Bahrain and Iran: Restoring Diplomatic Ties
Bahrain and Iran: Restoring Diplomatic Ties
Bahrain and Iran have recently announced their intention to begin talks aimed at restoring diplomatic relations after the two countries’ foreign ministers met in Tehran.
Context
In 2016, Bahrain had severed ties with Iran after tensions between Saudi Arabia and Iran as well as accusations of political interference. After the Saudis re-established ties with Iran in 2023, Bahrain has similarly warmed up to the idea.
Motivations for Normalization
Regional Stability
Normalization of relations between Bahrain and Iran can help ease geopolitical tensions in the Gulf region. This will have a spillover effect, in which neighboring nations may also warm up to Iran, reducing the risk of conflicts and fostering a more predictable and peaceful environment.
In addition, the two countries can collaborate on security issues, such as enhancing maritime security in the Arabian/Persian Gulf. This facilitates trade and commercial activity.
Economic Growth
As of 2022, Bahrain exported $6 million to Iran, with the trend decreasing by a 5-year annualized rate of 34.6%. Primary goods include food, medical devices, and aluminum products. Reports show that only 0.02% of Iran’s total exports went to Bahrain in 2021. However, data is limited since relations were cut.
Moreover, both countries are oil producers, with Iran and Bahrain globally ranking 7th (4 million barrels/day) and 36th (167,000 barrels/day) respectively as of December 2023. Collaboration in this field has the potential to enhance discoveries and generate revenue.
Investment Inflows
Normalization of relations can significantly increase investment inflows by fostering a stable and predictable business environment. With improved diplomatic ties, both countries can attract foreign direct investment and encourage cross-border business between their economies. Investor confidence in the region is likely to rise, supported by reduced political risk and enhanced legal protections.
Challenges
International Sanctions
As part of normalization efforts, Bahrain is considering releasing Iran’s foreign exchange resources held in the country, which had been previously frozen. However, the United States government has expressed concerns about the potential deal, citing existing sanctions. Bahrain's release of these funds could be viewed as undermining these sanctions, potentially leading to diplomatic tensions between Bahrain and the United States.
Geopolitical Dynamics
Bahrain's normalization efforts with Iran may be influenced by complex regional geopolitics, including the dynamics within the Gulf Cooperation Council (GCC) and broader Middle Eastern alliances. Some GCC countries, aligned closely with Bahrain, may view improved relations with Iran skeptically due to longstanding regional rivalries and differing geopolitical interests.
This may not be a major risk, however, as Saudi Arabia, the biggest regional player, has already restored ties. Nevertheless, managing these dynamics effectively is crucial to avoid straining relations with GCC allies while pursuing economic opportunities with Iran.
Domestic Opinion
Bahrain faces a significant religious divide between its Sunni-majority government and Shia-majority population. Historically, Iran has supported Bahrain's Shia community, leading to concerns among Sunni Bahrainis about Iran's influence.
Normalizing relations with Iran could exacerbate these religious tensions, potentially fueling domestic opposition and political unrest. Addressing these concerns and ensuring inclusive dialogue is essential to maintaining social cohesion within the country. A poll in 2022 showed that Bahrainis’ approval of good relations with Iran is low (Chart 1). However, this may have risen given recent developments.
Chart 1 | Bahrainis’ Opinion on Iran Relations
Recommendations
Cooperate on Energy
Bahrain and Iran can enhance their collaboration in oil production through joint exploration and development projects, leveraging each other's expertise and advanced technologies. They can share infrastructure like pipelines, storage facilities, and refineries, reducing costs and improving logistics.
Strategic partnerships and joint ventures between their national oil companies, Bahrain’s BAPCO and Iran’s NIOC, can create synergies in production. By negotiating favorable trade agreements, they can secure stable markets and optimize revenues. Collaborative research and development efforts can drive technological innovations and sustainable practices.
Expand Economic Relations
Normalization can lead to joint ventures and strategic partnerships in various sectors, including oil and gas, infrastructure development, tourism, and financial services. Prominently, Bahrain’s non-oil exports reached $838 million in May 2024, falling slightly from the same month last year. Rebuilding relations with Iran is an opportunity to bring them back up, as the country is accelerating its own non-oil exports, which rose 40% from 2020.
Furthermore, due to geographic proximity, bilateral trade agreements and economic cooperation frameworks can facilitate easier movement of capital, goods, and services, stimulating economic growth and job creation in both countries. As trust and cooperation deepen, opportunities for mutual economic benefit expand, making the prospect of increased investment inflows a significant driver of their normalized relations.
Manage Relationships Carefully
Balancing Bahrain's normalization efforts with its international obligations and relationships, particularly with key allies like the United States, presents a challenge that requires careful diplomatic navigation and consideration of broader regional implications.
Conclusion
Normalizing relations between Bahrain and Iran presents significant economic opportunities, including increased trade and investment. However, challenges such as geopolitical dynamics and Bahrain's internal religious divide must be carefully managed. Addressing these issues can help achieve a mutually beneficial relationship that promotes regional stability.
