What’s happened?

Iran and Saudi Arabia will start formal discussions this month over the resumption of direct flights, according to Iran’s state-affiliated media, building on the diplomatic rapprochement agreed in March. The news adds credence to reports that Saudi Arabia has recently offered enhanced economic co-operation in return for Iran containing the response of its regional proxies (especially Yemen’s Houthis) to the Israel-Hamas war.

Why does it matter?

Iran hoped the landmark reconciliation deal would lead to renewed trade and investment links to ease dire economic conditions arising from strict US trade and financial sanctions. Saudi government statements encouraged such optimism, talking up the potential for investment, and Iran’s Trade Promotion Organisation has been consistently, publicly bullish, projecting in April that trade could quickly reach US$1bn a year. However, official Saudi data put trade to end-September at under US$1m and moves to re-establish substantial commercial relations remain at the confidence-building stage. Saudi Arabia’s main motivation for resuming ties with Iran was only indirectly economic; it wanted a way out of its involvement in the civil war in Yemen, where it has been fighting the Iranian-backed Houthis, which had led to rocket attacks on its territory and deterred foreign investment.

The Gaza war has increased Iran’s leverage by dint of its crucial role in preventing a regional spillover by persuading its regional proxies to refrain from launching attacks against Israeli and US interests. These include the Houthis, who have fired missiles towards Israel and have been attacking and hijacking Israeli-linked commercial ships in the Red Sea and the Arabian Sea. An extended disruption of shipping through key supply routes for Saudi Arabia could be economically costly, and the uncertain evolution of Yemen’s civil war after the ending of a formal ceasefire in October remains a lingering security risk for the kingdom.

In this context, Saudi Arabia appears to more willing to draw closer to Iran. The crown prince, Mohammed bin Salman al‑Saud, met Iran’s president, Ebrahim Raisi, in November, with reports claiming enhanced economic engagement was pledged in return for Iran exerting its de-escalatory influence. Senior officials from Iran’s central bank have since visited the kingdom to discuss resuming banking relations, and the restarting of regular direct flights would be a big step towards deeper ties—albeit more beneficial to Saudi Arabia as pilgrims to the kingdom would probably initially be the main customers.

What next?

The leverage accruing to Iran from the Israel-Hamas war may moderately accelerate economic co-operation (from a negligible base) with Saudi Arabia arising from diplomatic rapprochement, primarily through increased trade and tourism. However, trade will remain severely limited by US sanctions, and deep residual mutual mistrust makes substantial investment improbable in 2024‑28.

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.