Tehran's diplomatic quarter, in the north of the capital, lies in the shadow of the Alborz mountains, their snow-capped peaks overlooking tree-lined avenues and elegant pre-revolutionary palaces. Police posts guard foreign missions, though the building that used to be Saudi Arabia’s embassy is now damaged and empty.

Outside it stands a shiny new blue sign marking Nemer Baqer al-Nemer Street, in honour of the Saudi Shia cleric whose execution in January triggered a furious assault on the embassy and a profound crisis in the already troubled relations between Iran and Saudi Arabia.

Tehran has a long tradition of politically-inspired street names. Winston Churchill Avenue, near the British embassy, was renamed for the IRA hunger striker Bobby Sands. Off Valiasr Street is Imad Moghniyeh Square, commemorating the Hezbollah commander killed by the Mossad or CIA. Nearby is Khaled Islambouli Street, remembering the Egyptian Islamist executed for assassinating Anwar Sadat in 1981.

The assault on the Saudi embassy (and consulate in Mashhad), was apparently orchestrated by the Basij, the volunteer force of the Iranian revolutionary guards. And it followed warnings from Ayatollah Ali Khamenei, the Supreme Leader himself, of “divine vengeance” if Nemer was killed.

But when the Saudis hit back by severing their ties with Iran, the attack looked like its own goal because it diverted attention away from the execution — one of 47 on the same day. Riyadh insisted the cleric was a violent extremist, while Nemer’s followers in the kingdom’s Eastern Province portrayed him as a “martyr” and peaceful activist representing a persecuted minority.

Saudis were outraged by what they saw as Tehran’s interference in their internal affairs, especially since Nemer was a Shia ayatollah. They were unimpressed by the detention of the embassy rioters and the dismissal of a deputy governor — or by condemnation from President Hassan Rouhani and Mohammad Javad Zarif, his foreign minister. Both had been under attack by hardliners for not doing enough to confront the Saudis.

And the timing was disastrous, coming just before “implementation day” following last summer’s nuclear agreement when international sanctions would finally be lifted. “It was the worst thing that could happen,” said one Tehran-based diplomat. Even Khamenei conceded later that it had damaged Iran and Islam.

It also felt like the last straw in a relationship had been rocky since the 1979 revolution and Saudi backing for Saddam Hussein in the first Gulf war. In recent years Iraq, Bahrain, Lebanon and Yemen have all been sources of contention and anxiety, along with Barack Obama’s tilt towards Iran and his efforts to tackle its nuclear programme. Overall, Tehran’s growing confidence is at Riyadh’s expense.

“The Saudis feel Iran is gaining and they are losing,” one senior Iranian adviser observed before the Nemer affair. “Iran is ascending and the Arab world is in limbo. Saudi Arabia is playing an angry, reactive violent game.”

The Saudis lambast Iran for their support for Bashar al-Assad and their Lebanese Shia ally Hezbollah. The Iranians blame Riyadh for backing jihadi groups and the Wahhabi ideology that in part inspires the militant Islamic State group. National rivalry is overlaid with viciously sectarian language that exploits both Sunni-Shia animosity and Arab-Persian hostility. Each accuses the other of fomenting terrorism.

Iranians tend to see themselves as the descendants of an ancient civilisation and Saudis as upstarts — “unelected emirs and kings” enthroned by western imperialists. Iranians have regional reach — most impressively in the form of the Revolutionary Guards; the Saudis have little more than cash. Riyadh’s dependence on the US is a source of scorn. “It is not enough to have a chequebook,” quips Foad Izadi of Tehran University. “People who are associated with the Americans do not want to fight.”

Iran ramped up its anti-Saudi rhetoric at the start of the Yemen war last year and turned up the volume after the 2015 hajj tragedy in Mecca — in which 460 Iranians were amongst at least 2,200 pilgrims killed.

Iranians relish needling the Saudis: on social media King Salman is compared to Abu-Bakr al-Baghdadi, the IS “caliph”. A spoof Iranian video shows a Saudi leading an army of sheep into battle while bragging about heroism and victory. Saudis reciprocate: clerics vilify Shias as “Rafida” or Zoroastrians. When watermelons imported from Iran were found to contain chemical pesticides they were nicknamed “Safavid watermelons” — a reference to the dynasty that built a powerful Persian nation-state and confronted the Ottomans from the 16th century.

In a new book studying this tangled relationship, the Iranian scholar Banafsheh Keynoush notes the growing prominence of intelligence personnel on both sides, which makes it even harder for them to deal sensibly with each other — despite good intentions at the top. “Iranians at senior levels have anxiously made it clear to me that their intent is never to undermine Saudi Arabia irreparably, mindful that doing so could further fuel extremism,” she writes.

Last week the Saudis announced the arrests of 32 people in the Eastern Province who were said to have been spying for Iran. “They are still throwing mud at each other,” observed the diplomat. “But they will have to find ways to climb down.” Iran, noted Izadi, “already has too many enemies. The Saudis have a lot of money so picking a fight with them is not really in Iran’s national security interest.”

The likeliest candidate for backchannel diplomacy is Oman, the only Gulf state with close links to Iran — and which helped achieve a breakthrough in the nuclear talks. Qatar may also be able to mediate.

And last week’s Iranian elections have strengthened Rouhani and Zarif — who has spoken privately of the need to mend fences with Arab neighbours. Mohammed Bin Salman, the powerful Saudi deputy crown prince and defence minister, is capable of springing surprises. Agreement on oil production quotas at a time of plummeting prices is another urgent matter for both countries.

Russia and China are also anxious to narrow the gap so that Tehran and Riyadh can be kept at the same table for efforts to translate a fragile Syrian ceasefire into some kind of political settlement. Yet given the fraught history of Iranian-Saudi ties it’s still a fair bet that the new sign on Nemer Baqer al-Nemer Street won’t be coming down any time soon.

—By arrangement with the Guardian

Published in Dawn, March 4th, 2016