* Oman caught between rivals Iran, Saudi Arabia
* Oman joined Saudi-led counter-terrorism alliance
* But remains outside a separate Yemen coalition
* Tehran ties may be key to boosting Oman economy
By Tom Finn and Fatma al-Arimi
MUSCAT, Jan 9 Caught between two vast neighbours
locked in a regional struggle, Oman has long been to the Middle
East what neutral Switzerland is to global diplomacy. But now
its policy of being "friends to all and enemy to none" is under
Oman has never found it easy to balance relations with
Saudi Arabia to the west and Iran to the north, but worsening
rivalry between the region's dominant Sunni and Shi'ite powers
is testing its cherished policy of non-alignment more than ever.
That policy has been felt far beyond the small but
strategically-located sultanate on the Strait of Hormuz, through
which 40 percent of the world's seaborne crude oil flows.
Oman helped to mediate secret U.S.-Iran talks in 2013 that
led to the historic nuclear deal signed in Geneva two years
later. It has also helped to free American hostages in Yemen.
Omanis believe this Swiss-style peacemaker role is vital in
helping to prevent the Middle East from sinking even deeper into
"We hope Oman will stick to the same policies. A full-blown
conflict between Iran and Saudi Arabia would be a disaster for
everyone," said Tawfiq al-Lawati, a member of Oman's
consultative Shura Council.
However, an assertive Saudi Arabia, which is leading a
bombing campaign against Iranian-allied rebels in Yemen, has
insisted that the Gulf Arab monarchies draw closer together to
At the same time, Oman is struggling with a vast budget
deficit largely due to low global prices of its oil exports.
Muscat is therefore looking to raise trade with Iran, following
the easing of international sanctions on Tehran under the
nuclear deal, to buttress its economy.
As a result, Muscat has had to walk a diplomatic tightrope.
"With Saudi Arabia we do sometimes have disagreements and with
Iran too," said Lawati. "But there is still more bringing us all
Muscat surprised neighbours last week by agreeing to join a
Saudi-led military coalition - not the one fighting in Yemen but
a separate, larger grouping. This is officially aimed at
fighting Islamic State and other militants but suspected of
serving also as a counter to Tehran around the Muslim world.
Gulf Arab citizens hailed the decision as a sign that their
nations were finally closing ranks against the perceived Iranian
menace. Oman had "returned to the bosom of the Gulf", said
prominent Saudi columnist Turki al-Dakhil.
King Salman is expected to visit Muscat shortly, Saudi and
Gulf sources have said, in what would be a sign of strengthening
relations. "In grave times, clear positions are needed," said a
Gulf Arab official. "We of course know Oman will stand with us."
And yet Oman may struggle to please its wealthier fellow
Gulf Arabs consistently. They interpret neutrality as disregard
for the Gulf's shared security during wars in Iraq, Syria and
Yemen where Riyadh and Tehran back opposing sides.
Joining the Saudi-led alliance signals Oman's concern over
the spread of Islamic State and Al Qaeda militants who have
vowed to carry out attacks on the Gulf Arab monarchies. Oman
also faces some domestic uncertainty as 76-year-old Sultan
Qaboos has no named successor.
But a transformation of the foreign policy balancing act
does not appear to be in prospect.
A former Omani diplomat, who declined to be named, described
the move as a "largely symbolic" gesture to accommodate Riyadh
and said it would involve "little material commitment".
Ahmed al-Mukhaini, a former Assistant Secretary General for
the Shura Council, suggested the move may give Oman more
influence to calm strained regional nerves but "would not
compromise our independence".
"It might even give Oman more leverage, more space, to play
a better role in this coalition and the region. By joining the
coalition Oman is shielding itself from criticism from Saudi
Arabia," he added.
There are economic risks to a Saudi rapprochement. Any
perception that Muscat is allying with Riyadh may irk Tehran,
analysts say. Iran has billions of dollars of foreign reserves
in Omani banks and could pull the plug on promised projects in
The nuclear deal has offered hope of a leap in trade between
Oman and its gas-rich neighbour. Muscat expects the end of
sanctions to speed the completion of a liquefied natural gas
pipeline, which it hopes will feed energy-intensive industries.
"Oman needs the economic cooperation that Iran has pledged
... The two countries' planned subsea gas pipeline is an
important part of the sultanate's plans for economic
improvement," said Giorgio Cafiero, CEO of Gulf State Analytics.
Oman sees foreign investment from Iran, including a car
factory, a hospital complex and a nanotechnology plant, as
helping economic diversification away from oil, he added.
(Editing by Noah Browning, William Maclean and David Stamp)