Sun. Oct 13th, 2019

How will economic competition shape the regional order in the Middle East?

The Middle East today is in conflict.

On one side, stands Saudi Arabia, an absolute monarchy whose foreign policy is based on maintaining a regional order with Saudi Arabia as the sole hegemon, as the legitimate leader of the muslim world.

On the other, stands the Islamic Republic of Iran. A republic born from revolution, and whose foreign policy is based on asserting itself as the regional hegemon and overthrowing the present regional order.

Separated only by the Strait of Hormuz, their differing ideologies, interests, and position in the international arena makes them much further from each other politically. While much of international attention has been focused primarily on military situations, the competition between these states also manifests itself in economic competition. In particular, trade with China, India, and Pakistan between Iran and Saudi Arabia.

Setting The Stage For Conflict

Traditionally, oil has been a key part of both Iran and Saudi Arabia’s economy. As such, the Strait of Hormuz accounts for 20 per cent of the world’s oil supply. However, Iran has constantly had trouble in dealing selling its oil, due to the sanctions placed on it. In the light of the Iran nuclear deal, Iran has once again been poised to expand its economy. In fact, Europe buys more than one billion barrels of oil from Iran daily. Iran also exports oil to India and China.

This has, as expected, been disastrous news for the Saudi economy. With Iranian oil now being available for export, the oil price dropped from $65 per barrel in June 2015, just before the deal was signed, to $31 per barrel in Jan 2016. Since the Saudi economy relied heavily on oil exports, the drop in oil prices rapidly caused panic. As such, Saudi Arabia has constantly looked towards new and better ways to expand their economy.

Iranian anti-riot policemen scuffle with Iranian protesters during a demonstration near the Saudi Arabian embassy in Teheran | © The Straits Times

Looking East

Given the universal need for oil, it comes as no surprise that both Iran and Saudi Arabia have planned to sell their oil to the countries of Asia, in particular, China, India, and Pakistan. Saudi Arabia. India has backed Iran’s Chabahar port, situated close to Pakistan’s Gwadar port. Interestingly, Gwadar has received Chinese attention as part of it’s Belt and Road Initiative, and a Saudi delegation was recently sent to Gwadar after Imran Khan’s visit to Riyadh, but Chabahar has not received the same attention. However, all five countries are part of China’s Belt and Road Initiative in one way or another.

Into The Future

It is possible that in the short term, Iran will most likely remain on the back foot. In May 2018, Donald trump announced the US withdrawal from the Iran nuclear deal, and re-imposed sanctions on Iran. US sanctions include fines for trading with Iran, and given US global influence, it seems difficult for many countries to ignore this sudden reversal of US policy. The US market is simply too large for many companies to ignore. Several European companies have already complied with the sanctions and withdrawn investment from Iran. As such, Iran might not be expected to grow while it remains locked out of much of the world’s market.

However, almost immediately, Europe began working against the sanctions, imposing a blocking statute on European companies that complied with the Washington’s economic policy. China announced that it would not stop buying Iranian oil, and invoked a clause in long term supply agreements with Iran to switch from European to Iranian tankers since Maersk declared it would not transport Iranian oil. India, however, adopted a more nuanced approach. While declaring that it respected United Nations sanctions and not American ones, India has also begun reducing Iranian oil imports. Despite appearing to defer to Washington, Indian officials have also stated as a matter of fact that cutting Iranian oil completely out of India is impossible. As such, Iran remains able to export much of its oil, and while the price of oil has risen since sanctions were re-imposed, the increase has not been as marked as the price drop after the Iran nuclear deal was signed.

Increasingly, Iran’s economic survival has depended on China. China not only buys Iranian oil, but given Europe’s political duel with the US, China has expressed interest in buying up European assets and investment in Iran. After Total, a French oil company withdrew from a 4.8 billion dollar investment in Iran, China took over Total’s share in the project. Chinese companies have also continued to sign economic partnerships with Iranian companies. It is therefore not out of the question that China will continue to fund Iran’s economy, and be a major source of Iranian growth in the near future.

Iran’s economy is also considerably more diverse than Saudi Arabia’s. 48 per cent of its export revenue is from oil. The Saudi economy, on the other hand, is heavily dependent on oil, which comprise a staggering 90 per cent of its exports. With the influx of capital and investment into Iran, in multiple industries, it is reasonable to believe that Iran can expand its economy much more than Saudi Arabia will. In fact, when Saudi Arabia realised it needed to raise capital when the price of oil dropped in 2015, its solution was not to look for ways to diversify its economy, but to attempt to sell shares of its national oil and natural gas company Aramco.

Hezbollah supporter holding the Iran flag, May 2014. | © Gabriele Pedrini / shutterstock.co

It is also likely that in the long term, Iran will emerge as the dominant power in the region, especially if Saudi Arabia refuses to give up its dependence on oil exports. Given Iran’s re-introduction into the international economy, and the fierce opposition to Trump’s attempt to again isolate Iran, Iranian exports have the potential to drive Iran into a position of regional economic power more prominent than Saudi Arabia. Iran, apparently, is too important for Europe, China, or India to give up as a trading partner. Even the Saudi-backed port of Gwadar in Pakistan will not exclusively be used to transport Saudi oil. In fact, China plans to use it for the transport of natural gas imports from Iran. Saudi Arabia pledged investment in Gwadar knowing about the Chabahar port, with the intent of reducing the attractiveness of trade with Iran, yet the plans for its use will favour Iran. In other words, Iran has managed to turn the Saudi investment, meant as a way to limit Iranian influence and growth, into a way to further its own growth.

All this, however, is subject to a very important qualification. Saudi Arabia is already a major exporter of oil, and its oil reserves are greater than Iran’s. However, Saudi Arabia seems on the path to being afflicted by the resource curse. This is because of Saudi Arabia’s ability to sustain their economy through oil exports, thus there is little incentive to diversify their economy. But Saudi oil reserves are being depleted at a faster rate than new reserves are being found. As a result, Saudi oil reserves are not expected to be able to finance the country in the long run. However, the Saudi government has attempted to make moves towards a post-oil future for Saudi Arabia, beginning with its attempt to implement the Saudi Vision 2030 project, focusing on construction. Given the almost complete lack of development of any other industry in Saudi Arabia, the implementation of this project could potentially increase Saudi economic influence regionally, and slow the spread of Iranian influence. The creation of a regional order in which Iran is more dominant than Saudi Arabia, therefore, might be dependent on Saudi Arabia’s failure to diversify its economy.

Back to the present

The regional conflict is heating up, and Iran seems to be the centre of it. Already, Trump to have weathered the first challenges thrown its way. Both Iran and Saudi Arabia are rising, and have the potential to rise much more. The difference is, Iran has started to realise its potential, while Saudi Arabia is only beginning to see its own. Iran will eventually come to replace Saudi Arabia as the regional hegemon unless Saudi Arabia successfully undertakes measures to maintain its dominance economically. The question is, will it?

Clement Ooi is a freshman at SIM-UOL majoring in International Relations.

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