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

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2005 Record Year for Germany-Iran Trade...but end of the
"good times"?
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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.

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New Iranian Government, German Angst Negatively Affecting
Trade
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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

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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).

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Sanctions: Potential Effects on German Business
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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

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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.

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German Government Engaged in Export Control
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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.

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Comment
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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