Iran Times

BUSINESS AND PEACE

In much the same way as sectarianism shapes relationships but does not define them, so does the political economy of the Gulf. History shows that the borders of the acceptable are largely defined by the politics surrounding them. Though Saudi Arabia and Iran had very similar, and thus competing, industrial plans in the 1970s, politics dictated a peaceful competition. Similarly, it wasn’t until the mid-1990s that mutual economic interests between the two could be recognized and further enhanced in the light of cautious detente. (35) Today, it is clear that the volatile political playing field and the mistrust between Riyadh and Tehran leave little room for considerations other than the grand political ones. However, a serious improvement of U.S.-Iranian relations would quite logically also redefine the regional economic realm.

But first, let us state the obvious: any rapprochement between Tehran and Washington would not alter the fact that Saudi Arabia sits on top of a quarter of the world’s proven oil reserves. (36) It also would not annul the many strategic, long-term and multi-million/billion-dollar contracts between Saudi and American firms over a wide range of sectors.

In the short term, the United States has no viable alternative to Saudi oil imports, especially as long as Iraq remains volatile. But even were this situation to improve, growing global demand for oil and still-growing U.S. imports, despite recent rhetoric in Washington, all underline the continued importance of Saudi Arabia in the global energy market. What is more, the United States has for decades also used oil as leverage in global politics. Many consecutive U.S. administrations have acknowledged the need to “control” Persian Gulf oil as a means to limit the autonomy of potential rivals such as China. Finally, through its oil wealth and subsequent industrial development, Saudi Arabia (and the same applies to the smaller Gulf monarchies) has become both a market for Western goods and an investment opportunity. (37) More recently, the U.S. financial crisis has highlighted the importance of Saudi wealth. Prince al-Waleed reportedly injected huge sums into Citigroup last November, (38) and the United States has a firm interest in the Saudis maintaining their American reserves. According to Jean-Francois Seznec, “[t]here’s an important financial issue of interest to the Obama administration. I think the U.S. will ask the Saudis to maintain their $500 billion in reserves, in Treasury bills, and not switch them to other currencies or reinvest them in Saudi Arabia. We’re pretty desperate in funding our various activities-saving the banks, and what not in this country. So the Saudi reserves are of great importance to the U.S. right now.” (39)

There is a second implication of this oil wealth: U.S. (and European) firms have many interests in Saudi Arabia, both as a market for Western goods and as an industrial provider. The latter mainly, but certainly not solely, manifests itself in oil-derived sectors such as fertilizers and petrochemicals. (40) While during the Pahlavi era, both Iran and Saudi Arabia had quite similar industrial development plans, it has, for understandable reasons, been the Arab side of the Gulf that has succeeded in developing cutting-edge industries-now even capable of moving in a counterintuitive direction, into the West-and in signing strategic deals with the European and American pioneers in these sectors to further enhance their technological basis.

Between 2004 and 2006, Saudi inward Foreign Direct Investments (FDI) as a percentage of gross fixed capital rose from 4.5 percent to 32.1 percent (for comparison, in Iran, it rose from 0.7 to 1.9 percent; the average in the developing world in 2006 was 13.8 percent). (41) These inward FDI create an interdependent relationship; the interests of, among many others, Chevron Phillips, Dow and ExxonMobil are clearly important to the United States, and the interest of such companies in Saudi Arabia currently surpasses the traditional “access to feedstock.” (42)

Looking at Saudi-Iranian relations from the same economic perspective, (43) while Riyadh saw a true leap in inward FDI, Tehran is still in dire need of foreign capital. One could even say that Iran is “on the verge of bankruptcy.” (44) While the obvious source of such capital after a detente would be the West, it is important to consider Arab sources of foreign investment for Iran. Indeed, almost a third of Arab (and especially Gulf Arab) foreign investment in recent years have been intra-Arab and FDI has been at the core of regional economic integration since 2000. It has accelerated much more rapidly than trade and is cross-cutting subregions in a way that commerce has never managed. (45)

As we have established elsewhere, however, there are two important limitations that hinder the Iranian inclusion into this equation. On the one hand, economic mismanagement in Iran is an obstacle to foreign, including Arab, investment that cannot be overstated. But probably equally important is the current global political atmosphere. Under these circumstances, small economic gestures such as trade agreements or border regulations are not unthinkable, but large-scale, long-term cooperation in strategic industries clearly is. However, given the starting point of our argument, the latter is about to drastically change, and this will probably also affect the first, at least in the mid- to long-term.

Another important argument in this regard is Iranian natural gas. The Saudi Arabian petrochemical industry has an ever-increasing need for natural gas, and Iran holds the second largest reserves in the world. Whether this is a basis for the future courting of Iran by Riyadh, however, is a source of disagreement. Much of this depends on the confidence one has in Saudi gas exploration, especially in the Rub al-Khali (the Empty Quarter), and the country’s ability to keep up with its petrochemical demands. Iran, on the other hand, holds some 15.5 percent of the world’s proven reserves. The downside is that its production rate is particularly low-3.7 percent of total world production at the end of 2006. Saudi Arabia, which has only 3.0 percent of proven reserves, produced 2.6 percent. Iran even had trouble meeting domestic needs in the winter of 2007-08. However, ambitious plans exist to upgrade production more than threefold, from 130 bcm in 2007 to 475 bcm in 2020, leaving room for exports. Some estimates of possible production are even higher, up to 600 bcm/per year.

It must be noted, though, that such increases require structural industrial changes and the right foreign and domestic investment atmosphere. (46) Under these circumstances, and given a politically more suitable environment (peace is good for business), a quid pro quo is not unthinkable: Saudi investments in return for natural-gas supplies. This, in turn, would entail an economic interdependence in which “business is good for peace” as well.

In economic terms, one more issue needs our attention. What is the impact on the above of the current global financial downturn? It is obvious that in our globalized economic world, no one will be unaffected. There are, however, differences in impact. For both Saudi Arabia and Iran, the global pricing of oil is important. While prices have dropped dramatically since their peak in July 2008, they have steadily increased again to the roughly $70 per-barrel level of mid-June. This is a more than reasonable level for Riyadh, while Iran needs higher crude prices to maintain a positive balance. (47) We will not try to predict the future of the price of oil but another sharp decline is not very likely (48) and would hit Iran first.

From the point of view of the at least stable and likely upward movement of crude prices, there is hardly any need to seriously question the December 2008 Jadwa economic forecasts, (49) which predicted a slowdown of growth, rather than a contraction for the Saudi economy. Also, bear in mind the roughly $40 oil price at that time. What is more, the projections for 2010 are again rather positive, especially compared to the outlook for Western industrial economy, even though the Saudi stock market lost 60 percent of its value and combined GCC assets in sovereign wealth funds diminished by an estimated $600 billion in just a few months time. (50) Moreover, the impact on smaller Gulf monarchies is more severe at the moment, given their larger dependence on banking, real estate and tourism. Hence, it can be said with some certainty (if such applies in economics) that many of the above-mentioned possibilities for bilateral quid pro quos will remain intact.

CONCLUSION

As noted above, the regional triangle has extremely limited meaning in current times. What then is the best schematic representation of the current complex state of play in Gulf affairs? Furtig suggests an “artificial triangle” of Iran, the United States and the Kingdom of Saudi Arabia. Though a U.S. presence in the Gulf is not new, it is more direct now (in Iraq) and allows for the two-against-one notion to be upheld as well (Iranian containment). In fact, he adds, given the strong dependence of the Arab Gulf countries on the United States, it could also be referred to as bipolar. (51) In any case, it is important to emphasize the artificiality of the triangle: although the United States has for decades played a role in the regional order, it has never been an integral part of it, nor does it wish to be. A withdrawal from Iraq, leaving the when aside, will inherently alter this temporary balance.

Furtig then suggests the following: what should be upheld is the Gulf triangle. However, what should be abandoned is the equally persistent two-against-one notion. Given the overlap in Saudi Arabia and Iran’s interests in Iraq, and given the tentative cracks in U.S.-Iranian animosity, a balanced and more harmonious triangle is envisioned. (52) In this sense, Saudi Arabia can be an important interlocutor to establish this balance, and both Saudi Arabia and Iran should then be encouraged to pursue this multilateral security system. Thus, should something of this sort be the vision in Washington, the Desert Kingdom is essential, as is Iran. (53)

Besides this Gulf security system, we have demonstrated the importance of the kingdom in other fields as well, ranging from its oil wealth and evolving economic interdependence to its role in the Arab-Israeli conflict and in the war on terror. Riyadh would remain important when tensions ease between Tehran and Washington, even though it might not remain the single most important U.S. pillar in the Gulf.

Though it is not a surprise that some would label this a loss for the kingdom, there are also gains that must be balanced against it. A stable order with a stable Iraq is in the kingdom’s best interest. An easing of tensions could help improve Saudi relations with Qatar and Oman, in particular, and might even further GCC cooperation. An American-Iranian detente could severely limit the current Saudi-Iranian competition for the “Arab hearts and minds” (and thus the need to walk a tightrope; this has at times harmed Saudi credibility both within the country and abroad). Finally, peace is good for business, and we have demonstrated that there are important possibilities of economic cooperation between Riyadh and Tehran. Currently, politics hinders these economic imperatives, but, should the political environment alter significantly, the barriers could fall.

Saudi interests would best be served if those involved took all these considerations into account, both the positive and the negative. While it is easy to fear Iranian or even “Shia dominance,” it is more fruitful to imagine what a less isolated Iran would look like and what the potential benefits of normalizing relations might be.

Notes:

(35) See Okruhlik, “Saudi Arabian-Iranian Relations …,” pp. 116-119, for details of the economic dimension of this rapprochement. One should bear in mind, however, the competition in OPEC at that time.

(36) In addition, it has been a swing producer for decades. Though some have questioned its ability in this regard, more recently it has at least within OPEC been at the forefront of keeping prices stable. What is more, Riyadh is doing Washington a large favor by holding onto the dollar as the single currency for its oil exports. See the SUSRIS interview with Thomas Lippman at http://www.saudi-us-relations.org/articles/2007/ interviews/070929-lippman-interview.html, published on September 29, 2007.

(37) Aarts, “Events versus Trends …,” pp. 408-422.

(38) Accessed online on June 7, 2009, at http://www.gnardian.co.uk/business/2008/nov/20/citigroup-bank-saudiarabia.

(39) Interview by SUSRIS with Jean-Francois Seznec (June 3, 2009), accessed online at http://www.saudi-us relations.org:80/articles/2009/interviews/090603-obama-visit.html.

(40) See, for instance, Giacomo Luciani, “The GCC Refining and Petrochemical Sectors,” Gulf Yearbook 2006-2007 (Dubai, Gulf Research Centre, 2007), p. 163.

(41) UNCTAD, FDI Country Fact Sheets, http://www.unctad.org/Templates/Page.asp?intItemID=3198&lang=l.

(42) Patrick Rooney, “Factors That Influence the Petrochemical Industry in the Middle East,” Middle East Economic Survey, Vol. 48, No. 23, June 2005. Also see Eckart Woertz, “A New Age of Petrodollar Recycling?”, in Woertz, Gulf Geo-Economics (Dubai: Gulf Research Center, 2007), pp. 77-106; Giacomo Luciani, “The GCC Refining and Petrochemical Sectors,” Gulf Yearbook 2006-2007 (Dubai, Gulf Research Center, 2007), pp. 149-169; Luciani, “The GCC Refining and Petrochemical Sectors in Global Perspective,” in Woertz, Gulf Geo-Economics, pp. 165-197; also see http://www.saudienergyforum.com/index.php?page=sponsor for additional information on key players and joint ventures.

(43) The following largely draws upon Van Duijne and Aarts, Saudi-lranian Ties.

(44) Interview by SUSRIS with Jean-Francois Seznec, June 3, 2009.

(45) Steffen Hertog, “The GCC and Arab Economic Integration: A New Paradigm,” Middle East Policy, Vol. 14, No. 1, Spring 2007, p. 59.

(46) HSBC Global Research, Company Report: Saudi Basic Industries Co., (April 12, 2007), pp. 9-10; BP, BP Statistical Review of World Energy 2007 (June 2007), pp. 22-24; Nasri Ghorban, “Iran’s Future Gas Development and Exports in View of the January 2008 Gas Crisis,” Middle East Economic Survey, Vol. 51, No. 8, February 23, 2008. This argument was further discussed at the symposium “Industrialization in the Gulf: A Socioeconomic Revolution,” organized by the Center for Contemporary Arab Studies at Georgetown University, March 27-28, 2008. Most observers are pessimistic about the possibility of large quantities of natural gas in the Rub al-Khali. What is more, while it is sometimes argued that Saudi Arabia would prefer Qatari natural gas, it was argued that the possibilities in this regard are severely limited due to Qatar’s LNG commitments and the often troubled bilateral relations between them.

(47) There are several reasons for this, including the higher production costs, limited refining capabilities in combination with larger domestic fuel demands and thus the need to import 40 percent of its gasoline (which is also subsidized) and, less directly oil-related, problems like inflation.

(48) Given the pricing of contracts, it is clear that energy traders see it rising still in the coming months and years. “The Outlook for the Oil Price: Burst and Boom,” The Economist, May 2 I, 2009.

(49) Jadwa Investment (Brad Bourland), “Saudi Arabia and the Global Financial Crisis,” Jadwa Economy Monthly Bulletin (December 2008). Accessed on July 7, 2009, online at http://www.jadwa.com/Research/ store/Monthly%20Bulletin%20December%202008.pdf. Especially see the data on page 14.

(50) For details, see Atif Kubursi, “The Global Financial Crisis and the Arab Sovereign Wealth Funds: Implications and limitations,” in Sven Behrendt and Bassma Kodmani, eds., Managing Arab Sovereign Wealth in Turbulent Times-and Beyond, Carnegie Papers, No. 16 (Carnegie Endowment for International Peace, April 2009), pp. 28-32.

(51) Furtig, Conflict and Cooperation in the Persian Gulf, p. 640.

(52) Ibid.

(53) RAND, Saudi-Iranian Relations …, pp. 100-101 and 104-105.

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