Saudi Arabia and Iran announced the resumption of diplomatic relations on 10 March, in a detente mediated by China.
The implications, at first glance, are lower regional risk given the long-running friction between these two, and the potential for greater cooperation between the respective proxies of Saudi Arabia and Iran in Iraq, Lebanon, Syria and Yemen.
Nevertheless, while Saudi Arabia and Iran have gains to make by cooperating in terms of greater trade and less security risk, they will remain long-term geopolitical and economic (hydrocarbon and non-hydrocarbon) rivals.
Israel will likely persist with hawkishness on Iran and efforts to normalise relations with Saudi Arabia.
China's role as an influential arbiter is unprecedented in the region and reflects a transition from purely economic to geopolitical influence.
But the US remains the decisive military force in the region and the closest ally of, and restraining force on, Israel.
This mediation is likely to have no impact on China’s ability to broker peace in the Russia-Ukraine War because it is not viewed as a neutral party in that conflict.
Detente between the region's largest rivals
Relations were suspended in 2016 after Iranians protesting the execution in Saudi Arabia of Nimr Al-Nimr, a Shia cleric and government critic, stormed Saudi diplomatic buildings in Tehran and Mashhad.
This follows the UAE-Iran resumption of diplomatic ties in August 2022 and five rounds of Saudi Arabia-Iran talks, hosted by Iraq, between April 2021 and September 2022.
It is big news when two of the largest countries in the region, which have a long history of not getting along face to face and through their respective proxies in countries such as Iraq, Lebanon, Syria and Yemen, engage in a detente.
This is a positive step in terms of reducing regional risk, and is in stark contrast to moments of heightened concern following, for example, the drone attacks on Saudi Aramco facilities deep within the Saudi border (September 2019), the US assassination of Qassim Soleimani (January 2020) and the spate of commercial tanker attacks (August 2021).
For investors in Saudi Arabia, the hope is that the detente with Iran leads to a reduction in attacks from Yemen, particularly on oil assets. Saudi Arabia is on a path to functional relations with all of the key countries in its orbit: the US and Israel for security and defence, Russia and the UAE on oil output, and China and India on oil and petrochemical demand.
For Iran, which is mainly off the radar for foreign investors, the hope is the softening of its opposing regional alliance – specifically Saudi Arabia and GCC support for potential Israel-US military action – and potentially also a pullback in Saudi funding for international media outlets that are followed by mass protestors in Iran.
The revival of the Nuclear Deal is still unlikely given Iran's more advanced nuclear program, with concerns over near-weapons-grade enrichment, and the lack of credibility in any US presidential commitment lasting beyond one election cycle or in the face of congressional opposition.
Israel is the elephant in the room
But we should not get carried away because a direct, hot military conflict between the two was always unlikely, precisely because it would quickly draw in global powers on opposing sides, likely much more quickly and directly than seen in Ukraine, given the hydrocarbon resources involved.
Also, enthusiasm should be tempered by the fact that Israel, the country with arguably the greatest military and intelligence capability in the region apart from the US, is not a part of this.
Israel-Iran friction has overtaken that between Israel and the Arab nations, a generation ago, or between Saudi Arabia and Iran, more recently, as the largest security risk in the region.
For foreign policy hawks in Israel, there will be no let up in the attempt to rally a coalition that encircles Iran and to take matters into its own hands, when sufficient resolve is missing in that coalition.
For foreign policy doves in Israel, the objective will remain further Saudi Arabia-Israel rapprochement, eg the normalisation of relations along the lines of the Abraham Accords. Ultimately, that may set Saudi Arabia up to act an arbiter between Israel and Iran.
China versus the US on the MENA stage
China
This deal confirms a greater geopolitical role for China in the Middle East, where the relationship has been grounded historically in the hydrocarbon trade above all else.
Apart from Dubai and Oman, there is a surplus of capital in the rest of the GCC, removing the foreign policy tool of investment and finance (the Belt and Road Initiative) used by China elsewhere.
China’s influence on Iran may have been significant. Iranian President Raisi‘s visit to China in February did not result in new significant trade or investment announcements.
China may be reducing the risk that another country with which it is aligned (Iran) follows the path of Russia, in terms of instigating a war that weakens it and makes it uncomfortable for China to maintain that alignment.
US
The deal may appear to confirm an ongoing decline of US influence in the region but that is not accurate.
There is simply no other country currently capable of deploying decisive military power, certainly not China, Turkey or Russia, nor exerting meaningful external influence (whether inflaming or restraining) over Israeli military policy.
For example, it is not clear what stick and carrot China can present to either Saudi Arabia or Iran should one of them fail to respect the detente – eg actual trade and investment, and military supplies to Iran, as opposed to pledges, are limited by US sanctions.
Nevertheless, this event is a reminder to the US that, to the degree it pulls back from the Middle East, mainly to dedicate resources to the Asia Pacific theatre, it creates space for others to grow more influential – first India and Russia, and now China.
Related reading
The Aramco attack and 10 reasons why an Iran war is still unlikely, Sep 2019
Iran: Soleimani assassination, Jan 2020
Iran reaction to nuclear scientist killing likely restraint not revenge, Nov 2020
Iran, tanker attacks, and oil, Aug 2021
Iran Nuclear Deal: Are we there yet and will it even be worth it?, Feb 2022
Middle East EM equity strategy: 2023 outlook, Jan 2023
Israel's illiberalism is here to stay, raises domestic more than regional risk, Feb 2023
China and the Russia-Ukraine War: A voice for restraint and de-escalation?, Feb 2023
Saudi-GCC: EM portfolio defence, structural transformation, index heavyweight, Mar 2023