GERMANY DRYING OUT TRADE WITH IRAN THROUGH

C O N F I D E N T I A L SECTION 01 OF 03 BERLIN 002007 SIPDIS SIPDIS PLEASE PASS TO JAMES JEFFREY AND EMILY HARDING AT NSC; LKOHLER AT TREASURY E.O. 12958: DECL: 11/02/2017 TAGS: EFIN ETRD EPET ETTC KNNP PREL IR GM SUBJECT: GERMANY DRYING OUT TRADE WITH IRAN THROUGH BUREAUCRATIC MEANS REF: BERLIN 01745 Classified By: Acting DCM Robert A. Pollard FOR REASONS: 1.4 (B) AND (D ) ¶1. (C) Summary: Due to the German government's quiet tightening of export controls and credit guarantees, increased political risk, and banks' market withdrawals, Germany's exports to Iran have markedly fallen. Iranian purges of state-owned companies and regulators and rising extortion and bureaucracy have increased the perception of political risk and curtailed German business activity as well. Small and medium-sized enterprises, many of whom have had business dealings with Iran for decades, account for the majority of the remaining exports. German energy companies are exploring new sources of natural gas rather than continuing to invest in Iran. German industry voices frustration that unilaterally cutting "legitimate" business ties with Iran -- without reciprocal action by other major exporters -- would not achieve desired modifications in Iranian behavior and would also permit companies in China, Russia and elsewhere to fill the vacuum. The government is quietly making trade with Iran so costly that many German exporters are simply walking away. End summary. -------------- -------------- No Longer Germany's Biggest Middle East Export Market -------------- -------------- ¶2. (SBU) From 2000 to 2005, German exports to Iran more than doubled from 1.57 billion to 4.37 billion euros, making it Germany's largest trading partner in the Middle East. However, in 2006 both the United Arab Emirates (5.41 billion) and Saudi Arabia (4.65 billion) surpassed Iran (4.12 billion) as destinations for German exports. Following the first round of UN Security Council sanctions, the reduction in exports deepened. The German Statistical Office's figures for the first half of 2007 show an 18 percent decline year-over-year from the first half of 2006. As German export credit institutions, banks and companies continue scaling back their transactions involving Iran during the remainder of the year, observers expect exports to fall up to 30 percent on an annualized basis. ¶3. (SBU) In the first half of 2007, machinery (31 percent), iron products and chemical products (15 percent each),and transport vehicles and their related parts and electrical engineering products (7 percent each) accounted for the bulk of German exports to Iran. ¶4. (SBU) Meanwhile, Iranian exports to Germany totaled 225 million euros in the first half of 2007 -- most of it low-tech stuff. Among the top categories were agricultural products and meat (28 percent),textiles (18 percent), nutritional products (13 percent),iron products (11 percent) and chemical products (8 percent). Interestingly, Germany's imports of crude oil, natural gas and services related to its extraction only accounted for 6 million euros in the first half of 2007. -------------- Cloudy Investment Picture -------------- ¶5. (C) Ministry of Economics and industry officials reported little new investment in Iran and implied that a major German auto manufacturer had withdrawn from Iran. "Investment is weak, and the statistics on investment are weak," said Juergen Friedrich, the Ministry's Office Director for North Africa, the Near and Middle East and former head of Germany's trade mission in Dubai. The Ministry of Economics cited 2004 figures as the most recent available showing Iranian investments of only $50 million in Germany and German investments of $700-$800 million in Iran. Felix Neugart, Director of North Africa and Middle East for the German Chamber of Industry and Commerce (DIHK),said that despite significant investments related to petrochemicals and other energy-related assets in the recent past, he knew of no new investments in this field. A Ministry of Foreign Affairs policymaker confirmed that, like business people, German officials are concerned about the Chinese and Indians locking in long-term contracts for Iranian gas and requested that the USG discourage Indian investment in this sector. -------------- Tightening Screws and Moral Suasion BERLIN 00002007 002 OF 003 -------------- ¶6. (C) Federal Chancellery officials say policy adjustments and advocacy are discouraging German business dealings with Iran. Credit guarantees, which serve as insurance against non-payment rather than as loans, had historically facilitated Germany's boom in exports to Iran, particularly for large export contracts and capital goods such as large machinery or industrial plant construction. In an October 30 meeting, Chancellery officials told EmbOffs that Euler Hermes Kreditversicherungs-AG, Germany's primary export credit institution, raised the cost of credit guarantees by 30 percent in line with a political decision. Hermes' Iran-related insurance policies carry outstanding liabilities of roughly 5 billion euros. However, Chancellery officials added that applications are dropping off, the German government is refusing more applications and "no fresh money is being added" into the credit guarantee pool. Dirk Rotenberg, Counselor for Export Credits and Investment Guarantees at the Ministry of Foreign Affairs, told EconOff separately that Hermes insurance now covers no more than one-third of German exports, and he predicts that only 400 to 500 million euros of exports will be covered in 2007 compared to just under 1 billion euros in 2006. ¶7. (C) Rotenberg also noted that German officials fear that the Iranian government could answer a complete cutoff of credit guarantees by directing Iranians firms not to repay German exporters. In that case, German taxpayers would be stuck with the bill. He argued that for Germany to unilaterally eliminate credit guarantees would have little effect as the exports are not prohibited under any sanctions regime and other European countries also offer credit guarantees. ¶8. (C) Federal Chancellery officials argue that Chancellor Merkel's speech to the UN General Assembly unambiguously signaled industry leaders that the German government discourages trade with and investment in Iran. "Asked if we would support investment, we would say no," said Geza Andreas von Geyr, the Head of the Chancellery's Security Policy and Arms Control. "(Business leaders),of course, see that the political frame has changed." Von Geyr indicated that government officials had undertaken high-level talks to directly discourage German industry from investing in Iran. -------------- -------------- Firms Ask for Legal Certainty; Government "Dries Out" Trade -------------- -------------- ¶9. (SBU) Jens Nagel, Managing Director of the Federation of German Wholesale and Foreign Trade (BGA),said the German government had not attempted to dissuade industry from legal trade or investments but had delayed export permits, cut export credit guarantees and increased customs controls "to dry out trade with Iran through bureaucratic means." "Some companies are talking about the boycott through the back door," he said. Scaling back "civilian" trade that violates no sanctions regime would mostly hurt small and medium enterprises who cannot easily develop new markets, he said. Although he acknowledged that exporters oppose an across-the-board trade embargo and believe they are unjustifiably losing business to Chinese and other firms, he said they will comply with multilateral sanctions and would prefer legal certainty rather than enduring insinuations of wrongdoing or possible negative fallout. ¶10. (SBU) Economics Ministry officials took a similar position, expressing a preference for multilateral sanctions over unilateral or autonomous EU sanctions. The latter, they argue, would not achieve effective results because Chinese and Russian firms would quickly fill the void. He added that companies trading with Iran believe sanctions will only radicalize the population. Neugart echoed the call for legal certainty, saying it was dangerous for the German government to offer "informal guidance" because commerce depends on clear rules. ¶11. (SBU) Neugart, as well as Economics Ministry officials, noted that exporter inquiries quickly overwhelmed staff at Germany's export licensing office (BAFA) following the adoption of EU regulations implementing UNSCR 1747. German exporters expressed concern about ambiguity surrounding EU "catch-all" controls governing exports to Iran and asked BAFA for definitive rulings on whether the new regulations would BERLIN 00002007 003 OF 003 still permit them to export a wide range of consumer goods to Iran. -------------- Comment -------------- ¶12. (C) Growing trade between Germany and other nations in the Middle East make it difficult to know how much re-exportation from third countries may have softened the blow of reduced direct trade. Questions remain about Germany's long-term investments in Iran, its shifting picture on natural gas sources and the activities of leading companies who secured large state contracts and built up Iran's industrial base as recently as 2005. Industry regards USG's call for an end to business as usual with Iran as placing a cloud over legitimate "civilian" trade. TIMKEN JR