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Iran-Saudi relations: A new Cold War heating up?

Tension is rising between long-term rivals Iran and Saudi Arabia in what commentators are likening to a "Cold War" scenario which is increasing geostrategic risk in the Middle East.

While the two powers have long competed for regional dominance – albeit more covertly -- recent developments have pulled them into a more open battle.

Soldiers on patrol in Syria.
STR | AFP/Getty Images
Soldiers on patrol in Syria.

"We are starting to see something resembling a Cold War type scenario. I think tensions will probably get worse in the coming years" Torbjorn Soltvedt, principal analyst for the Middle East and North Africa at Maplecroft, told CNBC in a telephone interview.

He pointed to the interim agreement on Iran's nuclear power, agreed between the country and six world powers, as a potential destabilizing factor leading to a shift in policy.

The United States has traditionally guaranteed Saudi Arabia's security in the region. In particular, it acted as a buffer against powers such as Iran.

However the opening of relations between the United States and Iran risks undermining this.

(Read more: Iran could 'reorder' Middle East: Malloch-Brown)

And if Iran is freed from the United States' watchful eye, some fear that it will pursue a more activist foreign policy in the region.

"There is a worry that Iran will become more assertive with its proxies in the region,particularly in Syria and Lebanon" Soltvedt told CNBC.

Proxy wars

The on-going tug of war between Iran and Saudi Arabia risks inflaming a number of conflicts in countries across the Middle East.

Unless constructive engagement takes place between Iran and Saudi Arabia, conflicts in the region such as the war in Syria – seen as a proxy war between the two countries - will continue to worsen, Islam Altayeb, Middle East and North Africa Analyst ISS told CNBC in an email.

As the civil war in Syria smoulders, Iran and Saudi Arabia continue to arm opposing sides. Iran is supporting its client Syrian President Bashar al-Assad and Saudi Arabia continues to back the Islamist rebels.

"In Syria the stakes are very high. Assad's fall would significantly reduce Iran's ability to support Hezbollah in Lebanon and influence events there" Soltvedt told CNBC.

(Read more: Power vacuum in Middle East lifts militants)

The conflict in Syria is aggravating decades of civil strife in neighboring Lebanon. Hezbollah – the Shia militant group and party backed by Iran – is unequivocally supporting the Assad regime. This is inflaming an already fractious relationship between Sunni and Shia Muslims in Lebanon.

While Iran is active in Lebanon through its ally Hezbollah, Saudi Arabia's influence is more limited. But rising tensions are pulling both powers in.

Last December, after the assassination of Lebanese official Mohamad Chatah – a pro-Saudi politician – the Saudis pledged $3 billion to the Lebanese army.

The rivalry is also exacerbating turmoil in Iraq. Post-war Iraq – which is aligned with Iran -- sits on Saudi Arabia's border. As Saudi Arabia encourages the country's Sunni Muslims to rise up against the Shia government – in a bid to limit Iran's influence there -- it is inflaming sectarian strife.

Iran rising?

As Iran's political position improves, its sanction-stricken economy is still struggling.

The economy has been squeezed by the sanctions imposed by the European Union and the United States in 2012. While halting Iran's ability to export oil to these countries – and thus reducing its revenues -- sanctions on its banks prevented Iran from getting loans from these countries.

Since the sanctions were imposed in 2012 inflation in Iran"accelerated markedly", according to the World Bank. This means the cost of living for the everyday Iranian has increased dramatically, with the middle classes particularly squeezed.

In June last year President Hassan Rouhani was elected on a mandate for improving the country's economic situation. Economic data recently released by the World Bank suggests that the country is on the tip of a recovery.

(Read more: Israeli PM: Why we cannot do business with Rouhani)

While Iran has been in recession for the past two years, it believes it real gross domestic product will growth 1 percent in 2014. This will increase to 1.8 percent in 2015 and 2.0 percent in 2016.

And while this is good news for Iran, it poses a direct challenge for Saudi Arabia which had long benefitted from its rivals economic weakness.

"Gulf States' anxieties over a rapprochement between the U.S. and Iran should not be underestimated" Altayeb told CNBC.

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