The governments of Saudi Arabia, Iran, and mainland China announced on March 10 that an agreement had been reached to re-establish diplomatic relations between Saudi Arabia and Iran. Saudi Arabia had cut diplomatic ties with Iran in 2016.

The agreement was officially brokered by the Chinese government, building on efforts carried out by the Iraqi and Omani governments over the previous year. Under the conditions of the agreement — signed in Beijing in the presence of China's most senior diplomat, Foreign Affairs and Security Office Director Wang Yi — Saudi Arabia and Iran have determined to open their respective embassies within the next two months and desist in interference in internal affairs, building on previously signed agreements for economic and trade co-operation.

The agreement likely reflects a wider attempt by the Saudi leadership to reset international perceptions of Saudi Arabia as a stabilizing actor in the region, focusing on economic development and trade opportunities. The Saudi government, under Crown Prince and Prime Minister Mohammed bin Salman, seeks foreign investment and delivering on project goals outlined in the Vision 2030 program, including the construction of state-backed mega projects and the development of a domestic Saudi tourist and entertainment industry.

Those goals would be threatened by military confrontation with Iran and the threat of attacks by the Ansar Allah (Houthi) movement in Yemen. Saudi hydrocarbon export infrastructure in the Gulf is highly vulnerable to Iranian disruption and sabotage attacks. Reducing risks to disruption of maritime traffic in the Gulf and facilitating wider trade opportunities, also likely involving mainland China, will probably be positioned as a key outcome of continued engagement.

A more independent policy

Engaging mainland China is almost certainly intended to signal to US leadership that Saudi Arabia seeks a more independent foreign policy. It is still extremely unlikely that Saudi Arabia is willing to replace the United States as its main source of sophisticated arms imports or to disengage from the current security relationship that it maintains with the US, at least in the medium term.

The timing of the agreement — at the end of the Chinese national People's Congress in which Xi Jinping secured an unprecedented third term in office and in which he publicly denounced what he claimed was a US-led "suppression of China" — was probably intended to demonstrate a willingness to further engage in wider diplomacy in the Middle East and North Africa (MENA) region.

The goals of the reconciliation agreement are limited in scope, with the involvement of mainland China as the main broker and guarantor of the agreement, likely reflecting the Saudi leadership's concern that US credibility as a supporter for Saudi national interests has significantly decreased.

Normalizing relations with Saudi Arabia will reduce Iran's regional isolation, and likely undermine any regional US-led anti-Iran "alliance" between Israel and Sunni-Muslim governments. Any potential economic benefits are likely to be limited, with Gulf Cooperation Council (GCC) states unwilling to risk being penalized by US sanctions.

Relations with neighbors

S&P Global Market Intelligence does not assess that the agreement represents a fundamental shift in the Iranian leadership's strategic goals for the MENA region, or in its means to pursue these. It is unclear at this point what else the China-brokered agreement includes beyond both parties re-implementing previous agreements on trade and investment (1998) and security co-operation (2001).

Ebrahim Raisi's government came to power pledging improved relations with Iran's neighbors, including in the southern Gulf, anticipating deteriorating ties with the West over nuclear negotiations. Publicly deferring to China's brokering role, hardline conservative Iranian media outlets have portrayed the deal as validation that the global balance of power and influence is shifting eastwards towards China — Iran's largest trade partner and crude oil client and, alongside Russia, one of its two major international supporters.

The agreement, if implemented, would signal a willingness to avoid further containment in the region, but is unlikely to represent a longer-term development of a shared regional security architecture between Iran and Saudi Arabia.

Indicators of changing risk environment

• The Chinese government increases support for Saudi and Iranian BRICS membership, building political momentum to develop wider geopolitical and economic frameworks with reduced US influence.
• US support for Saudi-Israeli normalization is facilitated by resumed arms sales to Saudi Arabia — perceived as being escalatory by Iran's security establishment and reducing the likelihood of additional reconciliation developments.
• Mainland China hosts a summit for GCC members and Iran intended to facilitate additional economic development and multilateral relations, indicating more sustained enthusiasm to build longer-term tangible relations between Saudi Arabia and Iran.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.