The Next Front in the Saudi-Iran War

The two regional powers are at each other's throats. But Riyadh's next move won't be in Syria or Yemen -- it'll aim to hit Tehran where it really hurts.


It looks like 2016 was born in violence. Saudi Arabia’s execution of popular Saudi Shiite cleric Nimr al-Nimr has led to an escalation with its regional nemesis, Iran. After Saudi Arabia’s embassy in Tehran was sacked by an angry Iranian mob, Riyadh severed diplomatic ties with the country and organized a regional coalition of countries to isolate it further — Bahrain, the United Arab Emirates, Qatar, Kuwait, Djibouti, and Sudan have all cut or downgraded diplomatic ties with the Islamic Republic in the incident’s aftermath. Iran accused Saudi Arabia of going even further Thursday, claiming that Saudi warplanes had launched airstrikes against its embassy in war-torn Yemen.

Far from being an angry string of irrational actions, the Saudi escalation in recent days seems like a cold and premeditated act of international gamesmanship. Meanwhile, there is reason to believe that Iran’s moves following Nimr’s execution were a strategic blunder. Sheikh Nimr was, after all, a Saudi citizen; by going beyond condemnation to issuing threats, Iran’s reaction served to confirm, rather than challenge, the Saudi narrative about the cleric as a terrorist mastermind in the employ of an Iranian agenda.

But the fallout from the recent war of words won’t only be felt on the battlefields of Syria and Yemen. While the military struggles in the region get the most attention, the most important area in which the conflict will play out could be the economic arena.

Militarily speaking, we’re likely to see more of the same. Both Iran and Saudi Arabia prefer to employ proxies or native allies to fight their battles outside their territories, rather than send in their own armies. With two regional civil wars raging, it looks like Riyadh and Tehran will increase support for their allies, as a negotiated peace looks further away than ever. Unfortunately, Syrian and Yemeni civilians will bear the brunt of the violence.

The markets have also weighed in, and they do not appear to expect any direct military confrontation between the two countries. The oil market is particularly sensitive to disruptions in oil supply routes or facilities, as would occur during a conflict between the two Gulf powers. But while there was a spike in oil prices immediately following the recent escalation, it was short-lived, and prices continue to slide, hitting an 11-year low Wednesday.

The fact is, Saudi Arabia is at a disadvantage when it comes to a military showdown with Iran. Its grip over the Sunni world is more contested than Iran’s championing of the Shiite world — numerous Sunni groups, including the so-called Islamic State, openly oppose Saudi Arabia and challenge its leadership of the Sunni faith. Iran, on the other hand, does not have to deal with anything similar; it also has the direct support of Russia, especially in Syria, while U.S.-Saudi relations seem to have cooled.

It seems more likely that Saudi Arabia will prefer to fight a war in which it has an enormous advantage — one in the oil market.


Saudi Arabia’s plan to weaken Iran’s economy

Even as oil prices sit near an 11-year low, Saudi Arabia has continued to pump massive amounts of crude oil. It has repeatedly refused to cut production, rendering OPEC’s price-setting mechanisms useless — and the kingdom has enough excess capacity to drive the price even further down. Analysts have speculated that Riyadh might be trying to drive U.S. shale oil producers out of the market, but the more important aim is to wreak havoc on the budgets of Iran and Russia, both of which are dependent on oil revenues for income.

But aren’t low oil prices even more painful for Saudi Arabia? After all, the country recently reported a record budget deficit of $98 billion; the International Monetary Fund has even warned that the country will deplete its financial assets within five years if oil prices do not recover and it doesn’t rein in its budget. This has prompted some analysts to speculate about the “looming bankruptcy of Saudi Arabia” or even its “inevitable collapse.”

Reports of Saudi Arabia’s demise, however, have been greatly exaggerated. Despite its high reliance on oil, the kingdom still has a relatively cozy financial cushion and several options that it can employ to get its budget in order. And, more relevant to the conflict in question, Saudi Arabia has far more wiggle room here than Iran.

While the Saudi economy is more heavily reliant on oil than Iran’s, its foreign exchange reserves are far higher and its sovereign wealth fund owns far more assets. It also still has the untapped option of issuing bonds — it has the world’s lowest GDP-to-debt ratio (under 2 percent) and a high credit rating. Most importantly, Riyadh is already taking steps to inject more funds into government coffers: The development to watch out for is the planned economic reforms package, which would institute a value-added tax, cut subsidies, and privatize certain sectors. According to Saudi calculations, should this be successful, the country will see a balanced budget before 2020.

Iran, on the other hand, does not have as many options. It’s already in the midst of a subsidy reform plan and, unlike Saudi Arabia, already taxes its citizens. Raising taxes is difficult when inflation is high (16.2 percent) and unemployment is in the double digits (10.4 percent). The oil price necessary to balance Iran’s budget is much higher than the price needed to balance the Saudi budget; the Iranian oil sector is in need of development after more than a decade of sanctions.

In short, Iran can try to outgun Saudi Arabia, and its proxies can try to outnumber its allies on the various battlefields — but it cannot outspend Saudi Arabia and cannot outlast it in an environment where oil is cheap. Saudi Arabia doesn’t need to collapse Iran’s economy — it only needs to make the proxy war too expensive for it to maintain, prompting it to withdraw into its own borders, allowing a Saudi-friendly reconfiguration of the region.

Once things are lined up in the right direction, Saudi Arabia could quietly open the taps further and allow a couple more million barrels a day on the market, driving prices down even further. The longer it can hold the prices down, the more it will be compounding Iran and Russia’s economic pain.


The end of Saudi Arabia?

For these reasons, Iran’s aggressive reaction to Nimr’s death represents a strategic blunder. Rather than simply issuing a condemnation, Iranian leaders issued what could only be construed as a direct threat. Iran’s supreme leader, Ayatollah Ali Khamenei, talked of “divine vengeance”; a spokesman at its Foreign Ministry said that Saudi Arabia will “pay a high price.” Hezbollah leader Hassan Nasrallah gave a televised speech in which he went so far as to describe Saudi Arabia as an illegitimate state and said that Nimr’s execution “will not pass.”

This belligerent rhetoric only plays into the hands of the Saudi monarchy, whose recent tough stance toward Iran seems to have become very popular at home. When a hostile “other” issues existential threats against a country, it can engender among its citizens a moment of nationalistic solidarity with the government — exactly what it needs to pass a reform package that would include short-term pain. 

Clearly, Saudi Arabia and Iran are locked in a high-stakes competition for regional primacy. Although both claim religious legitimacy and cite Islamic scripture, their actions betray a cold amorality and blindness to the dangers lurking ahead. Who will handle the fallout as Sunni-Shiite tensions continue to tear apart the region and as the seeds of hatred and vengeance are sown for future generations?

Playing with fear and hatred, especially through the exploitation of religious identity, is like playing with fire. With the executions, Saudi Arabia has further tied its national identity to its rulers’ Sunni worldview — amounting to a “national identity suicide.” A young Shiite man from the kingdom’s Eastern Province is now less likely to feel Saudi or adopt a Saudi identity — something that does not bode well for the future. After the executions, young protestors in Nimr’s hometown marched to chants of “the people demand the downfall of the Sauds.”

Saudi Arabia and Iran could have solved their long-standing issues without destabilizing the region, but they instead chose to cynically exploit existing sectarian tensions. The final chapter in this saga has not yet been written — but the region will not see peace until both sides recognize and respect each other’s boundaries.


Iyad el-Baghdadi is a writer and a fellow at Norwegian think tank Civita. Find him on Twitter at @iyad_elbaghdadi. Twitter: @iyad_elbaghdadi