Iran and Saudi Arabia's Newest Battlefield: The Economy

Why you should care

Because it’s a whole new world of opportunity.

Basim Al-Ahmadi is Middle East Consultant at SET Advisory and cofounder of Global Risk Insights.

Saudi-Iranian tensions tend to grab headlines — from being on opposite sides of conflicts throughout the Middle East to their severing of diplomatic ties. But most media outlets have overlooked one major aspect in their relations: economics. Saudi Arabia and Iran are both at economic crossroads, where they recognize the need to steer a new economic course to avoid struggling through the 21st century global economy.

Tehran recognized that it had to engage the world or risk being overwhelmed by sanctions. So President Rouhani led the efforts to sign a nuclear deal and open the Islamic Republic up to foreign trade and commerce. Meanwhile, the Kingdom of Saudi Arabia was shaken by low oil prices, and Deputy Crown Prince Mohammed bin Salman (King Salman’s son), determined to end Saudi reliance on oil, laid out a road map for diversifying and modernizing the economy for future generations.

This momentum for economic change is too strong for any domestic movement to completely overturn it.

 

The question is: Which country will successfully reform its economy? Whoever triumphs will take the lead in wielding regional influence.

Iran

Rouhani, since being elected in 2013, has largely achieved what he wanted. Some nuclear-related sanctions have been lifted, foreign businesses have lined up to enter the market of 80 million people and plenty of business deals are being signed.

Iran’s economy is expected to have grown 5 percent last year and to do the same in 2017. Rouhani is working closely with Ali Larijani, the reform-minded chairman of the parliament, on infrastructure development, cutting red tape, reforming subsidies — economic measures that will help improve the Iranian business climate. Reformists are being rewarded politically for this gradual economic progress, and they made huge gains in last year’s parliamentary elections.

The Supreme Leader Ayatollah Khamenei, the ultimate guardian of the revolution, has shown subtle signs that he too is backing economic reforms. He approved the nuclear deal, supported limited foreign investments and has refused to invite the hard-line Ahmadinejad to run in this spring’s presidential elections. Despite the powerful influence of conservatives in Iran, this momentum for economic change is too strong for any domestic movement to completely overturn it. Donald Trump, on the other hand, may be a different story. It will be very difficult for the U.S. president-elect to tear up the Iran nuclear deal altogether, but do not expect an easing of sanctions — something foreign investors are crying out for — especially lifting the ban on dollar transactions with Iran.

Saudi Arabia

In the spring of last year, the 31-year old Deputy Crown Prince bin Salman announced Vision 2030, an ambitious blueprint designed to modernize and diversify the economy by reducing the kingdom’s dependency on oil, exploring other assets and carrying out structural reforms. The Vision has been packaged into specific short-term targets for 2020 called the National Transformation Program (NTP), including a balanced budget, 450,000 private-sector jobs and more than a tripling of the country’s non-oil revenue.

Will the politics of Saudi Arabia allow Vision 2030 to work? To assess this, we have to answer the central question: Who has the power to shape economic policy in Saudi Arabia?

The Saudi Political Elite Is in Charge

As low oil prices plunged and Saudi Arabia’s budget deficit ballooned, the society expected the political establishment to right the ship. Prince bin Salman is the face of the political class, driving forward economic reforms with authority and confidence.

Vision 2030 is in good hands; Prince bin Salman sees the big picture and intends to modernize Saudi Arabia’s economy. He also places a strong emphasis on getting rid of bureaucratic hurdles and streamlining government — so expect to see bolder policy decisions being made even quicker, reforms being implemented with more urgency and a leaner, more efficient government to develop over the coming years. This will help achieve Vision 2030.

Who Will Win This Competition for Capital?

When thinking of Saudi Arabia and Iran, try not to get carried away with sensationalist headlines. Think business, think opportunities. Ask yourself whether both markets have real and promising potential for investments. Will they be able to realize their goals of reform? Will they be able to address political and regulatory risks?

Saudi Arabia shows great promise. It has an economy integrated with the world, and it has introduced very promising reforms with a real eye on change. Prince bin Salman, a reformer, has huge influence over the economy and the power to drive Vision 2030 forward. Iran, too, shows interesting potential: The reformists are leading a consensus within Iran that foreign investment is key to economic growth. This puts reformists in a strong position leading up to this spring’s presidential elections.

Both markets offer investors plenty of opportunities, assuming they mitigate their risks. But, after all, there’s usually not much reward without some risk.

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