China brings together Saudi Arabia and Iran
Why China’s mediation between Saudi Arabia and Iran raises the risk of a US-led war, or of regime change in Saudi Arabia.
In July 2022, I said that one of the implications of the NATO – Russia war in Ukraine may be for Saudi Arabia to seek Chinese or Russian guarantees to reconcile with Iran. This has now come to pass. The broader context involves all the core Muslim states – Saudi Arabia, Iran, Turkey and Pakistan – opting for the Chinese side in the confrontation with the US. As this Sino-Islamic alliance presents a direct challenge to the US. However, all the US’ options are bad, as it can eitehr do nothing or escalate to protect its regional hegemony, either by striking Iran or even by destabilising Saudi Arabia by targeting Crown Prince Mohammad bin Salman.
Executive Summary
The agreement is a Saudi admission of defeat in its confrontation with Iran, and a snub to the US, which, the Saudis believe, has failed them as their security guarantor.
Turkey, for its part, has improved its ties with Iran under Russian auspices. The UAE has independently improved ties with both Iran and Turkey. And Saudi Arabia and Turkey have reconciled.
The key Muslim states – Iran, Saudi Arabia, Turkey and Pakistan – now all have better ties with China and Russia than they do with the US, even as they remain dependent on US military equipment, for now. This reflects a step towards the materialisation of Samuel Huntington’s prophecy about a Sino-Islamic alliance that challenges the West.
Iran and Saudi Arabia will move to supporting China’s Belt and Road Initiative (BRI) in Iraq, Lebanon, Syria and Yemen with a view towards using economic investments as a means of brining about localised, piecemeal political agreements.
Such political agreements will take years to create stability, assuming they actually materialise, and are subject to local actors’ red lines and to the complexities of these countries, which are beyond the scope of this piece.
Saudi Arabia will likely move towards normalising ties with Israel, as a means of minimising problems with the US.
The US’ options to prevent its displacement in the Muslim world include destabilising Saudi Arabia, which is made difficult by MBS’ consolidation, and striking Iran over its nuclear programme. The final alternative is for the US to accept its diminished role for now, as it continues to attempt to weaken Russia and China.
A faux petro-yuan will emerge, with oil priced in dollar but transactions cleared in yuan.
China will likely follow up on this agreement with major investments in Saudi mining resources, which include gold, copper, iron, titanium, silver and phosphates.
The Saudi Perspective
This deal reflects Saudi Arabia’s realisation that it has lost its confrontation against Iran in Lebanon, Iraq, Syria, and especially Yemen. Iran demonstrated that it can strike Saudi energy infrastructure at will, and that the US is unable to protect Saudi Arabia. Indeed, Saudi Arabia likely views the US as having failed as the country’s security guarantor, due to its inability or unwillingness to retaliate against Iran’s attacks on international shipping and global energy security, and its willingness to recognise Iran’s right to a nuclear programme in the Iran nuclear deal. It also likely reflects the Saudi perspective that the US is aggressive and weak. Aggressive, in things such as President Biden promising to treat Saudi Arabia as a pariah, refusing to meet with MBS and threatening to cut off weapons supplies. Weak, in that President Biden ended up visiting Saudi Arabia, meeting with MBS, and failing to deliver any consequences against Saudi Arabia when MBS reduced oil supplies ahead of the 2022 mid-term elections, in direct defiance of President Biden. These considerations have brought Arabia closer to what it believes is the new rising power, China. Saudi Arabia needs time to rearm and alter its defence doctrines to better fit with its new role as an independent actor not bound exclusively to the United States.
Before announcing its reconciliation with Iran, Saudi Arabia was engaged in talks with the US about normalising ties with Israel. Saudi Arabia had reportedly requested rewards such as civilian nuclear cooperation, new air defence support and its recognition as a major non-NATO ally. This suggests that the Saudis want to remain safe from US punishment during what they believe is the US’ decline as a global power. The need to maintain balance during this pivot to China stems from Saudi Arabia’s dependence on the US for its defence, from its mistrust of Iran and from the fact that China is untested as a diplomatic, let alone security, guarantor. The attempt to normalise with Israel – for a price – reflects Saudi Arabia’s belief that good ties with Israel protect it from unfavourable action by the US – the Saudis believe that the US would never act against Israeli interests.
It is worth noting that that, paradoxically, the deal also reflects Saudi Arabia’s lack of concern with the US’ view, or at least a certain willingness to antagonise the US. The Saudis realise that US – Chinese relations have never been worse. They also realise that Iran has humiliated the Biden administration by having refused to re-join the JCPOA, despite the Democratic administration making revival of the agreement a priority after winning the 2020 presidential elections. Iran is enriching uranium to 60% openly and may have enriched it to 84% - 6 percentage points below weapons-grade. This makes the risk of conflict with the US or Israel higher than ever before. And yet, Saudi Arabia chose to snub the US and reconcile with Iran under Chinese mediation. This is what makes this reconciliation a political earthquake.
The US’ Geopolitical Losses: The Sino-Islamic Alliance
Saudi Arabia’s central bank announced that it had deposited USD 5 billion with Turkey’s central bank, following a visit by President Erdogan to Saudi Arabia last year. Saudi Arabia is also reportedly close to normalising ties with Syria, a key Russian and Iranian priority. The UAE and Turkey and the UAE and Iran are attempting to improve ties, including by building a transport corridor from Bandar Abbas to Mersin where containers would not be opened for inspection when crossing borders. Meanwhile, Russia is mediating between Turkey and Iran to resolve the issue of the PKK in Syria while averting a new Turkish push into Syrian territory. With these changes in mind, the Iranian – Saudi agreement should be seen as part of a broader conflict reduction between the three main Muslim Middle Eastern powers. Critically, this is happening under Russian and Chinese auspices and does not involve the US. Since WWI, the UK and its successor empire, the US, have had large parts of the Islamic world as reliable allies, most notably with Muslim countries working with the US to defeat the Soviet Union, not least by exporting jihadis like Osama bin Laden to Afghanistan. Now, the major countries of the Muslim world – Saudi Arabia, Pakistan, Iran and Turkey – are aligned with China and Russia. What this points to is the realisation of Samuel Huntington’s prediction, namely, that the Islamic world is more likely to side with the Chinese civilisation than with the West, largely due to the universalist pretensions of the West. These pretensions are costing the West allies across the world, while China’s core tenet of non-intervention in the domestic affairs of others is gaining it allies.
Commercial Implications
Chinese Saudi Economic Partnership
It is inconceivable that this agreement will not translate into additional bilateral economic deals between China and Saudi Arabia. Saudi Arabia is seeking to diversify its economy from oil. The most predictable economic model for Saudi Arabia is the export of natural resources in exchange for hard currency. This model keeps the Saudi state strong, and gives it the power to redistribute income and manage investments. This model also suits China perfectly, given its interminable appetite for natural resources and Saudi Arabia’s wealth in resources such as bauxite, silver, gold, copper, zinc and phosphates. Furthermore, China is now more likely to assist Saudi Arabia in its endeavour to develop some independence in its defence manufacturing, as well as developing other types of Saudi infrastructure. China is already a major player in Saudi Arabia. Its role is set to grow further.
Security and Expanded BRI
For China to have stepped into the conflict between Saudi Arabia and Iran, there are likely to have been some broader understandings. I assume that these include Iran assuring Saudi Arabia that the Ansar Allah (Houthi) Movement would refrain from striking Saudi energy infrastructure – something which China needs for its own energy security. I also expect that Saudi Arabia has assured Iran that Saudi would not assist Israel or the US in any putative strike on Iran. The Chinese - Russian - Iranian understandings likely include Saudi Arabia investing in Yemen, Syria, Iraq and Lebanon, with a view to maximising Saudi economic influence as a means of maintaining or increasing Saudi political influence. Such investments may well occur under the rubric of the Belt and Road Initiative. That said, this agreement is not a prelude to permanent peace and stability in any of those countries. Rather, this is a prelude to Saudi Arabia and Iran working out localised compromises on some issues where local actors do not obstruct too heavily, and with China stepping in to translate these agreements into economic opportunities under the BRI.
Faux Petro-yuan
Consider this. The world’s two largest oil exporters – Saudi Arabia and Russia – and the two countries with the largest natural gas reserves – Russia and Iran – are now both aligned with China. Iran and Russia are under severe Western sanctions, with China at risk of joining them. While Iran and Russia need hard currency, the dollar is officially unavailable to them, nor is the euro or the sterling. China is also their main export market and the source of most of their imports. This suggests that Russia and Iran would do much better if the yuan was their primary reserve and trade currency. However, the yuan is still not a convertible currency, and China is unable to sustain the massive current account deficits that the US sustains. These factors are critical for the yuan to be a reserve currency. Crucially, China lacks a blue water navy that can secure global trade. Military might and the securing of global trade is key to the US’ ability to provide the world’s reserve and trade currency. Therefore, while China’s allies need it to offer a currency for international exchange and reserves, China is unable to offer that yet. Therefore, at most, we can expect a symbolic petro-yuan: Iran and Saudi Arabia may well announce oil transactions in yuan, but the oil will in reality be priced in dollars, and the settlement will happen in yuan. This will not be a real petro-yuan, but a symbolic move intended to highlight that China had arrived and is now a major global player. As such, this does not threaten the dominance of the dollar – yet. Rather, the key threat to the dollar is the excessive use of sanctions, driving countries to use the dollar as an index currency while trading in goods or in other currencies.
The US’ options.
Saudi Arabia was reportedly in talks with China about integrating Chinese electronics into its military command and control. Meaning that China would have access to how US kit is managed and to existing US radars, jets, command and control systems and other critical military infrastructure. This for the US would presumably be a red line and would not be negotiable. Similarly, a petro-yuan, even a symbolic one, would be viewed by the US as a direct threat to the US’ global hegemony, and would not go unanswered. Even aside from compromising US security by working with Chinese electronics, or by implementing a form of a petro-yuan, the Saudi decision to reconcile with Iran under Chinese auspices reflects a considerable worsening of ties between the US and Saudi Arabia. The US seems unable to stop this process. Its hollow grandstanding on issues such as human rights, democracy and free speech has cost it too much goodwill. Its inability to follow up this talk with actions has cost it too much respect. Diplomacy depends on goodwill and respect; the alternative to diplomacy is coercion. Here, the US can act in one of two ways. It can escalate against MBS by supporting rival Saudi princes to replace him. However, that option seems farfetched, given how effectively MBS has cracked down on his rivals, and given the risk that bringing him down would lead to the collapse of the Saudi state and to global economic instability. The second option is to strike Iran over the nuclear issue and/or in support of Israel. With Iran enriching uranium to 60%, and possibly more, this is not an unrealistic possibility. Indeed, the agreements between Iran and each of Saudi Arabia and the UAE reduce the impact of such a strike, as their taking a neutral stance robs Iran of an excuse to retaliate by hitting their energy export infrastructure. The final option for the US is that it do nothing, and simply tolerate its diminished role within the Muslim world, for now, while continuing to focus on China and Russia. The US would hope that defeating its main rivals would allow it to eventually regain its influence in the Islamic world. That seems the least politically costly option in the short term, but may be the most costly in the long term. The US would be accepting Chinese pre-eminence in obtaining the Middle East’s resources, just as its conflict with China escalates to unprecedented levels.
Future Pieces
I am considering producing three pieces to cover this development more thoroughly. In the first, I want to focus on how the coming Ramadan is likely to be particularly hot, with a higher than usual risk of a regional conflagration between Israel and Iran and its proxies. In the second, I want to assess Turkey’s position. One caveat I would add to this piece is that Saudi Arabia views Turkey as a greater threat than Iran. Turkey has positioned forces in Qatar and Kuwait, threatening Saudi Arabia’s Eastern Province. Turkey is also not fully resigned to dealing with Iran without escalation, and has the option of turning back to the US. In the third piece that I am considering, I wish to assess the extent to which Saudi Arabia is right to assume that the US is a declining power. The US is technologically far ahead of all its rivals, but the main threats to its stability are internal, not external.
Indicators to Watch
US – Saudi relations
A change in the nature and frequency of air defence drills would indicate how close the two countries still are.
US talk of sanctions over climate change would indicate that Saudi – US relations are heading towards a major downturn.
A petro-yuan as described above would indicate that Saudi – US relations are not worsening dramatically. By contrast, pricing and closing deals in yuan would indicate a major deterioration in ties.
Qatar taking the opposite side against Saudi Arabia and Iran in regional arenas – Lebanon and Iraq especially – would indicate that the US is trying to contain this Saudi – Iranian rapprochement.
US – Iran relations
The presence of two aircraft carriers in the Arabian Sea/Indian Ocean within striking distance of Iran would indicate an increase in war risks.
The US claiming that Iran is in fact aiming to produce nuclear weapons – which would reverse its current intelligence estimates – would be a strong indicator of rising war risks.
Israel striking Iran due to Iran’s support for Palestinian factions’ attacks on Israel would raise the risk of the US getting drawn into the conflict.
Iran announcing that it would enrich uranium to weapons grades level would indicate that the risk of an Israeli or US strike is increasing.
Iran – Saudi relations
The election of a president in Lebanon, and the appointment of a prime minister, would reflect a first success of the reconciliation.
Saudi investments in Iraq, and the reaction of PMU militias to those, would be another test of the resilience of this rapprochement.
Saudi Arabia reducing or removing restrictions on shipping and aviation in northern Yemen would indicate that the agreement is stable.