GERMAN-IRAN TRADE: CHILL IN THE AIR

C O N F I D E N T I A L SECTION 01 OF 03 BERLIN 001495 SIPDIS SIPDIS STATE FOR T, ISN/RA, EB/ESC, NEA/IR, EUR/ERA, EUR/AGS E.O. 12958: DECL: 05/29/2016 TAGS: ECON EPET ETRD ETTC GM MNUC PREL IR SUBJECT: GERMAN-IRAN TRADE: CHILL IN THE AIR REF: A. 05 STATE 1745 ¶B. STATE 206 ¶C. STATE 649 Classified By: ECON Minister-Counselor Robert F. Cekuta for reasons 1.4 (b) and (d) ¶1. (C) Summary: Increased international pressure on Iran to halt its uranium enrichment activities may already be affecting Germany's trade with Iran, despite record numbers for 2005. Germany enjoys a substantial trade surplus with Iran, but officials and business people report German businesses are reluctant to sign long-term export contracts, despite the willingness of Iranian companies to pay up-front for many goods, due to the uncertain prospects of the economic environment and recent Iranian government anti-foreign business actions. Officials stress any new sanctions against Iran must be done multilaterally, but at the same time they express concerns some states may avoid joining sanctions efforts. German officials also repeatedly state the Government closely controls sensitive exports to prevent Iranian entities from obtaining militarily useful commodities, including dual-use items for WMD programs. End Summary -------------- -------------- 2005 Record Year for Germany-Iran Trade...but end of the "good times"? -------------- -------------- ¶2. (C) Germany and Iran enjoyed a record year for trade in ¶2005. German exports to Iran totaled over 4.42 billion euro for 2005, an increase of 24% over 2004. Since 1999, German exports to Iran have grown an average of 26% year-on-year. Machine tools (26.9%),made-to-order assembly plants (10.7%), and automobiles and spare parts (14.8%) comprised the majority of German exported goods. Other exports included chemical products, electronic goods, and steel products, particularly large pipes. The sectors that experienced significant year-on-year growth since 2002 were made-to-order assembly plants (61% average growth),steel products (66% average growth),automobiles (40% average growth),and electronic goods (23% average growth). Despite these figures, Klaus Ranner, the German MFA Office Director of the Task Force for External Business Promotion, noted German exports to Iran in 2005 still only amounted to 0.6% of total German exports. Iranian exports to Germany totaled 462 million euro in 2005, most of which consisted of oil imports worth 123.5 million euro. Not surprisingly, the value of oil imports from Iran has increased sharply since 2003, rising from 4.3 million euro to 123.5 million euro worth of crude oil in 2005. Oil from Iran, however, represented less than 1% of total oil imports for Germany in 2005. Other imports from Iran were fruits, dried fruits, and nuts, with a value of 100 million euros. ¶3. (C) Despite the record export numbers, German officials are quick to point out the majority of the trade occurred before September 2005, i.e., when President Ahmadinejad became Iran's President. Since then, trade between the two countries has decreased. Ministry of Economics and Technology's Deputy Director of North Africa and Middle East Affairs, Torsten Kollberg, noted exports to Iran have experienced a "significant decrease" since last fall, with trade already down 6% for the first quarter of 2006. Given the currently tense situation surrounding Iran, he did not foresee exports recovering this year, noting German companies would be fortunate to reach 2005 levels. -------------- -------------- New Iranian Government, German Angst Negatively Affecting Trade -------------- -------------- ¶4. (C) German government officials and the business community attribute the decrease in trade to growing German reluctance to enter into long-term contracts with Iranian customers due to the current tensions over Iran's nuclear programs and efforts on the part of the Ahmadinejad government to make business transactions costlier and more difficult for Western firms. Klaus Friedrich, who handles export controls at Germany's Engineering Federation (VDMA),noted that when Ahmadinejad came to power, he replaced many of the senior business advisors with whom German businesspeople had developed good working relations. He attributed the drop in German contracts since Fall 2005 to this personnel shakeup in Iran. Kollberg noted there have been no recent trade delegations nor are any currently planned. He acknowledged there had been plans for a state-led delegation from Bavaria BERLIN 00001495 002 OF 003 last winter, but the Bavarian Economic Minister Huber indefinitely postponed the trip. (Note: Consulate General Munich had pressured the Bavarian government to turn mission off. End Note). Kollberg also pointed to a recently enacted Iranian law that would levy a 30% tax on foreign workers employed by foreign companies in Iran, leading him to speculate the Iranian government might be rethinking its prior business relationship with foreign companies. This law would particularly affect German companies involved in the expansion of the petrochemical industry as well as companies that create assembly plants for the Iranian market. These companies send Germans to Iran to assist in initial construction and implementation phases of the projects and teach Iranians how to run the plants. ¶5. (C) An important factor increasing Germany's exports to emerging markets, such as Iran, has been export credit guarantees. Germany's federal government backed over 4 billion euros of export credits to Iran in 2005, a 74% percent increase from 2004. The OECD, which Euler Hermes Kreditversicherungs-AG and PwC Deutsche Revision AG, Germany's export credit lending institutions, use to determine its export credit lending policies, recently downgraded Iran from risk category four to five. (Note: A rating of seven represents the lowest grade and highest level of risk. End Note). The German Ministry of Foreign Affairs supported and encouraged the OECD's move, according to MFA State Secretary Georg Boomgaarden. Following the OECD downgrading of Iran, the insurance costs for export credit guarantees will increase correspondingly, these officials said. The increase will lead the German federal inter-agency committee that rules on the guarantees to scrutinize projects more carefully and raise the threshold of granting credit guarantees. ¶6. (C) This downgrading of Iran's credit risk worthiness could hinder German exports, according to MFA and Ministry of Economics officials. However, at the same time Iran's excellent credit rating and ability to pay in advance for many products, including ones for large infrastructure projects, could mitigate the effect of the greater risk rating. Michael Pfeiffer, head of the International Division at the German Chamber of Commerce believes the recent downgrade in risk assessment is more symbolic, with little actual affect on business decisions. Pfeiffer noted Iranian businesses, particularly in the cash-rich petrochemical industry, are willing to pay in advance for many export goods. Still, German businesses remain reluctant to enter into any new long-term agreements. (Comment: In addition to the petroleum-derived revenue paying for German exports, use of German financial institutions for Iranian business continues to be a concern for Germany. Leading German banks recently emphasized the need for caution when dealing with transactions that involve Iran. However, they were hesitant to cease what they consider legitimate activities, i.e., issuing letters of credit for small and medium size companies doing business in Iran. End Comment). -------------- -- Sanctions: Potential Effects on German Business -------------- -- ¶7. (C) Working-level German government officials were hesitant to discuss types of sanctions that could be applied, noting that thinking on the issue has gone no further than sanctions that would be focused on nuclear technology and defense equipment. Christof Wegner at the Ministry of Economics said sanctions probably would be targeted at the Iranian regime instead of the populace. He commented that Germany is afraid broad sanctions might rally the population around the otherwise unpopular government. Business representatives also questioned the effectiveness of economic sanctions, noting that unless an internationally unified front could be maintained, other countries -- with less stringent export controls or which are outside the OECD, for instance -- would replace Germany in exporting to Iran. German government officials noted that the free trade zone in the UAE could present a particular challenge in controlling German goods entering Iran. The UAE is Germany's second largest trading partner in the region. German officials and business officials did not deny that a portion of German exports to the UAE were probably re-exported to Iran through the free trade zone, but would not speculate on an amount. ¶8. (C) If it did come to sanctions, however, Ministry of Economics officials and business representatives thought large companies could bear the losses associated with disrupted trade better than the smaller and medium-sized German companies, to which larger firms direct much of the BERLIN 00001495 003 OF 003 specialized work. Some of these companies, such as machine tool firms, could experience considerable financial difficulties, if their business relied on only one Iranian-based contract for the majority of their revenue. Kollberg pointed out that assembly plants exported to Iran are made to order and cannot be "resold," something which would hinder a company's ability to recoup any losses by reselling assembly plants to other customers. -------------- German Government Engaged in Export Control -------------- ¶9. (C) Foreign and Ministry of Economics officials say they strictly scrutinize applications for licenses to export controlled commodities to Iran. The German Government requires licenses for dual-use commodities listed in international export control regimes, such as the Nuclear Suppliers Group Guidelines, the Missile Technology Control Regime Annex, or Wassenaar Arrangement Dual-Use List. For licensing military exports, Germany uses the EU Code of Conduct on Arms Trade. Wegner of the Ministry of Economics said only about five applications to export military goods to Iran are received per year, and these are routinely denied. Concerning listed dual-use goods, Alexander von Portatius, an Economic Ministry office director, said Germany exports very little to Iran. He cited figures to show that 1.7% of the total volume of exports to Iran in 2005 consisted of commodities requiring a license. Andreas Kauke of the MLFA echoed this and noted a downward trend of listed goods exports to Iran. To illustrate, he said the amount of German exports to Iran in 2004 that required licenses was 3.4% of the total export volume. Kauke and Wegner said no licenses would be granted for exports of any commodities to Iran that could be used in military or WMD programs. When asked about the potential for goods which do not require a license being diverted to military programs, such as automobile assembly plants being used to produce WMD-associated vehicles, they acknowledged the possibility. Germany currently lacks post-shipment verification procedures, such as the U.S.,s Blue Lantern or Extrancheck programs. ¶10. (C) Licensing is a factor in determining export credit guarantees, according to MFA and Ministry of Economics officials. The Federal Export Licensing Agency (BAFA) sits on the inter-agency export credit guarantee committee and reviews the contents of project proposals for the use of controlled commodities. If BAFA determines any commodities in the proposal require an export license and then denies the license, then the committee would refuse to grant the credit guarantee, according to the MFA and Ministry of Economics officials. -------------- Comment -------------- ¶11. (C) Germany has maintained a pragmatic trade policy with Iran over the decades, and it has seen its share of peaks and valleys. Germans consider Iran commercially promising, but recognize the political realities present higher costs than other emerging markets. Business representatives, although hoping otherwise, seem resigned to some type of sanctions regime, should negotiations fail. Given the current cost-benefit construct with doing business in Iran, the German government could be reasonably well placed to accept imposing sanctions with relatively little direct domestic economic fall out, though the fear of higher world oil prices continues to haunt the sanctions discussion here. BAUMAN