• Login

Economic Stimulus

Understanding Iran's motivation for restoring ties with Saudi Arabia

21 March 2023

Despite holding five rounds of public talks leading up to their March 10, 2023 announcement of an agreement to re-establish diplomatic relations, Saudi Arabia and Iran surprised many by the timing and, most notably, the deal's broker.


The restoration of relations between Riyadh and Tehran was unveiled without notice of a sixth round of talks, and the official agreement was brokered by China and signed in Beijing following unannounced talks from March 6 to 10, 2023. Over the past two years, China had been instrumental in the negotiations and successfully restored relations between the two countries with mediation from Iraq and occasionally Oman. According to the tripartite statement, the deal was signed as a response to Chinese President Xi Jinping's initiative to foster amicable relations between Saudi Arabia and Iran.


This Saudi-Iranian agreement raises questions regarding Iran's motivations and the benefits it reaped from hastily responding to China's mediation efforts. Despite reservations expressed by both sides during several rounds of negotiation held since April 2021, which brought together Saudi and Iranian security officials and were hosted by Iraq to align the views of the two sides, they were ultimately able to restore their relations.


Content of the Agreement

The tripartite statement outlining the agreement between Saudi Arabia and Iran includes several key points that represent the first step towards restoring diplomatic relations. At the diplomatic level, the two countries have agreed to resume relations and reopen their embassies and missions within a period not exceeding two months from the signing of the agreement. They have also affirmed their commitment to respecting the sovereignty of states and non-interference in internal affairs of states. Furthermore, the ministers of foreign affairs of both countries will meet to implement the agreement, arrange for the return of their ambassadors, and discuss ways of improving bilateral relations.


Given that security and economic aspects are crucial for enhancing their political relations, Riyadh and Tehran have also agreed to implement the Security Cooperation Agreement, signed in 2001, and the General Agreement for Cooperation in the Fields of Economy, Trade, Investment, Technology, Science, Culture, Sports, and Youth, signed in 1998.


Aside from identifying areas of cooperation, it was necessary to reaffirm the importance of general principles that could ensure the maintenance and reinforcement of their relations, thus contributing to the success of the agreement. In the tripartite statement, the parties have affirmed their respect for the sovereignty of states and non-interference in internal affairs of states, as well as their commitment to exerting all efforts towards enhancing regional and international peace and security.


Tehran’s Motivations


Iran's recent agreement with Saudi Arabia, brokered by China, can be attributed to several drivers and dynamics that ultimately brought the two countries' views together. The most significant of these factors are:


1.    Capitalizing on Saudi Arabia's desire for a new regional role, separate from its close ties with the United States:

The Kingdom of Saudi Arabia has been striving to diversify its relations with world powers, not just with the United States. The recent agreement brokered by China is compelling evidence of this, despite Washington's attempts to downplay Beijing's role in the deal. The White House's National Security Council Strategic Communications Coordinator, John Kirby, noted that Saudi Arabia had kept the United States informed of its discussions with Iran regarding the restoration of diplomatic relations.


Tehran's recognized of an opportunity to strike a deal with Riyadh to settle some of the Middle Eastern conflicts and de-escalate regional crises, creating a favorable environment for Saudi Vision 2030. This ambitious strategic plan, launched by Crown Prince Mohammed bin Salman, aims to reduce Saudi Arabia's dependence on oil and attract foreign investments to the kingdom. Achieving this plan requires regional stability and an end to the sources of instability.


 2. Iran’s attempts to break its isolation and relieve international pressure:

During recent times, Tehran has experienced increasing international pressure due to allegations of its involvement in Russia's war against Ukraine, human rights violations committed by its security forces while attempting to suppress months-long protests, and its failure to settle the issue of its nuclear deal with Western powers. These circumstances have prompted Iran to seek an achievement that would be comparable to restoring relations with Saudi Arabia, thereby enabling the Iranian regime to promote itself both domestically and abroad.


However, the agreement to restore relations with Saudi Arabia is unlikely to directly impact public stability or put an end to the ongoing popular protests, nor will it affect the course of talks between Iran and the West concerning the nuclear deal. Nevertheless, the Iranian regime's effort to resolve its significant issues with regional neighbors will create the impression that it can still make achievements despite facing internal and external pressures.


Moreover, the deal with Saudi Arabia will allow the Iranian government to claim it as one of its achievements, which will appease public opinion that is increasingly disgruntled with Iran's regional role and its effect on the country's internal affairs, particularly the substantial resources used to fund Iran's activities in the region.


3.    Iran acknowledged the magnitude of the predicament involving itself and its allies:

Especially given the increasingly severe economic sanctions imposed on Iran, which significantly impact the country's domestic landscape and limit its ability to ensure consistent support from allies and loyal networks, the Iranian regime has recognized the scale of the predicament facing itself and its allies. Consequently, it has been forced to seek alternative sources of power, specifically through cultivating good neighbourly relations, instead of relying solely on its allies as a source of power in the region. This is particularly relevant given the unfavourable conditions affecting Tehran's allies in the region.

Iraq is experiencing economic deterioration and a political vacuum, while in Syria, there are ongoing regional and international efforts, primarily by Israel and the United States, to reduce Iran's influence and undermine its movements. This is occurring as Russia becomes increasingly disinterested in the Syrian front, given its preoccupation with the ongoing war in Ukraine. In Lebanon, Hezbollah, Iran's most significant ally, is compelled to seek alternatives to Iranian funding due to a worsening financial crisis. In Yemen, the Houthis are facing mounting internal pressure, including in Sanaa, where the humanitarian and living conditions are deteriorating due to ongoing violations by the rebel militia.


Likely Gains


Considering the Saudi-Iranian agreement's potential to serve the interests of all involved parties, including China as a mediator, it is important to assess the potential benefits for Iran, which are as follows:


1.    Strengthening strategic ties with China:

It is evident that Iran, by relinquishing its traditional intransigence, has contributed to strengthening Beijing's growing influence in the Middle East and its efforts to establish itself as a successful diplomatic power in the region. This is particularly significant given the history of tensions between Saudi Arabia and Iran, as the resumption of relations represents a major breakthrough following their severance in 2016. As a result, the landmark agreement serves as a successful Chinese initiative and the beginning of its diplomatic activities in the region. In light of the benefits derived from the agreement, Beijing is likely to further strengthen its relations with both Riyadh and Tehran, particularly at a time when Iran requires stronger economic ties with its allies to counter Western pressures.


2.    Establishing a secure trade zone for China's Belt and Road Initiative, upon which Iran relies:

It can be argued that creating a secure and stable regional environment is the most critical prerequisite for the success of the Belt and Road Initiative. While the agreement benefits all three parties involved - Saudi Arabia, Iran, and China - Iran stands to gain the most. This is due to its pressing need to evade the US and European sanctions on its oil industry and trade. Therefore, the Belt and Road Initiative presents an opportunity for Iran to engage in stronger trade relations with East Asian and African countries.

Furthermore, the Saudi-Iranian agreement provides Iran with the opportunity to promote its Hormuz Peace Endeavor, or HOPE. The initiative was launched by former Iranian President Hassan Rouhani in his speech to the United Nations General Assembly on December 25, 2019, as a preliminary step towards collaborative efforts aimed at ensuring energy security, freedom of shipping, and the unhindered flow of oil through the Strait of Hormuz.


3.    Improved Coordination on Energy Matters:

The agreement will result in better coordination, particularly concerning Saudi Arabia's and Iran's influence as major producers in the oil industry and their membership in the Organization of the Petroleum Exporting Countries (OPEC), which is responsible for setting and coordinating oil policies to ensure stability in the oil market. Despite the deep political divisions that have arisen between the two countries in recent years, they have continued to coordinate on energy matters within OPEC. Therefore, the restoration of ties with Saudi Arabia provides Iran with an opportunity to enhance coordination within OPEC, especially if the new nuclear negotiations with the United States and other Western powers succeed, paving the way for a permanent or even temporary nuclear deal that would result in the lifting of economic sanctions on Iran's oil trade. Consequently, this would enable Tehran to regain its full quota within OPEC.


4.    Economic Gains within Iran:

Although the new agreement with Saudi Arabia is unlikely to affect Iran's internal situation, there has been an improvement in the performance of the Iranian currency on the domestic market. The Iranian rial has regained some of the losses it suffered in recent months due to protests, the economic recession, and European sanctions. Immediately after the announcement of the agreement with Saudi Arabia, the currency rose by more than 6%. According to the foreign exchange website Bonbast.com, the rial traded at 447,000 against the dollar on the unofficial free market on Saturday, March 11, compared to 477,000 the previous day.


In conclusion, it can be stated that the extent of gains that Iran would make from the agreement with Saudi Arabia depends on the level of consensus between the two nations, as well as their ability to resolve outstanding issues, effectively implement their agreement, and build on it to enhance their bilateral relations in the future.