Why are Iran and Saudi squaring up to each other, why now, why Saudi Arabia is going bust and who is likely to win

What happened over the weekend to send the moneymen into such a panic? There are specific reasons in China which I won’t discuss here, but why the panic elsewhere?

The key to all this is the Middle East. On Monday morning, the moneymen realised that the status quo in the Middle East is not only changing but could be shattering before their very eyes. On Sunday night, Saudi Arabia cut off diplomatic ties with its sworn enemy Iran. This was in reaction to the sacking of the Saudi embassy in Tehran, itself a reaction to the Saudi’s execution of 47 prisoners, including senior Shia Muslim cleric Nimr al-Nimr.

Why did the Saudis act now and why did the Iranians react?

At its core, the row between Iran and Saudi is an inter-Muslim, sectarian fight. Saudi is a Sunni Muslim country and Iran is a Shia Muslim country. The difference between Sunni and Shia, for argument’s sake, is not unlike the difference between Catholics and Protestants in Christianity – with the Shia being more like Catholics and the Sunni more like Protestants. The most extreme version of the Sunni tradition is called Wahhabism. This is what the Saudis practise. Wahhabis are, again for the sake of comparison, a bit like evangelical fundamentalist Protestants.

Possibly the most important tenet of Wahhabis is that they believe in what they call “the oneness of God”. As a result, association with lesser gods, other gods, mysticism, shrines, temples, saints or holy men amounts to idolatry and must be stamped out.

This puts Wahhabis on a collision course with the other strains of Islam, such as Shias or – even worse in the eyes of the Wahhabis – Sufism.

Over centuries, the dispute has rumbled on in the background but in the modern day, the battle lines for leadership of the two Islamic tribes has been drawn between the big boys – Shia Iran and Sunni Saudi Arabia.

Since 1979 the West has backed Saudi Arabia. But the problem for the Saudis is that Iran is still standing even after years of sanctions, isolation and being regarded as a Pariah. Worse for Saudis, Iran has now been ushered in from the cold. If anyone won the war in Iraq it was Iran because the Baghdad regime is Shia. Finally, and most worryingly for the Saudi monarchy, eastern Saudi Arabia (where most of the oil is found) is populated by an indigenous Shia Muslim minority which is pro-Iranian. These people have been squeezed by Riyadh for years, but they haven’t gone away.

These various developments are undermining the entire Saudi twin strategy in the region, which has always been about (a) keeping Iran isolated internationally and (b) keeping the people quiet at home.

To achieve both these aims the Saudis need (a) unambiguous American support in the region to surround the Iranians and (b) high oil prices to buy off its own population.

Both of these central planks now look shaky and as a result, the consequences of recent Saudi policy are laid bare for everyone to see.

Between 1979 and now, Saudi Arabia, buoyed up by oil revenues and driven by its own extreme Wahhabi doctrine, has been responsible for financing extreme Sunni mosques all around the world, as well as being the major source of private donations to the Mujahideen, Al Qa’ida and now Sunni groups in Syria, including Isil. Don’t forget that most of the 9/11 hijackers were Saudi as was indeed, bin Laden. Meanwhile, on the Shia side, Iran has backed the Shia group, Hezbollah, in Lebanon. Both sides are fighting proxy wars with each other in Yemen and Syria, however an extra difficulty is that in 2015, the fall in the price of oil has led to a race to the bottom for both. But – and this is the crucial but – Iranians, having been isolated and under sanctions for years, have endured hardship and can deal with it. In contrast, the average gilded Saudi doesn’t know what it means to turn off his air con at night. The hardy Iranians are able to deal with adversity; I am not so sure about the average Saudi.

I’m not the only one questioning the resolve of the average Saudi.

This worry about the backbone of the average man on the Riyadh street, when faced with a fall in his living standards driven by a fall in oil prices, is driving Saudi Arabia’s latest neurotic moves in executing prisoners.

The mass executions in Saudi Arabia suggest panic at the highest level of the monarchy. Even by the diabolic standards of Saudi Arabia, these killings are unusual. Most of the 47 prisoners shot and beheaded last week had sat quietly in Saudi jails for a decade. They were a threat to no one.

The decision to kill the prominent Shia cleric Nimr al-Nimr, the spokesman for Shia Muslims in the Eastern Province, seems particularly inflammatory.

Why kill them all now?

It’s impossible to know what’s going on inside the regime, but it’s clear that 2015 has been ‘annus horribilis’ for the Saudi monarchy.

Saudi Arabia finds itself isolated as America cuddles up to Iran. It is also outflanked by the return of Russia to the region, particularly in Syria. The Saudi-backed Army of Conquest – a Sunni militia – in Syria is crumbling under Russian attack. In Yemen, Saudi’s forces are losing out to the Iranian-backed Houthi rebels. And its Turkish ally-of-convenience – a country bonded to Saudi by a millennia-old Turkish dislike for the Persians – is deflected by the rekindling of problems with the Kurds who are beating Isil on the ground in Syria and Iraq.

Geo-politically nothing has gone right for Riyadh.

If all this weren’t bad enough, Saudi Arabia is going bust.

Yes you read right. The IMF reckons that the kingdom’s $700bn in financial reserves will be gone within five years, if oil prices stay low.

All this uncertainly is causing money to flood into the dollar and the US as it is traditionally the safe haven in times of crisis. And believe me, if this regions blows, this will be the crisis to top all crises.