in sectarian turmoil, with Iran and Saudi Arabia fighting a proxy war in Syria that is escalating into an international security threat. But the reopening of Iran to world markets has lit up the prospect of a rare emerging market bonanza — and the merest of hints that a resurgent Iran may help spark Saudi Arabia into a new phase of economic competition with its regional rival.

Mr Rouhani and his delegation are initialling contracts in Italy worth roughly $17bn — for everything from oil pipelines to railways — and in France for a new fleet of 114 Airbus jetliners. These deals, with the two European countries to which Iran was closest before an embargo crippled its economy, are a portent of what is to come now that most (but not all) sanctions have been lifted. Some regional economists estimate Iran’s unmet investment needs at about $150bn a year for the next five years; a more cautious International Monetary Fund projects a rise of Iranian imports from $75bn this year to $115bn in 2020. What has Saudi Arabia done in response?

It has embarked on a radical reform of the administration of its economy and welfare system. Similar reforms were discussed and discarded as too risky in the past. But some fuel subsidies, a huge drain at a time of low oil prices, are being cut. And Mohammed bin Salman, the deputy crown prince, has raised the idea of a partial flotation of Saudi Aramco, the state oil company and the kingdom’s crown jewel.

That set international calculators whirring with putative valuations, which may have been the real intent: to change the subject away from Iran. Riyadh knows well that when westerners look at Saudi Arabia they see its vast lucre. The economy remains relatively closed to foreign investors. Yet it should not be underestimated.

Though a flabby rentier state based on clientelism, it has in the past created oases of excellence; Saudi Aramco, bought back from its US owners in the 1970s, and Sabic, the petrochemicals group set up at the same time, are both examples. That is a long time ago. But the collapse in oil prices, the challenge of Iran and the need to provide a livelihood for a restive young population particularly prey to the millenarian jihadism of Isis suggest the new Saudi leadership needs to come up with something.

Opportunities they eschew will be taken up by their neighbours. The ports of the United Arab Emirates will be­come the trans-shipment hub for Iran. Gas-rich Qatar can help Iran exploit its vast gas reserves. International banks will probably hold back on Iran through fear of counterparty risk, which opens golden opportunities for banks with local knowledge, from Dubai to Beirut.

Saudi Arabia, furthermore, could do better against Iran in the economic rather than diplomatic or military arena. Even an Iran under sanctions bested the kingdom on the battlefields of the region, getting more bang for its buck than the tens of billions expended by the Saudis yielded. When Riyadh recently broke off diplomatic relations with Tehran, only its client Bahrain and a motley crew from the Horn of Africa, including Somalia and Djibouti, followed.

The idea of the titans of the Gulf moving their rivalry into an economic contest is barely embryonic. Yet at a time when the world’s geopolitical calculus is shifting to include Iran and international scrutiny of the links between Saudi Wahhabism and jihadi extremism is intensifying, the rulers of Riyadh may want to re-evaluate their strengths.

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