Iran’s Truce With Saudi Arabia Heals Rift, but Not Its Reeling Economy

WSJ.

Iran’s Truce With Saudi Arabia Heals Rift, but Not Its Reeling Economy

Deal to restore ties does little to ease impact of Western sanctions; ‘We have become numb against inflation’

TEHRAN—Iran’s move to reset diplomatic relations with Saudi Arabia was a radical break from years of enmity between the two Middle East rivals, but it hasn’t been enough to prop up its struggling economy.

Before China stepped in to broker the deal earlier this month, Iran’s currency, the rial, had lost a fifth of its value over the last two weeks of February to hit a record low, adding to the problems besetting the ruling clerics here.

Inflation was already rising, hitting 59% late last year, and talks to revive the 2015 nuclear deal and get some relief from U.S. sanctions were all but dead. European powers had given up on a separate mechanism to transfer funds to Iran for humanitarian aid. Prisoner-swap negotiations with the U.S. weren’t progressing either, keeping billions of dollars in overseas bank accounts out of reach. The Americans had also begun cracking down on flows of hard currency from neighboring Iraq, removing an important pressure valve.

“The economic situation is a major part of why right now the Iranians decided to make this de-escalation agreement with the Saudis,” said Alex Vatanka, director of the Iran Program at Washington’s Middle East Institute.

But while news of the deal helped ease the strain on the rial in the short term, pushing it off its historic low of more than 600,000 to the dollar, the currency has since lost value as the reality sinks in that, even with the Saudi deal, the country has few prospects for a turnaround unless it can escape sanctions over its nuclear program or build closer economic ties with China and Russia.

“It’s a thin market that lives and dies on headlines—and the headlines have been good the past few weeks,” said Henry Rome, a senior fellow with the Washington Institute for Near East Policy.

But, he said, “inflation, especially food, is very high and rising, and the government is doing little to reel it in.”

The approach of Nowruz—the two-week Persian New Year holiday that began Monday—was a flashpoint. Middle-class Iranians found themselves with much diminished purchasing power for the rice, meat and other ingredients for the holiday’s feasts, and retired teachers, social-security officials and military personnel were protesting economic conditions across the country.

Iranian Supreme Leader Ayatollah Ali Khamenei acknowledged the scope of the problems in a speech Tuesday marking Nowruz.

“If, God willing, we are able to reduce the economic problems and if, God willing, our officials make an effort, practice diligence and work hard on important tasks in this field, many of the country’s other problems will also be solved,” Mr. Khamenei said, according to the state-run news agency IRNA.

Iran’s clerical leaders have promised to tackle inflation before without success. When Iranian President Ebrahim Raisi took office in 2021 he vowed to reduce inflation to below 15% in 2023 and to single digits in 2024, but prices have only escalated, raising pressure on the government.

Inflation remains rampant at more than 50%, with the cost of meat rising by 90% over the past year, according to the semiofficial ISNA news agency. When reformist newspaper Sazandegi reported about rising anger about food prices with a dramatic front-page headline, “Meat Rebellion,” on Feb. 20, it was immediately shut down.

Ordinary Iranians say they have had trouble affording the ingredients to prepare Nowruz meals this week.

“We have become numb against inflation,” said Alireza Babaie, a home-appliances salesman. “We don’t feel anything anymore.”

Economists and traders say Saudi Arabia and Iran’s other neighbors are unlikely to pour significant amounts of cash into the Islamic Republic despite Tehran’s restoring diplomatic ties with Riyadh. Western sanctions remain a powerful deterrent.

They also say Saudi Arabia would want to see if Tehran holds up its end of the deal by halting covert weapons shipments to its Houthi allies in Yemen, where Iran and Saudi Arabia had been fighting a proxy war.

The resumption of diplomatic relations would help broaden political and economic cooperation in the region, Iranian Parliament speaker Mohammad Bagher Qalibaf said after the China-brokered deal was signed.

There are some positive signs for Iran, chiefly its growing involvement with China, which increasingly is positioning itself as a global diplomatic counterpoint to the U.S.

Beijing’s role in facilitating the deal between the two Middle East rivals signals that it intends to continue buying oil from both Saudi Arabia and Iran, ensuring Tehran a continuing economic lifeline, said Esfandyar Batmanghelidj, chief executive officer of Bourse and Bazaar, a London-based think tank that studies the Iranian economy.

Iran also has a growing military relationship with Russia, supplying drones for use in its war in Ukraine, and it is trying to expand other trade flows with Moscow. It is also negotiating with the West to retrieve some oil-revenue funds locked in countries such as South Korea, though with little success.

Besides these relationships and the improvement in the relationship with Saudi Arabia, Iran has few other options to alleviate its problems and improve the prospects for its 88 million people. In January, the World Bank predicted its economy would grow 2.2% this year and by 1.9% in 2024—less than it needs to put it back on a sustainable long-term growth track. 

Crucially, the government is now finding it harder to maintain subsidies for food and energy and can’t afford to increase wages for civil servants.

“Tehran doesn’t have a lot of financial firepower to try to address these problems,” Mr. Batmanghelidj said.

Nor will closer ties to heavyweights such as China and Saudi Arabia make up for years of mismanagement and sanctions, said Mostafa Pakzad, a Tehran-based adviser to foreign companies.

“The Saudi deal releases a bit of oxygen for the regime not to suffocate,” he said.

Iran’s Truce With Saudi Arabia Heals Rift, but Not Its Reeling Economy - WSJ

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Aramco CEO affirms support to ensure China’s energy security

RIYADH: Global energy giant Saudi Arabian Oil Co. has affirmed its support for China’s long-term energy security and development, as the Riyadh-based company works closely with Chinese entities to meet sustainable targets, its CEO said.  

Speaking at the China Development Forum in Beijing on March 26, Amin Nasser said that Aramco has partnerships and emission-reducing technologies with China to make lower-carbon products.  

“We want to be an all-inclusive source of energy and chemicals for China’s long-term energy security and China’s high-quality development – to the horizon, and even beyond,” said Nasser.  

He added: “That’s why we are doubling down on China’s energy supply, including new lower carbon products, chemicals, and advanced materials, all supported by emissions reduction technologies.”  

Nasser further pointed out that Aramco’s plans to elevate its oil production to 13 million barrels per day by 2027 will strengthen China’s long-term energy security.  

“Aramco’s view of the energy future, and the most realistic path to get there, closely aligns with China’s. And, like China, we think in decades, not quarters,” he said.  

During the speech, Nasser revealed that Aramco is looking for global investment opportunities in liquified natural gas.  

“We are steadily adding lower carbon energy to our portfolio, especially blue hydrogen and blue ammonia, electro fuels, and renewables. And we are evaluating an entry into liquified natural gas as well. As the energy transition evolves, there is also the critical issue of materials transition,” he added.  

Aramco CEO affirms support to ensure China’s energy security (arabnews.com)

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