Meaningful new U.S. sanctions on Iran will have to wait for the next administration. President Obama continues to oppose congressional efforts to inflict financial pain on Tehran for its malign activities. In January the Treasury Department finally did react to Iran’s unlawful ballistic-missile tests, but those sanctions will cause no economic damage. Instead they targeted individuals and companies—procurement networks that Tehran can easily reconstitute.
The Gulf States might not be so timid: Saudi Arabia and its allies have potent financial weapons they can deploy against Iran. The sectarian war between the Sunni and Shiite states is intensifying militarily, with proxies fighting from Syria to Yemen, and economically. On Jan. 4 Riyadh announced an end to all commercial relations with Iran and said it would cut off travel, with an exception for pilgrims visiting holy sites. In response Tehran banned imports of all Saudi products.
Last week the Saudis teamed up with Russia to propose capping oil production at January levels, putting pressure on Tehran to do the same as it tries to rescue its battered economy. Riyadh has deployed oil as a weapon before. In 2012 and 2013, after sanctions halved Iranian oil exports, Saudi Arabia raised production to prevent global price shocks. As the Iran nuclear deal was being negotiated in 2014-15, the Saudis increased oil production again. That helped to push prices below $35 a barrel. Now as Iran re-enters energy markets, desperate for economic relief, it will get only about half the price for its oil on which it based its budget last year.
Low oil prices hurt the Saudis too. Riyadh has had to sell $100 billion in assets to cover recent deficits, and Standard & Poor’s has downgraded its credit rating to A-minus. Still, the kingdom is an economic powerhouse. Apart from Turkey, it has the Middle East’s largest economy, with a GDP of about $750 billion—almost twice that of Iran.
Riyadh holds sovereign-wealth funds valued at almost $700 billion, and its pension funds have foreign investments of about $70 billion. Those sums alone give the kingdom enormous leverage over anyone considering investing in Iran. Saudi Arabia could make the financial players choose a side: They can have Riyadh’s business or Tehran’s, but not both.
For example, the asset-management firm BlackRock is reported to have been a destination for Saudi holdings. In March 2015, news broke that a BlackRock manager was planning an exploratory trip to Iran. In September, Saudi Arabia reportedly withdrew holdings from several firms, including BlackRock. One industry source called it “Black Monday.”
There may have been no connection between the two events. Perhaps Saudi Arabia simply wanted to diversify its investments or make some quick cash. Riyadh did not make its intent explicit and continues to do business with BlackRock. Even so, the investment firm could be forgiven for seeing sticks and carrots intended to keep it out of Iran.
Saudi Arabia has also become the world’s largest importer of weapons. In June it agreed to deals with France worth almost $12 billion, including a $500 million contract for 23 Airbus helicopters. Negotiations to buy fast patrol boats continue. Some observers see this as a reward for the tough line that Paris adopted in the nuclear talks.
The greatest financial lever, however, may be Riyadh’s control over investment within Saudi Arabia. The country’s newly accessible stock market has been predicted to attract up to $50 billion in foreign capital by 2017. That’s not even accounting for the January announcement that Riyadh may sell shares in Aramco, the national oil and gas company, valued at up to $10 trillion—potentially the most lucrative initial public offering in history.
As of 2013, seven of the 10 largest construction contractors in Saudi Arabia were foreign. These companies, including South Korean firms like Daelim, Samsung and Doosan and Spanish firms like Tecnicas Reunidas, have contracts worth billions. All these firms reportedly are exploring projects in Iran, but they could quickly find themselves in an uncomfortable position.
In total, Riyadh projects long-term opportunities for foreign investment at $344 billion.Mohammed bin Salman, the kingdom’s economic czar (and the king’s son), has embarked on a privatization program that will likely increase the size of this pie.
Iran wouldn’t be powerless in a prolonged economic conflict. The country’s Petroleum Ministry hopes to attract $100 billion in investment to resuscitate its ailing energy industry, a tempting prospect for foreign capital. Nor is Saudi Arabia omnipotent: The kingdom ran an estimated budget deficit of 15% in 2015 and could burn through its foreign-exchange reserves in five years if oil prices don’t recover.
Still, Saudi Arabia is clearly better equipped for economic warfare. It also has a formidable ally in the United Arab Emirates, an even larger destination for foreign direct investment that holds sovereign-wealth funds valued at almost $1 trillion. The U.A.E. is also Iran’s fourth-largest trading partner, so Iranian investors are much more exposed to its markets.
The Obama administration is hesitant to impose new economic and financial sanctions on Tehran. But if the Saudis and the Emiratis unite their financial firepower, it might be enough to put the Islamic Republic’s economy once again flat on its back.
Mr. Weinberg is a senior fellow at the Foundation for Defense of Democracies. Mr. Dubowitz is the foundation’s executive director and leads its Center on Sanctions and Illicit Finance.