The announcement of the resumption of relations between Saudi Arabia and Iran, and the settlement of many outstanding files between them, carries many implications, but it remains up to decisions on the relaunch of economic and trade relations between the two countries.

Saudi Finance Minister Mohammed al-Jadaan's statement on the possibility of Saudi investments in Iran proved that things could lead to positive conditions that would reflect on both countries.

Al-Jadaan not only said that investments are possible, but added that there are many opportunities for Saudi investments in Iran.

The potential of the two countries

Due to neighborly relations and extended historical relations, trade and economic transactions between the two countries continued, most notably the influx of Iranians to Saudi Arabia to perform Hajj and Umrah, an activity that extends throughout the year.

Saudi Arabia and Iran are also members of OPEC and OPEC Plus (OPEC+), Saudi Arabia has a huge balance and large reserves of oil and gas (261.6 billion barrels of oil reserves, 8 trillion cubic meters of natural gas reserves), while Iran has a large balance and huge reserves of oil and natural gas (208.6 billion barrels of oil reserves, and 34 trillion cubic meters of gas reserves), according to the data of the Unified Arab Economic Report for 2022, and for both countries. Its niche in the energy markets.

Trade between the two countries remained an important bridge for the exchange of goods, especially carpets, aromatic materials and some food, although the development of the two countries' relations with the outside world has imposed new conditions that have led to a change in trade trends in light of the need of the two countries for other products and supplies, including machinery and means of transport, for example.

However, the conclusion of the agreement to restore relations between the two countries is expected to show positive results in the economic field. In this report, we will discuss the future of economic relations between Saudi Arabia and Iran, and the challenges that lie ahead.

Economic relations

Data from the Saudi General Authority for Statistics indicates that the data on trade exchange between Riyadh and Tehran stopped in 2015, and these data did not occur after this date, and Iran was not even included in the bulletin of Saudi Arabia's trade exchange with the countries of the world.

In 2015, the value of trade exchange between Saudi Arabia and Iran amounted to 1.24 billion Saudi riyals ($330 million), while the trade balance surplus came in favor of Iran by about 316 million riyals.

Trade and economic relations between the two countries may allow the return of those transactions that have been suspended, in addition to new forms of cooperation, in light of the diversification of the Iranian economy, and the possibility of Tehran exporting agricultural goods, raw materials and primary commodities, such as steel, to meet the needs of construction projects in Saudi Arabia.

Foreign Direct Investment

Saudi Arabia benefited greatly from the oil boom witnessed by the global market, from mid-2021 until the end of 2022, which increased the balance of its sovereign fund (approximately $ 615 billion), and its ability to implement foreign investments in many countries.

On the other hand, under economic sanctions, Iran is suffering from a decline in its oil revenues, compared to what they were before 2018, with its need for foreign investments.

Tehran has been counting heavily on the success of the nuclear negotiations with the West with the aim of returning foreign direct investment to the oil and gas sector and modernizing the infrastructure in this important sector of the Iranian economy, as well as the manufacturing sector.

According to the World Bank database, Iran's share of foreign direct investment during the period 2019-2021 amounted respectively to $ 1.51 billion, $ 1.34 billion, and $ 1.43 billion, which is small amounts in terms of Iran's needs for these investments and the scarcity of foreign exchange due to sanctions.

If the new agreement between Riyadh and Tehran succeeds in boosting investments between the two countries, injecting Saudi funds in the form of direct investments would improve the performance of the Iranian currency exchange rate (the dollar is equivalent to 42,<> Iranian rials in the official market), especially if these investments are in large and sustainable amounts.

In contrast, the economic interest between the two countries requires Iran to inject similar investments into Saudi Arabia, strengthening relations and promoting common interests.

Iran may face some difficulties now in light of the sanctions imposed on it, but under the scenario of lifting those sanctions, it may become easy to take the path of exchange of investments between the two countries to weave a thread regulating the development of trade and economic relations between the two countries.

Challenges

The development of trade and economic relations between Iran and Saudi Arabia may be one of the most important factors for the stability of relations between the two countries in other fields.

However, although the recent agreement indicates the determination of the two countries to develop relations between them positively and to close many files of disagreement between them, the future of these relations is also linked to other factors, some of which are external:

  • First, on top of these external factors that limit the development of trade and economic relations between Saudi Arabia and Iran are the sanctions imposed on Iran by the West, as the financial system in Iran still suffers from problems that hinder the settlement of any commercial or financial transactions, unless these transactions are carried out within the framework of equal deals, and in light of what the sanctions on Tehran allow.
  • Second, the Saudi and Iranian economies are largely considered competing economies, as both countries depend on oil, and their exports are limited to oil and its products, and some other traditional goods, which may limit the strengthening of the path of restoring trade and economic relations between the two countries. This situation necessitates joint investments to launch value-added products for the two countries that can be developed using new technologies.
  • Third, Iran needs to develop many of its legislations to receive foreign investments, especially with regard to private sector contributions, which can play an important role in accelerating the pace of these investments on the one hand, and strengthening bilateral relations on the other.